Herc Holdings Inc (HRI) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Hertz Global Holdings 2008 fourth quarter and year-end earnings conference call. Later we will conduct a question and answer session. (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 related 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 fourth quarter and year-end 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 ending September 30, 2008. Copies of these filings are available from the SEC, the Hertz website or the Company's Investor Relations Department.

I would like to remind you today's call is being recorded by the Company and is also being made available for replay starting today at 12:30 p.m., in the eastern time zone, and running through March 10, 2009. You can access the replay service by dialing 800-475-6701, or internationally, 320-365-3844, and at the voice prompt entering today's conference access code of 985183.

I would now like to turn the call over to our host, Leslie Huntsinger. Please go ahead.

Good morning and welcome to Hertz Global Holdings 2008 fourth quarter and year-end conference call. For those of you that I haven't met yet, I serve as the Company's new Investor Relations Officer, and 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 at www.hertz.com/investor relations. In a minute, I will turn the call over to Mark Frissora, Hertz's Chairman and CEO. Also speaking today is Elyse Douglas, our Chief Financial Officer. In addition, we have Joe Nothwang, Executive Vice President and President of 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. They're here today for the Q&A session.

Today, we'll use certain non-GAAP financial measures, all of which are reconciled with GAAP numbers in our press release, which is post odd our website. We believe our profitability and performance is better demonstrated using these non-GAAP metrics. Our call today focuses on Hertz Global Holdings Inc., the publicly traded Company. Results for the Hertz Corporation differed only slightly, as explained in our press release. Now, I will turn the call over to Mark Frissora.

Good morning, everyone, and thanks for joining us. In the final three months of 2008, both the car and equipment rental markets experienced unprecedented declines due to the precipitous slowdown in consumer spending as well as significantly reduced demand for industrial construction equipment. At Hertz, on slide four, we're addressing these challenges head on, working quickly and decisively to stay ahead of the accelerated market contraction. We've aggressively lowered our cost structure, right sized our fleets, continued to invest in innovative differentiated products, and are generating strong cash flow to reduce debt. In fact, in the fourth quarter we generated $1.8 billion in total net cash flow which is represented by the change in net debt excluding the effects of currency, reducing total debt by $1.9 billion. All of this cash was used to reduce borrowings under both the corporate and fleet facilities. And at year end, total debt was down $1 billion, or 8%, from its 2007 level.

Total restricted and unrestricted cash and equivalents were $1.3 billion, which brought total net debt down 9% year-over-year. For the full year, we produced an effective cash flow yield of approximately 19% based on $593 million of total net cash flow for the twelve months ending December 31, 2008. What's even more significant is that this yield is better than the 12% yield we delivered in 2007 even though we're operating in a much tougher environment today. We believe our ability to generate strong cash flow, coupled with our premium brand, dedication to customer service, and heightened efficiency gives us the wherewithal to prevail to a prolonged cyclical downturn.

Let me briefly give you some sense of what we're up against starting at the macro level on slide five and moving down to the competitive landscape. After that, we'll focus on Hertz and the specific initiatives we're undertaking to manage today's macro issues. The US car rental markets are very closely linked to GDP, which fell at an annual rate of about 4% between October and December, the worst quarterly showing since 1982, and the construction and industrial equipment rental markets are tied to commercial lending. The US market represents 64% of our total worldwide car rental revenue, and 69% of our total equipment rental revenue.

In Europe, things haven't fared much better. European GDP fell nearly 2% in the fourth quarter. According to Eurostat, it was the deepest quarter-on-quarter contraction since the Eurozone was established in 1999. The European market makes up 27% of our worldwide car rental revenue, and 13% of our total equipment rental revenue. On slide six, you will see the rental car industry also is being impacted by declining travel trends. According to the latest airline reports, passenger traffic in the US, was down 10% in the fourth quarter from a year earlier, and US hotel occupancy fell 8% in the fourth quarter. For Hertz, worldwide car rental volume, measured by transactions, declined by 11% in the latest quarter. US commercial accounts were the primary driver of the volume decline, with total transactions falling 16% in the latest quarter. However, worldwide transaction days fell only 7% in the quarter and 1% for the full year.

In the midst of declining volumes, industry pricing has been constrained by aggressive competition for corporate rental accounts. This is on slide seven. While we were able to retain 99% of our business customers in the fourth quarter, our commercial pricing has been impacted as a result. On top of this, industry rental fleet over capacity and a soft used car market adds to the difficult pricing environment. In order to stay competitive, especially among commercial accounts, our worldwide car rental revenue per day came down 5% last quarter as a higher proportion of our mix in the fourth quarter was leisure business. For the full year, our worldwide car rental revenue per day was down 2%.

On the next slide, typical seasonal returns of OEM program cars in the fourth quarter helped us to further right size our car rental fleet. Fortunately, we sold very few risk cars last quarter when residual values were at the lowest levels. This was because of the significant number of option sales that we executed in the third quarter when pricing was much better. Overall, we reduced our global car rental fleet by roughly 9% compared with the fourth quarter last year, and transaction days declined only 7% in the quarter. Therefore, we did a good job managing the efficiency of our fleet, as transaction days and fleet size should be closely aligned in their movements. Lower prices on declining volume and a tighter fleet drove worldwide car rental revenues down 15%, or 11% excluding currency effects, in the last three months of the year.

Moving on to the equipment rental segment on slide nine, industry volumes here also reflect a very difficult economic and business environment as investment in commercial construction and the industrial markets slow. Demand for earth-moving equipment continued to decline and industrial end markets like aerial, electrical, pumping, and safety equipment essentially shut down in the last month of the year. Our worldwide HERC volume was down about 16% in the fourth quarter and 6% for the year. Worldwide equipment rental pricing declined 2% versus the comparable 2007 fourth quarter and 1% for the full year. We reduced our worldwide equipment rental fleet by roughly 11% compared with the fourth quarter last year, and by 8% sequentially from the 2008 third quarter on a first cost basis.

In the fourth quarter, we significantly increased our equipment fleet sales at auction in an effort to get ahead of falling demand. Unfortunately, the GAAP expanded and volumes fell even faster in the fourth quarter. Total worldwide equipment rental revenue was down 21%, or 17% when you exclude unfavorable currency effects. For the 2008 full year, consolidated worldwide equipment rental revenue is down 6%, or 7% currency adjusted.

You can see that the intensity of the slowdown in demand is far greater than anyone could have anticipated going into the fourth quarter. As volume, pricing, and residual values continued to decline, we took a number of specific actions to strengthen our operations and become more competitive in the face of the protracted global downturn. These actions included more tightly managing our fleet portfolio for increased asset utilization, intensifying emphasis on cash generation and further streamlining our cost structure.

In terms of efficiency, let's first talk about the fleet on slide ten. There will be more market risk in the near term so right sizing our business is a priority. The majority of the car sales in the fourth quarter were sold back to the OEMs, as contractually negotiated. These are what we call, program cars, and the fourth quarter is when the majority of these cars are returned to our suppliers. As a result, our worldwide mix of program cars and risk cars, or cars that we sell ourselves in the used market was 28/72, respectively, at year end. While this mix is typical for the last quarter of any year, over a twelve month period it is very dynamic changing regularly as a result of seasonality and depending on the economics offered by our suppliers. With the leaner fleet, we continue to manage inventory levels closely to drive asset utilization. However, in the fourth quarter, worldwide fleet efficiency declined 1% year-over-year for car rental operations. On the equipment side, we still have some work to do in terms of de-fleeting. We will continue to down size capacity as dictated by market conditions.

Now, let me talk about some of our other productivity initiatives on slide 11. Our Lean Sigma Systems to re-engineer business processes are expanding and I am pleased with the results we're seeing. This is a continuous improvement program so there is certainly more opportunity here. Consolidating locations, reviewing and renegotiating third party contracts, merging back office operations, and introducing self-service kiosks at airports are other initiatives we have undertaken to rationalize our cost structure. Yet, despite these efforts, we have been forced to cut additional head count as demand continues to fall. In 2008, we cut our temporary and full time workforce by 7,000 employees, or 19% of the total, to address the current market conditions. Between November of '08 and February of '09, 4,000 positions were taken out. This latest restructuring program, which was announced last month, is expected to yield $150 million to $170 million in annual savings. These job cuts were across the board in the car and equipment rental businesses, corporate and support areas, and an in all geographies, with less impact on the customer facing positions.

Finally, we have taken a look at our locations to identify which are generating value for us in this new environment and where we may have gaps. As a result of the worldwide analysis, we closed a net 8% of our equipment rental facilities in 2008, and opened a net 3% more corporate car rental locations, more or less divided equally between on airport and off airport sites. At December 31st, we had more than 4,400 corporate car rental locations compared with 4,270 last year. Overall, the refinement in our footprint allows us to focus our marketing and operational efforts on the most profitable, highest volume locations. We have plans for additional adjustments, but expect to be completed with this initiative by the end of the first quarter.

Unfortunately, the progress we made in many areas during 2008 was outweighed by the severe impact from overall falling demand, competitive pricing and higher fleet costs as residual values declined in the car rental business, as well as the more significant downturn in our highly profitable equipment rental segment. During the fourth quarter, adjusted pre-tax income declined by $260 million from 2007 on a $359 million reduction in revenue. This represents 26% profit retention which is a significant improvement over the 2008 third quarter. You'll recall that in the third quarter, revenue declined by $28 million, and adjusted pretax income was down $166 million. Therefore, we had negative profit retention during that period. We expect our retention rate to continue to improve throughout 2009. Of course, that's contingent upon there being no dramatic changes in the business climate.

For 2008, we delivered more than $300 million in incremental cost savings, exceeding our target. This is on slide 12. Again, these initiatives only partially offset the impact of the recessionary effects on earnings. Be assured that our employees are working with the highest level of urgency on the things we can control, and leveraging the Company's operational agility to succeed in the changing environment. While we're hoping for the best, it is only prudent to plan for the worst. The steps we're taking are designed to position us to maintain our competitive edge in the near term and to build on our growth position for the future. Maintaining a balance between cost savings and growth is essential. Along those lines, we have an expanding diversified product and service offering that's helping to mitigate the overall drop in rental sales in both of our key businesses.

For car rental, on slide 13, we recently launched Connect by Hertz, a car sharing service where consumers are able to rent vehicles by the hour from nearby locations. This service provides entry into several new demographic groups for Hertz. Urban consumers who avoided the hassle of owning and parking a car in the city can use Connect by Hertz to run errands or visit friends and relatives in other towns. In just the two months since the program was introduced, we've already signed up more than 2,100 members in New York, London and Paris. We're also reaching out to a younger demographic through college car sharing programs. In January, we signed agreements with Ohio State University and Pepperdine University to offer our service to students on those campuses, where reducing parking and traffic congestion is a priority, and we are beginning to sign corporate accounts, like Marriott Hotels, to our car sharing program.

Some other relatively new services that are taking hold are those to counter the declining prices in the used car auction market. Alternative sales channels such as Hertz.com, third party Internet sites, our new rent to buy program, and dealer direct arrangements provide us an avenue to avoid auction fees and exceed wholesale prices by going direct to the consumer. Roughly 39% of our US used car sales in the 2008 fourth quarter came from these alternative channels. As always, we're aggressively pursuing new business. We secured a net addition of 46 new car rental accounts during the fourth quarter, and added just under 240 net new accounts for the full year 2008 on a global basis. At the end of 2008, Hertz was a recognized supplier at 87 insurance companies and a preferred supplier at 98 insurance companies. Combined, we are now a recognized or preferred supplier at 185 of the 209 largest auto insurance companies in the US. These accounts are supported by our continued growth in domestic off airport locations.

On the equipment side, in addition to a substantial number of incremental smaller accounts, our Hertz business captured 38 new accounts in the $500,000 plus annual revenue category during 2008. This new business has the potential to generate about $43 million annually. 16 of these new national accounts were won in the industrial sector where construction and fragmented markets made up the balance. Our national account business has been stable, representing 50% of our 2008 North American equipment rental revenue, versus 48% in 2007.

Geographically, we're expanding into the emerging markets. First, in China, with our equipment rental products which we rolled outlast summer. We are really pleased to achieve profitability there so quickly, well ahead of expectations. Later this spring, we'll open car rental locations in Shanghai and Beijing, capitalizing on the strong Hertz brand for cross-selling opportunities.

Promotional programs like multi-month rentals, partnership incentives and prepaid discount rentals are also getting positive traction. In the end, however, customer service is our number one priority and growth driver, and I think the feedback speaks for itself. On the next slide, for 2008 our net promoters fueled growth. In our North American car rental business, our net promoter score with a number of net promoters, increased 3% over 2007 despite the workforce and fleet reductions. In Europe, we improved our NPS by 26% in a very challenging operating environment. Also last year, numerous publications around the world, like Conde Nast Traveler, Travel Weekly, and Travel and Leisure, to name just a few, touted our performance with 25 different industry first place awards for service, customer loyalty, environmental progress and brand awareness.

Now, before I turn the call over to Elyse, I want to take a minute to talk about our financial flexibility. I know that is an important topic right now, so let me lay it out for you on slide 15, and Elyse will follow up with more detail. We run Hertz in a very disciplined and efficient manner. At the end of the quarter, we had $594 million in unrestricted cash, and $4.2 billion in unused borrowing capacity under our credit facilities which is subject to borrowing based limitations. Our new ABS facility is another source of liquidity. This $825 million fleet facility, added in September, contributed to our total liquidity at year end. For 2009, we have about $1 billion in debt maturities due, with some facilities already in place to cover those commitments. Generating cash flows is our highest priority. The restructuring program we just announced should generate cash as we move forward. Additionally, lower demand levels are reducing cash requirements for fleet acquisitions, and as cars are built better, and our equipment purchases focus on longer life industrial products, the aging of our existing fleets won't impact sales. With that, I will turn it over to Elyse to review the financial details of the quarter.

Thanks, Mark. Good morning, everyone. Let me begin today by discussing our key profitability metrics, followed by the operating results, and closing with the discussion of our financial strength.

On slide 17, in the fourth quarter we recorded total revenue of $1.8 billion, 16% lower year-over-year, or 12% lower excluding foreign exchange. This decline was due to lower volumes, compounded by pricing pressures across all market segments and geographies, as the industry was in the process of reducing excess fleet capacity to meet rapidly falling demand. In the fourth quarter, we recorded an intangible asset impairment charge of $1.2 billion, identified in connection with our annual impairment test and reflects year end market conditions. However, the charge is non-cash and will not affect our liquidity position, the availability under our credit facilities or compliance with our financial covenant ratios. On a GAAP basis therefore, we had a pre-tax loss of $1.4 billion. Excluding the impairment charge, the pre-tax loss was roughly $280 million. The loss included $94 million of restructuring and related expenses as we reduced headcount and closed underperforming locations in the fourth quarter, and $44 million in non-cash deferred debt financing costs.

Consolidated corporate EBITDA was $117 million in the fourth quarter, compared to $385 million in the 2007 period. For the full year, corporate EBITDA fell 29%. Falling volumes, lower rental prices, and diminished residual values drove the earnings decline. Despite the challenging quarter, our worldwide equipment rental business was still able to maintain a 43% corporate EBITDA margin. Adjusted diluted earnings per share was a loss of $0.22 in the fourth quarter, but was positive at $0.42 per share for the full year. On a GAAP basis, the fourth quarter loss was $3.76 per share, and $3.73 per share for the full year. The impairment charge represented $3.05 per share. While we're disappointed by these results, they're clearly a reflection of the challenging operating environment. Regardless, our entire team is focused on taking the necessary actions to preserve profitability, which as Mark pointed out, includes right sizing the fleet and adjusting costs to reflect lower demand.

Now, let's turn to slide 18, where I will walk you through some operating metrics for our car rental business. US car rental rate revenue was lower by 14% for the fourth quarter year-over-year. Pricing in the US, as measured by revenue per day, was down 5%, with on airport pricing down 6%, and off airport pricing 2% lower. Even though we announced a US price increase in late October, it was not sustainable due to the industry's excess fleet at that time. Domestic volume measured by transaction days was 9% lower in the latest three months as a 14% decline in total transactions was partially offset by a 6% increase in transaction length. As I mentioned, our business mix leaned more towards leisure rentals in the last quarter, which typically are held by customers for longer periods of time.

International car rental rate revenue declined 21%, but excluding the impact of foreign exchange, rental rate revenue was down only 7% in the quarter versus the prior year's comparable period. Revenue per day for international car rental in the fourth quarter was 4% lower due to pricing pressure across all our overseas markets. Within our international business, our car rental operations in Europe were similarly impacted by the global recession as rental rate revenue there, excluding the impact of foreign exchange, was down 11%. Transactions declined 8%, and revenue per day dropped 5% due to pricing pressure on contracted rate accounts. The transaction days for on and off airport combined were down 6% for the quarter as Europe also benefited from longer length transactions.

On October 24th, we instituted a 10% price increase of all our non-contracted rates across Europe, which was generally followed by our competitors. For the last three months of 2008, our average revenue per day on retail leisure segments was positive at .4%,, up 3.3% in December ,and continued to improve into 2009. Our operations in Australia and Brazil, also part of our international group, reported double digit volume growth this fourth quarter versus the 2007 similar period, although we see that trend slowing in 2009.

Slide 19 highlights worldwide car rental fleet efficiency, which is defined as the percentage of days a vehicle is rented compared with the total days available for rental. We did a good job on utilization throughout 2008, but the precipitous decline in demand in the last quarter of the year affected utilization negatively. However, we were still able to deliver a slight increase for the full year. In the US, we reduced our fleet by an additional 12,000 vehicles in the fourth quarter of 2008 versus a year earlier, and over the same period, we sold 53% fewer risk cars in the US as our aggressive third quarter actions reduced our exposure to used car residual values in the fourth quarter. As a percent of the initial cap costs, our average US residual value on this reduced level of sales volume declined 11% year-over-year, while the Manheim Index declined 12 points in the fourth quarter compared with the fourth quarter 2007.

While last quarter was challenging for the used car market, there were signs of improvement after the new year. The Manheim Index showed a nearly 4% increase on wholesale used car prices from December to January. As new car leases expire, and consumers aren't able to review the lease or afford a new car, purchasing a one, or two, year old well maintained used car is the best economic alternative. At December 31, 2008, the percentage of risk cars in our US fleet increased to 74%, from 59%, at September 30, 2008. This year-end concentration of risk cars is consistent with our 2007 mix. The average age of our total US car rental fleet at year end was about 10 months, compared with roughly eight months in the 2008 third quarter and 2007 fourth quarter.

Now, turning to worldwide equipment rental, or HERC, as we refer to it. Starting on slide 20, equipment businesses continued to be impacted by the weak construction demand, globally. Revenue was down 21% year-over-year driven by double digit volume reduction and a 2% price decline in the fourth quarter of 2008. We continued to diversify our customer base away from construction and into industrial and fragmented markets. In North America, revenue from residential and non-residential construction dropped to 47% of revenue in the fourth quarter, from 51% last year, and industrial revenue increased to 23% from 20%, the highest level of industrial exposure in the Company's history. On a favorable note, Canada showed continued demand in both the industrial and specialty equipment businesses. Our equipment rental volumes in Canada for the fourth quarter were up 3% year-over-year as our Hertz Plant Services initiative continued to capitalize on the Canadian oil services industry. Hertz Plant Services is our customized service offering providing on site and off site equipment management.

Our first equipment operation in Shanghai, China, which opened in July 2008, continued to exceed our expectations. In the fourth quarter, we generated a small profit as measured by both pre-tax and corporate EBITDA. Demand continued into the new year, and we expect to broaden our reach by penetrating several more markets in China this year. At December 31st, our worldwide equipment fleet age averaged 36 months, a two month increase, compared with the average fleet age at September 30th. We believe we still have one of the youngest equipment fleets relative to our industry peers and feel we can continue to age the fleet further without deterioration in the customer experience due to our fleet mix. In the fourth quarter, net CapEx for HERC was a reduction of $76 million, representing $126 million cash flow improvement for the quarter.

As Mark discussed, we've taken aggressive de-fleeting actions during the past quarter. Equipment sales on a first cost basis totaled $197 million, generating $199 million of less investment in fleet growth over the year earlier quarter. Continued demand for used equipment is coming from overseas markets like Latin America, South America, and parts of Africa. For the full year, used equipment sold on a first cost basis totaled $583 million, generating $775 million in less investment and fleet growth over 2007. HERC's fleet efficiency metric, calculated by taking total HERC revenue less equipment sales and other revenue and dividing that by the average fleet acquisition cost, was 5% below the prior year as our accelerated fleet reductions weren't able to keep pace with the steep declines in rental demand. I want to point out, though, this calculation understates efficiency due to the impact of the decline in pricing on revenues.

Now, let me review our financial strength on slide 21. As Mark mentioned, based on December 31, 2008 availability, we have more than sufficient liquidity in our existing fleet facilities to meet our 2009 debt maturities. We are beginning discussions with banks and other investors to review refinancing options for the next set of maturities coming in the second half of 2010. We feel confident we'll be able to refinance all of the debt coming due, bearing in mind the debt level to be refinanced may be smaller as we shrink our fleet in line with reduced demand.

Now, let's look at levered cash flow, which measures cash flow available to reduce net corporate debt. In the fourth quarter, we generated levered cash flow of $430 million, driven primarily by lower fleet investments. Additionally, we generated $1.8 billion in total net cash flow compared to $1.7 billion for the same period a year earlier, which demonstrates our ability to generate cash not only from earnings, but also from de-fleeting activities in both our business segments. Working capital improved in the quarter due to increased efforts on receivable collections and better payment terms. At year end, our working capital was negative 41 days, versus negative 35 days for the same period last year.

Also on slide 21, are the two financial covenants that we are required to meet under our credit facilities each quarter. At December 31st, our consolidated leverage ratio was 3.71 times below the maximum allowed of 5.25 times. The interest coverage ratio was 2.94 times above the minimum requirement of 2 times.

Lastly, moving to slide 23, for the full year 2008, our GAAP effective income tax rate was 14.5%, and cash income taxes paid totaled $33 million. The low 2008 effective income tax rate primarily is attributable to recording a valuation allowance on certain US deferred tax assets that we believe may not be realized, as well as impairment losses for which no tax benefit can be realized. With that, I will turn it back to Mark.

Thanks, Elyse. Consumers around the world cut back sharply on spending at the end of the last year, driving the economy into the worst backslide in a quarter century. Still, many economists predict the current quarter will be the worst of the recession as it drags on into a second year, and consumers and businesses retreat further. The global economy is deteriorating more quickly than leading economists predicted only weeks ago. For Hertz, contingency planning is accelerating and ongoing as worst case scenarios play out. Our imperative going forward is to ensure our costs remain closely aligned with demand. We'll achieve this through car and equipment sales, consolidating administration processes, further headcount adjustments as necessary, and continued efficiency initiatives like Lean Sigma, and preserving our financial strength to endure these challenging economic times. We've already identified an incremental $350 million in savings for 2009. This should drive improved profit retention throughout the year, as I mentioned previously in our call.

Furthermore, we increased prices on North American car rentals at airport locations in early 2009. Based upon publicly available information, competitors have also increased prices during this time period, which we believe is indicative of tighter fleets in the industry compared to the fourth quarter of 2008. Our focus is clearly on right sizing, and not simply downsizing, the Company. We're balancing cost savings with investments back into the business. For example, we remain committed to growing niche segments where we can capture high returns over a one year payback period. We have no programs in the pipeline that represent anywhere from $300 to $400 million of sales growth. After years of growth, our market is now looking at double digit declines. We believe the travel industry can manage the downturn, but it is in the country's interest to stimulate travel as one of the best means to stimulate the economy.

We realize that economic conditions will continue to be demanding throughout 2009. While no car rental companies are insulated from today's challenges, the strongest, most strategic competitors will gain a compelling advantage in consolidating the market and capitalizing on new channels of demand, and ultimately, those coming through this cycle will be better operators for having been here. Hertz will be the benchmark among them. With that, let's open it up for questions. Operator?

(Operator Instructions) Our first question, then, comes from the line of Chris Agnew with Goldman Sachs. Please go ahead.

Thank you. Good morning. I guess you're in a position, now, where it is easier to add fleet more slowly than being in a position where you need to delete it quickly. What's your view about net additions to your vehicle fleet through the year and how much flexibility do you have around that in terms of timing? Could you have a scenario whereby third quarter, your fleet levels are flat from where they are today?

Chris, the first part of your question, I think, you were accurate in stating the fact that we're in a position now where we're right sized, if you will, on the fleet to the demand levels, and we're in a position where we could add fleet if, in fact, demand picks up. If you're asking me where I think demand is going in the third quarter, I have no clue, honestly. We're hopeful that current demand levels continue to remain. We've been able to see some improvement, frankly, from what we saw as our fourth quarter levels towards the end of the fourth quarter. So that improvement has been encouraging to us, but whether or not that is sustainable going forward into third quarter, we really don't know. We are aging the fleet. We continue to do that, plus the lower fleet volumes will have 2009 purchases probably down somewhere in the neighborhood of 30%, Chris. That's kind of where we think purchases will be down roughly, depending again on demand. We're in a position, right now, where we feel very comfortable that we can get any fleet we want whenever we want, and as we rotate it, it will have a positive effect on depreciation. So, we expect that we'll have significantly lower fleet acquisition costs as we rotate that fleet.

Got you. And then, one more question. Am I right in thinking that you talked about commercial pricing being more competitive, and leisure, you're obviously putting through price increases? Would it be fair to assume that where we are today, sort of net neutral then?

I don't think we can say we're net neutral. I can say that on pricing, again, we led with a price increase, with an announcement, and continue to try to pull the market as the price premium leader up, but again, this is a very volatile market. We think that there is tight fleeting going on, as I mentioned to you, so that bodes well for the overall industry, where historically when we've had tighter fleets, pricing has improved. That's about the best visibility I can give you on that.

I guess maybe another way of asking it, is commercial pricing, which obviously contracts renew right through the year, does that continue to be as competitive, and therefore down, as you renew?

It continues to be competitive, but as you move forward, the year-over-year comp becomes easier, right. Where we saw an awful lot of pressure on pricing as we do corporate accounts every single month, it started really getting tough, I would say into the third quarter, and then into the fourth quarter. So, the comps become easier towards the back half of the year. First half of the year, we continued to see some pressure in corporate pricing. On the fleet side, I want to go back to that for one minute because you asked about where we were on fleet. I have failed to mention that in terms of what we committed to, we've only committed to about 50% of what we see as the demand for fleet this year. Okay? So, we've allowed ourselves a lot of flexibility on the fleet planning cycle.

Okay. Great. Thank you very much. I will get back in queue. Thanks.

Our next question is from Brian Johnson with Barclays Capital. Please go ahead.

Good morning. This is actually Daniel Rossner for Brian this morning.

Good morning.

I want to come back a little bit on your large debt maturity coming due in 2010, and would you be able to comment on what are the avenues that you would be looking at in light of the current state of the ABS market, and how much you think this could cost incrementally, compared to the financing you have now?

I will answer a couple of things and then, we'll let Elyse probably answer in more detail. But for the most part, we believe that and we are highly confident we'll get refinancing in 2010. So, we're very confident of that. There is really, probably, six or so avenues for us to do that, and let me let Elyse take you through those and what we have been working on, and in fact, discussing with people as we speak.

There is a number of avenues that we're pursuing here. One is obviously, the bank conduit market which we believe that market is open, and one strategy would be some term extensions of existing facilities. There is term issuance available in the ABS market as windows open up for higher quality traunches. They may be smaller in size, but we'll probably take advantage of that market as the year goes on. We're discussing fleet financing with some of the stronger OEMs, as well as leasing structures from traditional type of lease providers. And then, as I mentioned earlier, we'll very likely have to finance somewhat lower than the maturing amounts due to the lower fleet size. As to pricing, it is really too soon to say. I would hate to put a number out there right now given that we really aren't going to be doing anything until we get much closer to those maturity dates, which are really in the middle of 2010.

Okay. And I guess, back to the point that obviously in light of smaller fleet size you can probably do with less availability. What are your thoughts there? Right now, I guess based on your current plans for fleets, how much do you think you would have to refinance out of the $6 billion?

You know, we're just going to take that and we continually look at that, but given that we really don't know how the year is going to unfold, if demand starts to pick up, it could be a higher number than what I would throw out today, so I really don't want to put a number out there.

Most of the debt is not due until July, August of 2010, and we all know that if you've got that all done right now you would be crazy, right? The spreads should, in fact, improve a little bit, we would think, over the next twelve months. So we've committed and talked about doing, roughly this year at least, probably $1 billion, I think. So roughly that this year, and doing more of it towards the beginning of next year in 2010. Okay?

Perfect. Thank you.

Our next question comes from the line of Emily Shanks with Barclays Capital. Please go ahead.

Good morning. Thanks for taking the questions and all of the detail I just had a couple of clarifying questions. On the footnote regarding liquidity, the $1.5 billion that's cited, does that take into account both the ABL as well as the fleet facilities? That's all in, barring availability?

Let me just take a look.

Sure.

I believe it does, but let me just check.

That would be great. Thank you.

Yes, it does.

Okay. And then in terms of as we think about maintenance CapEx for HERC for 2009, can you give us a little bit of guidance there?

I believe that's also, Emily, shown on the slide. I believe it is slide 19. We show the maintenance CapEx separately. It is about $80 million. It is on slide 20.

Sorry, I am looking at it right now. That's for next year?

No, that was for the fourth quarter. I am just showing you for the fourth quarter.

Right, so I was hoping, should we think about will maintenance CapEx run similarly over 2009, or how should we think about that for the HERC fleet, specifically?

Hi, Gerry.

I think it is fair to look at it similarly to 2008, yes.

Yes, should be in line.

Okay. Great. We'll get back in queue. Thanks.

Thanks.

Our next question is from the line of Sundar Varadarajan with Deutsche Bank. Please go ahead.

Hi. Just another follow-up on the fleet financing maturities for this year. You talked about $1 billion or so, this year, you already have, kind of, liquidity to refinance. Could you kind of walk us through what the main sources of that are? Are you introducing any of the availability under your credit facilities outside of the fleet financing availability? And, how much of that do you expect to replace with actual fleet financing facilities you put in place?

Today, we have variable funding notes under our existing ABS, and we have capacity under those facilities as well as the additional $825 million fleet financing we put in place in September, so the two combined are in excess of $1.5 billion.

And in terms of the pricing on those, how does that compare with your existing facilities that are in place?

The $825 million that we did in September was about 125 basis points wider than the facilities that were put in place back in 2005.

And the variable funding notes?

Those are the variable funding notes, and all in pricing on those is probably LIBOR plus 35 to 50.

Okay. Thank you.

(Operator Instructions) Our next question from James Ellman with Seacliff. Please go ahead.

Hi, thanks a lot. Can you give us a little detail about the intangible test? I believe Dollar Thrifty wrote off all of its intangibles a quarter back. Where did Hertz only write off one-third of its intangibles, and when would the next test possibly be?

Well, we look at this throughout the year. In terms of our write off, I think it was less than 25% of our total intangible, and there is a whole model that was done with a third party appraiser. We used Duff & Phelps for the exercise, and it is basically done on a DCF basis, so it's looking at the outlook for the business. So, we will continue to look at that and evaluate it each quarter.

All right. And so, what would be the real triggers that would lead to further write down of some of the intangibles.

We normally run an annual test, but if there is a triggering event such as a market of our shares dropping or the business climate dropping dramatically, we would do another test in Q1 and look at our intangibles again. We will make that judgement as we go through that test at that point.

And that's Jatindar Kapur, our Controller, who is responding here.

Okay, very good. Can you give us a little detail on what's going on with residual prices when you go to sell both vehicles and equipment? I believe you reduced the depreciation rates at HERC, a year back or so. What is happening there with residual prices, and could you also give us a comment on what you expect to occur, or what is baked into your numbers for when you do start to sell some of those slightly older cars that are risk cars in the secondary markets?

I will answer on the rental side briefly and then Gerry can talk about the equipment rental side. But, on the rent-a-car side, I think it is pretty well known right now in the industry the residuals have improved in January and February, versus where they were in the fourth quarter.

But, how is that versus the depreciation you have taken and the residuals that is you have baked into your models?

We evaluate that periodically, and we have taken a number of adjustments throughout 2008 to adjust the rental car depreciation rates.

So, do you believe that with the current prices achieved in the market that your depreciation is approximately correct?

Yes, absolutely.

Okay. Then Gerry do you want to talk about equipment rental?

Yes. Within the last quarter, we saw about a 6% to 8% drop in residuals at units sold at auction, so we saw that occur really middle to late part of the fourth quarter. We did not take any change in depreciation in 2008, as the rates we had really reflected a good blend of that sales activity.

All right, and last question. Could you give us a little bit of outlook on your exposure to either bankruptcy or prepackage bankruptcy, or some other sort of forced restructuring at the Big Three automakers?

Sure. This is Elyse. Obviously, we do have exposure, and our goal here is to look at it constantly to minimize that exposure. The magnitude of our exposure really depends on what our outstanding receivable balances are with the OEMs, as well as the composition of our fleet. The losses would be related to the loss of any uncollectible receivable as well as we could potentially have to increase the enhancement levels in the ABS for any market value declines in the fleet. So, although this amount could be material, we believe we have more than enough liquidity to cover that exposure.

All right. Finally, could you comment in the same vain on the situation with Kia?

Yes, Kia paid us and we are current.

So the lawsuit has been settled?

It is resolved.

Yes.

All right. Thank you very much.

Our next question is from Christina Wu with Soleil Securities. Please go ahead.

Thanks. Good morning.

Good morning.

You had earlier commented with regard to Chris' question that you expect fleet to be down 30%. I just wanted to clarify, is that car rental fleet, or combined car and HERC fleet?

That was for rent-a-car we were talking about.

Right. Christina, what we said is that we purchase cars on a model year basis, and our purchases this year will be down 30%, not the fleet.

Great. Okay. Got it. A HERC specific question. With Obama's stimulus plan having passed, do you see any potential upside for the HERC business from increased construction, whether it be road construction or build to construction with school repairs, libraries, et cetera?

Yes, Christina. We think that there will be some positive impact, although the timing could be most likely later in 2009 as some of these moneys are let, contracts are bid and all the work takes place to get those moneys to specific projects. But, yes, in all the areas you mentioned, we think there could be positive impact, but we think that will be later in the year.

Having said that, one of the things that we were concerned about that we saw happen and are seeing happen a little bit, is that the stimulus package, while it is good longer term, in the short term a lot of people that had projects that were going to spend money on them have stopped spending money because they think they're going to get money from the stimulus package.

Right. With the timing then, of the potential spending being later in the year, do you expect that you'll hold onto fleet a bit in case of that increase, or you'll deflate and then buy fleet back when you see demand picking up?

I think we'll react quarter by quarter, and the likelihood is as the decline continues we will de-fleet, and then we certainly have enough flexibility to bring fleet in as we see the work start to materialize.

Perfect. Thanks so much.

Thank you.

Our next question is from William Truelove with UBS. Please go ahead.

Thanks. Good morning. I know you paid off a lot of debt in the fourth quarter, but could you tell us what the remaining quarterly maturities are for corporate and fleet for 2009? I didn't see that slide.

The maturities that we have for 2009 are about $1.1 billion, and that's primarily fleet financings that are coming due.

Is it still $771 million in the first quarter, and $169 million in the second quarter, Elyse?

I don't have those numbers in front of me by quarter.

That's what it was at the end of the third quarter, so I was just wondering.

We can get back to you separately on that. Okay?

Great.

We did amortize some of the fleet debt in the fourth quarter of '08 that had an '09 maturity.

Thanks. That's it.

Thank you.

Thank you. Our next question is from the line of John Healy with FTN Equity Capital. Please go ahead.

Thanks for taking my call. Question for you on the HERC business. When you look at the declines you saw in the fourth quarter and you looked at where the margins were, I thought with the declines the margins were a little better than I thought they would be. Can you talk to if you kind of use that same run rate in 2009 for the HERC business, where you think you could hold those EBITDA margins?

Yes. Gerry, go ahead.

Yes, John, I think based on the performance in the fourth quarter we're comfortable we can hold the EBITDA margins in the low 40s at this run rate into 2009. We have taken significant cost actions ahead of the curve from an operating perspective, and then continued balancing of the fleet allows us to produce better margins as we go, but we think we can hold in the low 40s in this environment.

Great. And kind of a big picture question for you, Mark. I think about your business and think about the things taking place in the industry, clearly no one has encountered all of these pressures at the same time in the history of the industry. Do you feel like that 2009 will be a different year than 2008 in terms of, I don't want to say the industry kind of changing and moving in a new direction, but from a capacity standpoint on the fleet, and from a pricing standpoint, are you more or less optimistic that as we move through 2009 and fast forward twelve months, and we have a year-end call for '09, that Hertz would be able to produce improved utilization and improved pricing this year, compared to 2008?

Yes, we believe that we can improve both utilization this year and improve pricing this year, so that's again our hope. Our plans are not necessarily built around that. We do what we call, worst case scenario planning, for our cost structure, but based on everything we see in the marketplace, that will happen. Our hope also is that because fourth quarter and third quarter, towards the end of the third quarter, the precipitous volume decline was so great that comps year-over-year in the third and fourth quarter become much easier. And then lastly, the one thing that I mentioned that I don't know if anyone picked up on it, but we're predicting that our profit retention rate will improve, which means another way of saying that, that kind of our profits improve as we go forward in the year, we right size the business. We're almost there now, and we have a better chance of making money as the quarters unfold throughout the year.

Great. Thank you.

Okay.

Our next question is from the line of Erin Caddell with Hovde Capital. Please go ahead.

Can you hear me okay?

Yes.

Thanks for taking my question. I was just wondering. You have you a fair bit of your fleet debt insured by MBIA and AMBAC, and with the news last week from MBIA that it is kind of separating into two companies and focusing on public finances as opposed to structure finance, what would be your thought on the ability to get wraps of any kind on your fleet debt going forward, and then, is there any implication in your mind to the state of the guarantee on the existing debt from the shift. at least at MBIA?

Yes.. I guess we're still getting our arms around the changes at MBIA, but with respect to a wrap deal, we're not looking at any type of wrap structure right now in the marketplace. That market may open up as the insurers get into a position where they can write the business comfortably, like taking the actions MBIA is taking, so I think, perhaps in the long run, it is a good move. Obviously, we do have MBIA and AMBAC on our current facilities, and there is a risk. Just to highlight one other point, on the $825 million deal, we chose not to have that deal wrapped. So really, that's where we believe the market is today for a rental car deal, is an unwrapped basis.

Okay. Then, just going back to the earlier question about the Ford and GM exposure, you have given some disclosure in your 10-Qs about kind of the maximum levels, about $200 million each to Ford and GM. Can you give any comment about where that is today?

Well obviously, I think our peak is when we're actively de-fleeting program cars is when we have the largest receivable exposure, so that really does change over time, really a factor of program cars we have in the fleet from each of the manufacturers.

Would it be 10% less than that maximum, 50% less, even give any color on how much that figure varies through the year?

Let's see. First at the year-end, it's actually down. Are you referring to the numbers we put out in November?

Yes.

That's pretty much the peak.

Okay.

Does that help?

Yes, that does. Last question. Can you just give some thought on your, I know there is discussion about it with with your recently announced price increase and competitive forces, but what is your general outlook for rental rate revenue per transaction day for '09, just given the mix shift of people renting smaller cars as opposed to bigger cars, but offset by the pricing increases that you, at least, hope stick?

Do you want to take a hazard, a guess there, an estimate, a range?

You really have to look at it by segment. I think we're optimistic that with the competitive fleets tightening, right sized, that there will be opportunity for positive year-over-year improvement on the leisure non-contracted side. On the commercial side, because of the year-over-year changes that occurred in the second half of last year, that's a little bit more challenging environment, that overall, particularly on leisure side, I think optimistic that we can get some positive traction on the revenue per day, in that segment, and if you go back to 2002 following the downturn after 9/11, that's exactly what happened as the industry fleets right sized.

Okay. All right. Thank you very much for answering my questions.

Thank you.

(Operator Instructions) Our next question is from Michael Millman with Millman Research Associates. Please go ahead, Thank you.

Following up on the pricing issue, Dollar Thrifty said on their call that prices and leisure was actually up. Can you tell us where your leisure pricing relative is today? Also, where the commercial pricing is today? Related to that, where Simply Wheelz pricing has moved? And I guess, you have this relationship with Advantage, to what extent might that relationship increase and possibly replace the Simply Wheelz?

Certainly we can't comment on any relationship with Advantage that we may or may not have, so I guess, we did take over some of the their reservations in the fourth quarter. Joe Nothwang, I guess you and I can pitch and catch this. In January, leisure was up, the pricing was up, and certainly commercial continues to be challenged, and we expect it to be challenged for probably half this year, at least. So, that's kind of my take on pricing.

Pricing is up, you're talking about year-over-year?

That's what I just said. In January, leisure pricing is up year-over-year.

Can you give us an idea of how much?

No, no. First of all, we don't talk about pricing on the call. There is anti-trust issues, so my lawyers are already pointing at me and so this is something we don't want to really get into. We also are not trying to get into guidance, as you know, which we're starting to encroach upon. So, sorry. I am not trying to be cute here, I just probably am at my limits of what I am going to be able to tell you about pricing at this point.

And specifically, on the car rental fleet, how much is that down today compared with a year ago, or 12/31, compared with a year ago?

We haven't talked about that. I mean, you're talking about right now in the current quarter?

Right today compared with twelve months ago, or if that doesn't work, 12/31 compared with 12/31.

We said the fleet was down at 12/31. I believe it was down 9%.

I thought that was the average in the quarter.

I don't know if that was the average. What was the ending fleet number? Do you have the number?

The ending fleet number in December from the third quarter was down 15.5%.

How much in the third quarter?

15.5% from the ending point in the third quarter to the ending point in the fourth quarter. It was down 15.5%.

What would that be year-over- year?

I don't have that.

The 9% is the year end, though.

She said it's the average. We should have it in the attachments. I know you can calculate is from the attachment. Anyone know right here? We'll see if we can get that back to you separately. Okay, Michael?

Yes, I think year end average was down 1.3.

And on the financing side, can you talk about the potential for the deferring LKE and what that could do in terms of cash flow?

Obviously, if we turned off the LKE, it would generate cash flow, but it would hurt from us a tax perspective, so we don't have plans to turn that off. As long as we're acquiring fleet, we'll use the LKE fund,.

So does that stand as an emergency, if needed?

It is certainly a lever we could pull.

Thank you.

This is Mikel Taride from Europe. Our fleet, both in Europe and the US, was down about 7.5% in December year-over-year, which is in line with less days, as you heard the numbers. Our fleet was aligned with the declining days, rental days.

Thank you.

Okay. Great. Next question.

Our next question is from the line of Adrianne Colby with Deutsche Bank. Please go ahead.

Thank you for taking my question. You indicated earlier that you closed net 8% of your equipment rental facilities in 2008. I was wondering if you could provide color as to where some of those closures were.

Sure, Adrianne. This is Gerry Plescia. We closed most of the locations in markets where we had multiple locations. So, if we had ten locations in San Francisco, we closed a few of those to shrink the pool of locations. As opposed to getting out of markets entirely, we really shrunk the network in multiple city locations. Mostly in the US, a few in Canada and some in Europe. It was spread fairly well across the globe.

Great. Earlier you mentioned, that as of now, you're only committed to about 50% of the fleet needed for 2009. I think you were referring to the car rental business. Can you comment on the equipment rental side of the business?

On the equipment rental side, we really have no fixed commitments at this time, just minimal dollars of fleet we're buying for specialty needs, but we don't have any fixed commitments for 2009 at this point.

Thank you.

Operator, we'll take two more questions.

Two more questions? Very good. Our next question is from the line of David Lim with Wachovia. Please go ahead.

Hi. Good morning. Just a couple of quick ones here. On the cost cutting side, how much more can you cut without affecting the customer service portion of your business?

Well obviously, through Lean Sigma you eliminate waste, and you use the voice of the customer, kind of the overview, so in terms of eliminating waste, it is a never ending journey, right, so it is not like you can ever be lean enough, and so your question is how much is enough. It is never over. It is never done, and it has been my philosophy my whole career that you can't get lean enough, so we constantly are looking at ways to reinvent ourselves. We kind of listed out, if you will, during the call some of those areas that we're working on, and again, big opportunity. We talked to investors that the opportunity through 2010 was significant, and we're chunking ahead of that. We're now ahead of the curve on where we said we would be, and feel pretty good that there continues to be opportunities, especially in our fleet operations. If you were to look at those processes and how they connect and how much time is in there, wasted time, due to our own really internal inefficiencies, it is significant. And, one point utilization improvement in the US is worth about $30 million of pre-tax income, and certainly we think there's probably 10 points opportunity just in that alone.

That's pretty impressive. I guess it's like the continuous improvement philosophy. Having said that, do you have like a special team? I know it is getting a little ticky-tacky here, but a special team that specifically looks at this stuff, or is it more from a department to department basis?

Yes, we have a full time senior leader that reports to me. Her name is Lois Boyd. She's the Senior Vice President of Process Improvement in the Company. I've got a separate Senior Vice President of Supply Chain Management who also reports into me, and both of them, as well as the operating guys are all working on process improvements, but, I actually have a full time function that does nothing but track cost reductions. We have a program management office, have an organization on Lean Sigma, we have our own black belts and green belts and master black belts and training programs, and websites and, yes, it is a complete major functional area for us, cost reduction and/or efficiency improvement.

Got it.

That's what gives us a lot of our traction, is an intense focus on making sure we track our costs by project and that we get traction against it.

And finally, on the fleet side, I know a lot of the OEMs are saying that they want to de-fleet, sell less to the fleets whether it be rental or commercial, et cetera, mainly on the rental side. But having said that, have you seen any of these OEMs trying to, or seen more of an intensity in their sales pitch to you, as of late?

Well, I mean the OEMs obviously would like to sell, I think, more fleet to someone like a Hertz. I know that we could take a lot more fleet than we're taking right now. We've never had a fleet capacity issue, and we still don't have one, and so we have great relationships with all the OEMs, and not just one or two, and so we feel very comfortable that those relationships are going to be positive over the next couple of years and as we look to work together with them. Going back to your cost reduction issue, I just wanted to be clear, we won't compromise customer service and NPS, or net promoter score system, for cost reductions. That's the one thing we make sure we don't do is we don't cut costs so that it hurts that score, that score of customer satisfaction we get on a daily basis by airport by location.

Got it. Thank you very much. Appreciate it.

Thank you.

Our final question today, then, comes from the line of Adam Silver with Babson Capital Management. Please go ahead.

Thanks for taking my call. Just one quick question. What was your balance on your ABL revolver at the end of the quarter?

End of the quarter? The ABL was zero, zero at the end of December.

ABL revolver was zero.

Thank you.

Okay. Thank you. All right. So once again, thank you all for joining us on our fourth quarter year-end conference call. Look forward to talking to you about our improvements as we move forward through the year.

Ladies and gentlemen that, does conclude our conference call for today. Thank you for your participation. You may now disconnect.