Herc Holdings Inc (HRI) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Hertz Global Holdings 2009 second quarter conference call.

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 second quarter results issued yesterday and in the Risk Factors and Forward Looking Statements sections of the company's 2008 Form 10-K. Copies of this filing are available from the SEC, the Hertz website, or the company's Investor Relations Department.

I would like to remind you that today's call is being recorded by the company and also being made available for replay starting today at 12:30 Eastern and running through August 12, 2009. I would now like to turn the conference over to our host, Leslie Hunziker. Please go ahead.

Good morning, and welcome to Hertz Global Holdings'2009 second quarter conference call. 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/investorrelations. In the minute I'll 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 Hertz Equipment Rental. They will be on hand 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 and at the back of the slide presentation, both of which are 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 Holding Inc., a publicly traded company. Results for the Hertz Corporation differ only slightly as explained in our press release. Now I'll turn the call over to Mark Frissora.

Good morning, thanks for joining us. Let's get started on Slide 6. On June 25th we provided guidance for the 2009 second quarter. And as you have seen from last night's press release, we performed very well against those projections. While the global economy continues to have an adverse impact on rental volume and revenue year over year, Hertz is benefiting from improving profit retention and margin expansion as our cost savings initiatives take hold. While consolidated second quarter revenue fell 19% year over year excluding currency, we were able to reduce adjusted direct operating expenses by 23% and adjusted SG&A by 26%. These cost actions led to adjusted pre-tax profit retention of 86% in the 2009 second quarter and contributed to $81 million of adjusted pre-tax income.

If you look at it from a corporate EBITDA perspective, which is similar to our metric for covenant calculations, proper retention was 81%. This is our third consecutive quarterly improvement in profit retention, and we expect to maintain this trend through the back half of the year as we implement our expanding pipeline of cost saving projects. We are more focused than ever on improving fleet and labor productivity as well as operating process efficiencies.

Total worldwide rental car fleet efficiency was 79% in the latest period, 320 basis points higher than the first quarter of 2009 and 261 basis points better than last year. We are operating a much tighter fleet today. Average fleet units are down 15% compared with last year's level, outpacing the 12% worldwide decline in rental car transaction days. The continued improvement in fleet efficiency being driven by more strategic management of logistics and extended transaction lengths.

Consolidated worldwide labor costs declined in the 2009 first half by 22% from last year, reflecting our focus on adjusting our work force to current business levels. In US Rent-A-Car specifically, labor costs were reduced by 19% during the quarter, compared with a 15% decline in total transactions year over year. This is evidence of the success we are having in driving labor efficiency across our largest business unit.

Fleet and labor efficiencies, along with better administrative productivity and the closing or consolidating of underperforming locations drove an increase in worldwide rental car adjusted pre-tax margin of 150 basis points to 9.7%. This is a huge accomplishment for us, given the extremely challenging operating environment and a tough year over year comp in US Rent-A-Car. Year to date, we generated $361 million of consolidated cost savings, well on pace to meet our exceed our goal of $570 million for all of 2009.

Today our biggest challenges are with on airport business travel and in our equipment rental business. According to analysis of data from airline global distribution systems, for the second quarter, year over year business travel reservations declined 21% while leisure travel was off only 9%. Encouragingly, the rate of volume decline in Hertz's commercial business has stabilized, and we have even seen sequential monthly improvement over the last 90 days. In the equipment rental market, industrial activity over the last three months declined 30% from last year. Nonresidential construction starts are off 43% between January and May of 2009 and McGraw-Hill continues to revise its forecast down in response to industry conditions. And while stimulus projects have been identified and funded, they are slow to get underway. For Hertz, we have seen a flattening of overall equipment rental demand in the last month, but pricing continues to be under pressure.

The good news on slide 7 is that there are many other encouraging trends in our business that cause us to be optimistic. For example, in the US, pure pricing increased 2% in the second quarter 2009 over the prior year, driven by leisure price increases. US revenue per day was down only 1% year over year, significantly better than the 3% decline reported in the 2009 first quarter. Leisure RPD was flat year over year and insurance replacement RPD increased 1%. However this is being offset by a higher percentage of lower priced off airport business, a shift in car class to smaller vehicles to meet off airport and leisure demand, still constrained commercial pricing, and longer length rentals.

Moving to slide 8 -- on the upside, rental length which was a focus for us this quarter across all categories was up 4% compared with the year earlier level. The extended rental length led to a 3% increase in revenue per transaction over last year. And when combined with 14% less fleet, it helped drive our US rental car fleet efficiency up by more than 320 basis points compared with last year and 354 basis points versus the 2009 first quarter. The off airport replacement business reported increased revenue per day and revenue per transaction year over year as a result of an improved mix of accounts.

Residual car values in the US are continuing to strengthen, as supply of late model used vehicles remained tight, and used car dealer inventories need replenishing. Our new value brand, Advantage Rent-A-Car, now has 18 locations in operation from the original four open at the time of the acquisition. It has regained its relationships with all third party online websites, where its market share is now in the mid 20% range. These results are exceeding our expectations.

Finally in the US, advance bookings continue stronger, boding well for this quarter's peak travel season. Today we have visibility through September.

In Europe, on slide 9, advanced bookings are also stronger as we move through the peak travel season. As a result, we are adding fleet to ensure we capture all of this higher than expected demand, and there is stabilization in used car prices overseas, with a few regions even showing residual value improvement from a year ago. International transaction days were down 14% year over year, but our fleet is 15% smaller, reflecting the efficiencies we are achieving on this front. In fact, international fleet efficiency is up 141 basis points from a year ago. Europe's adjusted pre-tax margin was positive in the 2009 second quarter, reversing the negative margin trend we have seen over the past two quarters. The second quarter margin was only slightly below prior year. By the end of the third quarter, we expect to achieve a year over year increase.

On the next slide, in our equipment rental business, there continues to be too much fleet capacity industrywide, a reflection of weak demand and lower residual values. HERC worldwide demand was down 30% in the second quarter compared with last year and was 420 basis points lower than the first quarter. This is putting terrific pressure on pricing and some competitors continue to be highly irrational. Our pricing fell 7% from year ago levels. While we have seen volume stabilization monthly, we have not seen the normal seasonal uptick and similar demand for equipment. We believe we are hovering near the bottom though, but only time will tell.

In the meantime, we continue our focus on better revenue management and cost savings initiatives. Our execution in these areas is paying off. Corporate EBITDA margin in the quarter was 42.7%, despite a 35% decline in equipment rental revenue excluding currency. We also generated a sequential quarterly improvement in adjusted pre-tax margin.

Since the beginning of the year, there have been 11,000 construction and industrial projects deferred, representing more than $163 billion of potential spending for the construction and industrial markets. The good news is that these delayed projects are still in the pipeline, and will eventually become a catalyst for the domestic industry's recovery.

China also offers opportunities for Hertz. We opened our second location there in the industrial city of Changdu in the second quarter. In the future we have plans for expanding our coverage in India and the Middle East.

Now let me change direction and talk for a minute about cash flows and liquidity on slide 11. Year to date June, total net cash flow was $632.8 million, versus a $1 billion use in last year's first six months -- an improvement of $1.6 billion. Net working capital days as of June 30th, 2009 improved 4.9% to negative 42.5 days. Day sales outstanding were better by 10% as we aggressively executed on collections. Inventories days on hand improved 15%, due to better inventory management techniques. And DPOs improved nearly 3% as we were successful in extending our vendor payment terms.

We have done a great deal in the first half of the year to maintain our $1.7 billion corporate liquidity position which includes unrestricted cash, even as we begin addressing our 2010 refinancing needs. We recently executed an equity and convertible debt public offerings. The deals were significantly oversubscribed. We ended up generating $790 million of net proceeds from these public offerings, and another $200 million of net proceeds from the private offer with our sponsors that closed in July. These proceeds will help solidify our already strong liquidity position.

Our goal for the transaction was twofold -- to take advantage of windows of opportunity in the credit and equity markets, to secure incremental liquidity in advance of our refinancing, and to preserve as much existing liquidity as possible to support post refinancing growth initiatives. Let me state for the record that as of today, the initiatives we are taking to satisfy our 2010 refinancing needs do not include the issuance of more equity. We have been very committed to growing our business, despite the recessionary environment impacting today's operations.

Hertz is an industry leader with a long-term focus on success. As such, we are investing in product, technology and geographic growth to further our position. This is on slide 12. In the second quarter, our US prepaid rental program continued to build momentum, generating $38 million in revenue since December the 2008 launch. Connect, our car sharing program, now has more than 5,000 members worldwide. Our US multi-month rental offering, which is being promoted as a monthly lease alternative, generated 26% higher revenue in the second quarter versus last year.

I have already told you how well the Advantage integration is going. I'm really pleased with the early benefits we are accruing from this new value brand. In 2010 we expect to more than double the number of current locations. After having purchased Advantage, Eileo, and Rent One early in the second quarter, we recently completed two more small acquisitions -- Irving Industrial Rentals, which is in keeping with our roll up strategy in the equipment rental business, and Automoti Incorporated, a virtual full service used car showroom. By acquiring Automoti, we leveraged their e-commerce platform to expand our retail car sales business. Through the Hertz Rent-To-Buy program, we provide customers with a financially attractive solution for purchasing late model used vehicles in a simple, streamlined way after test driving them as a three day rental. Even better, our cars can be sold while they are still on rent and generate revenue, reducing vehicle downtime and improving net proceeds on each car sold.

Finally, we opened three wholly owned rental car locations in China -- two in Shanghai and one in Beijing -- marking our entry into this growing region's rental car industry, and we have plans to open a second location in Beijing later this year. As you can see, we are continuing to diversify our revenue base and product while aggressively driving our cost initiatives, which over time should yield improved liquidity, improved profitability, growth, and optimized cash returns in spite of economic cycles. At the same time, the latest survey showed that we are improving customer and employee satisfaction, key initiatives for the company and for me personally.

With that, I'll turn it over to Elyse for a more detailed financial review.

Thanks, Mark and good morning, everyone. Let me begin by summarizing the consolidated results for the second quarter, starting on slide 13. As Mark mentioned, we generated $1.8 billion of total revenue and $81 million of adjusted pre-tax income in the second quarter. It's worth noting that our adjusted pre-tax does not include $48.5 million gain recognized in April when we purchased $150 million of face value high yield debt at market prices. And the profit retention of 86% Mark highlighted was the result of actions to aggressively size the business to market conditions, and the achievement of sustainable cost savings as we drive continuous process improvement throughout the businesses. As a result, adjusted direct operating and SG&A declined 23% and 26% respectively in the second quarter year over year.

Now let me discuss these performance trends in a little more detail by business units. I'll start with worldwide car rentals. Despite a 15% fall off in revenue, excluding the impact of currency, the adjusted pre-tax margin improved to 9.7% in the second quarter from 8.2% a year ago, driven primarily by improvements in the US.

Before I discuss the cost efficiencies driving margin improvement in US Rent-A-Car, let me spend a minute on revenue per day versus pure pricing which Mark mentioned earlier. Slide 15 shows the year over year change in US Rent-A-Car revenue per day, which fell 1%. However when you adjust for the impact of changes in mix, price is actually 2% higher in the quarter. Revenue per day is a combination of both price and mix. Mix encompasses on and off airport business, leisure, commercial, and insurance replacement rentals; rentals related to all different types of car classes; the various reservation channels; and various lengths of key transactions from hourly, daily and weekly to multi-month. When we talk about pure pricing, we back out the impact of mix on RPD to get more of an apples to apples price comparison. As we have stated in the past, although the small car insurance replacement rental has a lower rental rate per day, versus a daily SUV rental, those transactions are profitable as the costs associated with each transaction are proportional to revenue.

Now looking at the profit improvements in US car rental on slide 16, direct operating expenses and SG&A were both down in line with volumes, but also down as a percent of total US revenue. Key drivers of the cost improvement are structural and process changing, driving reduced damage and transporter expenses, and improved employee productivity as measured by transactions per employee, which was up 7% over last year. All of this contributed to an improved year over year adjusted pre-tax margin for US Rent-A-Car.

In European Rent-A-Car, expenses were also down in line with volume and also down as a percent of revenue. European employee productivity increased 6% year over year on the second quarter. In light of the economic conditions, to rightsize the business, we closed or consolidated 18 unprofitable locations, and we took specific actions to improve the profitability of a number of our corporate accounts and travel partnerships.

Our worldwide car rental fleet efficiency shown on slide 17 improved in the second quarter by 261 basis points and revenue per transaction increased 1.6% year over year. In the US, fleet efficiency was up 320 basis points over last year on a smaller fleet, due to a higher mix of longer length rentals as well as the result of reengineering processes related to vehicle delivery, maintenance, deletions, and vehicle related downtime. Revenue per transaction in the US was up 3% in the quarter compared to a year ago. In our international business, we also operated with a smaller fleet, and our mix of vehicles included a larger percentage of less expensive smaller cars to better match rental demand. Subsequently, international rental fleet efficiency improved 141 basis points over last year and 273 basis points over the first quarter, primarily driven by improvement to fleet planning and fleet distribution processes.

Now let's take a look at rental car monthly net fleet depreciation or car costs. Our worldwide costs were lower by 3% in the second quarter versus the first quarter, but 6% higher than last year due to weak residual values internationally and tough year over year car sales comps in the second quarter for the US. In Europe, car costs increased by 15% versus the second quarter of 2008, as residual values on the risk cars remained weak across the continent. However, a significant improvement in fleet interest expense offset nearly all of the increase in depreciation. It's important to note that we cut car costs by 13% sequentially from the first quarter. And I point out that absolute car costs in Europe today are still 12% lower than in the US.

In the US, our car costs improved by 3% compared with the first quarter, and 7% from January to June. However, on a year over year basis, they increased by about 8%. This comparison is distorted because in the second quarter last year, we sold a substantial number of small fuel efficient cars at premium prices, as fuel costs went over $4 a gallon. However, if if you adjust out car sale gains and losses for a more normal comparison, you would find that car costs for the 2009 second quarter actually showed a reduction year over year, stemming from lower new car prices and improved fleet portfolio management. We expect to see continued car cost reductions throughout the year.

As you can see on slide 18, the residual values experienced on US risk car sales improved six percentage points since year end 2008 on an age adjusted basis. This positive trend in residual prices allowed us to delete some of our older, higher cost vehicles and replace them with more economic new cars as Mark mentioned. At June 30, risk cars in our US fleet represented 68% of the total fleet, and the average age of the overall US fleet was 10 months, compared with roughly eight months in the second quarter of 2008. During the quarter, while the GM bankruptcy was big news on the macrolevel, it had essentially no impact on our business. The new GM has affirmed our program car contract terms and the residual values for GM vehicles have actually improved since the date of the filing.

Let me discuss the results of our equipment rental business on slide 19. As Mark told you, Hertz continues to be impacted by the weak demand in all segments of the equipment rental market and the irrational pricing that's resulting from too much supply in the industry. While Mark mentioned total revenues declined 5% due to volume and pricing, on a same store basis, worldwide revenue was down only 29%, both in constant currency terms compared with last year. During the quarter, we reduced our equipment fleet's net book value by another 25% year over year, and 11% since the beginning of 2009. As equipment fleet net book value disposals of $38 million in the quarter outpaced purchases of $15 million, we reported negative net CapEx of $23 million compared to net CapEx of $38 million a year ago, a $61 million improvement. Year to date disposals in constant currency were approximately $300 million of original equipment costs versus year to date purchases of about $30 million.

Mark highlighted the strong corporate EBITDA margin that Hertz continues to generate. This has been achieved through aggressive cost cutting initiative. Since the beginning of the year, we have taken an additional 15% reduction in force, implemented wage cuts, delayered the operations, and cross-trained employees to improve operational efficiency. We have closed or consolidated 21 underperforming branches since the year began. Labor productivity, measured as rental revenue per employee normalized for pricing, improved by 5% sequentially. Additionally, we have streamlined the North American regional offices over the first half of the year from seven down to five. These actions have contributed to second quarter adjusted pre-tax income of $24.7 million, a margin of 8.9%, compared with $700,000 in the first quarter of this year.

Hertz quarterly fleet efficiency on slide 20 was 10.3 percentage points below the prior year as declines in rental demand outpaced our fleet reduction. Fleet efficiency was 6.2 percentage points lower when you exclude the impact of pricing. Compared with the first quarter of this year, however, fleet efficiency improved, so we are making some progress. We have also slowed the rate of fleet sales in this quarter after aggressively defleeting in the third and fourth quarters of 2008 and in the first quarter of 2009. At June 30th, our worldwide equipment fleet age was 40 months, a two month increase compared with the fleet age at the end of the first quarter. We still feel comfortable aging the fleet into the mid-40s range without deteriorating the customer experience.

Moving on to slide 21, there are a few consolidated income statement metrics I want to touch on before we get into the cash flow discussion. First, as it relates to earnings per share, I want to quickly take you through the change in share count as a result of our recent equity offering. Adjusted diluted earnings per share was $0.12 in the second quarter, which was calculated using a normalized full year share count of 407.7 million shares. On a GAAP basis, however, the second quarter EPS was $0.01 based on a weighted average diluted share count of $349.2 million.

Restructuring and restructuring related charges in the quarter were $33.3 million, of which $22 million was cash. These charges outlined on slide 22 primarily related to severance costs, facility closures, and other one time expenses. As market conditions begin to improve over the next year, we expect restructuring will decline as we get back on track to grow the business.

Now moving to taxes. Cash income taxes paid in the quarter were $6.2 million. For the first half of 2009, the GAAP effective income tax rate was 14.9%. We expect the full year effective income tax rate to be between 16% and 17%.

Now, if you turn to slide 23, it shows our quarterly financial covenants that we are required to meet under the corporate credit facility. As of June 30th, our consolidated leverage ratio was 4.32 times, well below the maximum 5.5 times allowed. The interest coverage ratio was 2.46 times, well above the minimum requirement of 2 times. We had sufficient cushion under both covenants, even before our financing transaction. So we are favorably positioned to continue to meet our covenant tests going forward.

Now let's look at our cash and debt position on slide 24. As you know, we completed the equity and convertible debt public offerings in the second quarter, which generated net proceeds of $790 million and improved our overall liquidity position. An additional $200 million was received in July related to the private equity offering. The proceeds received in the second quarter were used to pay down $70 million in corporate revolving debt and $720 million in fleet revolving debt. This strategy gives us the maximum flexibility going forward to maintain our corporate liquidity to be used to fund the growth initiatives Mark discussed earlier or to satisfy a part of our fleet refinancing needs, although this is not anticipated. As a result of these actions, the ABS structure is well overcollateralized today. Allowing advance rates to decline, however, meaning debt outstanding represents a smaller percentage of the fleet's value, negatively impacted levered after tax flow as the investment and fleet equity was inflated at quarter end.

Due to the lower advance rates, levered cash flow year to date was a use of $191 million compared with the source of cash last year. This is on slide 25. If we exclude the impact of the recent offering and normalize the investment in fleet equity, we generated levered after tax cash flow of $120 million, a 67% year over year improvement.

Total net cash flow was $632.8 million for the first half of 2009. This compares favorably to the 2008 first half, when we reported a total net cash outflow of $1 billion, an improvement of $1.6 billion or $1.1 billion excluding the impact of the financing transaction. Total debt decreased by $1.2 billion to $9.8 billion from December 31, 2008. Total restricted and unrestricted cash and equivalents were $759 million, which brought total net debt down 6% from the beginning of 2009 to $9 billion. Since Hertz was sold by Ford in December of 2005, we have paid down $2.3 billion of total net debt, of which nearly $800 million was net corporate debt.

On the next slide, in terms of the 2010 fleet refinancing efforts, we are in active dialog with new and existing lenders and capital market investors as well as leasing companies and car manufacturers. We are making very good progress on a number of fronts. Our refinancing needs are essentially in the second half of 2010, but we expect to close a portion of the refinancing this year, and particularly amending and extending a number of our fleet conduit facilities, which we expect to close this quarter.

Let me take a minute to discuss developments in potential TALF financing. Based on a recent rating methodology report by S&P, they will not be in a position to provide AAA ratings on Rent-A-Car transactions. However, Moody's has indicated they can provide us a AAA rating. We are currently working with Fitch as they develop their rating criteria. While TALF is still a possibility, it is important to note that other capital market opportunities exist and we expect these markets to develop favorably over time. For example, the recent capital market deal by Avis bodes well for getting a non TALF capital market transaction done. And our current thinking on timing of executing an ABS transaction is in the fourth quarter.

We are pursuing a number of refinancing opportunities, which collectively could provide potential funding of up to $8 billion, while our expected refinancing need is only $4.2 billion. This is shown on slide 26. Given the dialog to date, we feel comfortable about achieving these objectives. With that, I'll turn it back to Mark.

Thanks, Elise. Let's move forward to the next slide. We are really pleased with the trends we are seeing in the US rental car business. Advanced bookings continue to build, exceeding our expectations. Leisure volume and pricing are stronger. Our number of contracted accounts is showing a net income year to date. Advantage's market shares is getting back on track as we expand geographic coverage and off-airport continues to strengthen its margins by keeping costs for start up locations low and securing longer length rentals.

We generated double digit adjusted pre-tax margin in US Rent-A-Car in the second quarter and improved our corporate EBITDA margin over last year in the second quarter. Essentially, higher car costs year over year are being offset by better fleet efficiency. We have been successful in developing a number of new car sales channels, including direct to dealer and rent to buy, which allow us to reduce the time it takes to sell cars. In addition, we have made great progress in leveraging our contribution management system to improve both yield management and fleet plan optimization in all regions.

Fleet management and logistics are also benefiting from the addition of the Advantage business and our ability to capitalize on fleet synergies. Denver Airport is our pilot location to share fleet between Hertz and Advantage during specific periods. In this market, our rental facilities are less than one mile part. We are able to accelerate the ramp up of the Advantage fleet in this market by approximately 8% by moving excess weekend inventory at Hertz to Advantage and then returning those cars to Hertz on Monday morning. This methodology permits accelerated volume growth at Advantage while increasing fleet utilization of both brands through fleet sharing. The end result is lower per unit vehicle costs for both businesses.

In Europe, our Rent-A-Car business is slowly improving. The signs are there, but it is still going to take some time. Inbound travel from the US to Europe, our highest contribution business, has improved since quarter end and domestic bookings are increasing as Europeans choose [intercourt] continental travel destinations.

For our part, we have a significant restructuring program underway in Europe to create a two region structure compared with country based arrangement we have today. This entails dividing ten countries under the leadership of two new regional vice presidents, consolidating back office administration functions, delaying the organization structure, and instituting process efficiencies. This project is about halfway completed. We are already seeing early benefits and expect to report $35 million in annual savings once the program is fully completed in the second quarter of 2010.

As you know, our equipment rental business continues along a tough road. This is fully a result of macroeconomic conditions, exacerbated by competitors' seemingly undisciplined operating strategies. Yet I'm pleased with how our team is navigating through this difficult environment. We are pursuing new business opportunities like rentals for the entertain and event industries, and we are retaining our national account base and even taking market share for competitors by differentiating ourselves through superior rental service and broad equipment selection.

In fact, Hertz was recently awarded the US Communities government purchasing alliance contract for equipment and tool rental services. Essentially, this contract allows state and local governments, nonprofits, and educational institutions the ability to access rental equipment and services using preestablished pricing through the US Communities program. This contract was competitively solicited. Hertz is the first and only equipment rental provider on the US communities program. Currently there are 36,000 participating agencies registered. This new exclusive contract should enable us to increase customer diversification by penetrating local and state government markets, gain market share, and extend customer relationship without any exposure to the competitive environment. We conservatively estimate this opportunity to be between $10 million and $15 million in its first year.

There are many positive things going on across all of our businesses that will continue to drive profitability improvement into the back half of the year. While we don't have much visibility yet to the fourth quarter volumes, we have been conservative in our performance assumptions and in adding fleet to meet the peak seasonal demand. Therefore, we are confirming our original guidance for 2009, and as a result of the current trends, will tell you that we are very comfortable with our projections at the high end of the ranges. Let's go ahead and open it up for questions.

(Operator instructions). Our first question comes from the line of Michael Millman with Millman Research Associates. Please go ahead.

Thank you. I guess on your next to the last slide, you talk about advance bookings continue to build, and price -- leisure pricing continues, which we would expect seasonally. But can you put that in some context year over year? And then, related, your [pure] leisure increase was 2%. Yet Avis announced their second quarter numbers were up 5% to 7% total company. And maybe even talk about why there seems to be such a discrepancy?

I guess in terms of the future demand, answer that question first -- on the rental car side, again we see demand improving into the third quarter, and beginning into the fourth quarter we are seeing improvements in advance reservations there as well, a slight improvement. Again, the visibility in the fourth quarter is much more murky, but we see improvement. I guess we anticipate the best way to answer that is our fleet will probably be down -- instead of being down 15% we saw in the second quarter, it will probably be down in the fourth quarter closer to the range of 5% to 8%. So a much lower reduction and in order to serve increased demand that we see coming. Those are our fleet plans. That might answer the demand equation. We also expect our depreciation per vehicle to come down significantly in the third and fourth quarter based on those numbers. I can't tell you what that's going to come down. But it's going to come down significantly from what you saw in the second quarter.

In addition to that, just to talk about pricing for a minute, in the second quarter we saw our leisure on the airport pricing was actually up 5.7%, Michael. So it was up significantly in the range you saw maybe forecasted by Avis. Our commercial sector continues to be under pressure in the range of 3% to 5%. The other thing I mentioned is we have a very broad swath of markets, unlike the other rental companies. Broader than any rental company, frankly. And that creates in some cases, a smaller increase in overall pricing. If you look at budget, as it relates to Avis budget, they had -- that's a big leisure brand for them. And Joe, you have some comments on that?

Just I think the opportunity for them to increase prices with the large umbrella that's out there with the Hertz pricing on the premium side overall gives them the ability to grow on a percentage basis greater than Hertz has the leader in the pricing segments.

So that may explain it, but again it is explainable to us. We are not concerned about it. We know we have we still have the price leadership position in terms of the highest prices out there. You can check that anytime you want. We are the highest, we are generally speaking we have the highest prices across the country, so.

That second quarter pure airport plus, [5.7%], what does that look like in June and July?

I don't have that data here handy with me. But I just gave that you statistics for the quarter. But in general, pricing should continue to improve, we hope, if in fact demand continues to strengthen, because fleets are very tight across the entire industry, okay? Thanks, Michael.

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

Hi. Good morning. Nice job, guys. Just a couple of questions -- thanks for all the info around the ABS side. One follow-up on the balance sheet, just to be clear, you guys did not buy back any of the bonds, i.e. the seniors or the subs, outside of the April purchases, is that correct?

That's correct.

Okay. And then, Mark, you had mentioned that you still think the HERC side of the business is overfleeted. Can you just give us a sense of what your view about industrywide levels at RAC and then if you can somehow box how overfleeted you think it looks at HERC?

Okay, so you said industry fleet levels at Rent-A-Car and also at HERC?

Yes, please.

Rent-A-Car fleets are extremely tight with all vendors. I would say what we can tell, Avis Budget Dollar Thrifty were extremely tightly fleeted, more so than let's say Hertz was going into the second quarter. ERAC -- which we call ERAC, it's Enterprise -- we felt were about fleeted like we were. Not as tight. While we were tight, we weren't super tight. I'll put it that way to you.

Going into this new demand in July and August, we are seeing further tightening actually because the demand is higher than what we anticipated, and what the industry anticipated. The demand, and again in July and August, is probably I'll say 3 points -- 3 to 4 points probably higher than what we would have thought when we talked to the investment community back when we did our pre announcement of earnings improvement and we announced guidance. So demand continues to strengthen. So we'll continue to [cost] a very, very tight fleet through the end of August, going into probably the first weeks of September, at least.

Okay then.

On the Hertz side, we think the entire industry is overfleeted, obviously. That's driven around the fact that instead of selling equipment at huge losses, people are hoping demand comes back, because the losses on some of the equipment if you were to sell it today would have five to six to seven year paybacks. So certainly when we look at those payback formulas, it makes sense continue to age the fleet a little bit. And then we are putting it to use selectively where we have opportunities springing up due to pent up demand that we think will come back eventually hopefully by the year end, and also due to some of the new programs we have watched and new business contracts we have had. Gerry, you want to add some color to that?

Sure, Mark. As you saw the first quarter, details from the major competitors, the industry appears to be 8 to 10 percentage points down in utilization for the prior year. Based on the activity we have seen in the second quarter, it appears that that has remained about as those levels. It will take several quarters of additional fleet sales, auction sales by the industry to level set that fleet. That is really a matter of the equation of the rapid sale at auction, plus the fees that create a large loss to sell rapidly versus a more orderly sale. I think that is what the entire industry is going through at this point.

That is extremely helpful. If I could just one follow-up question around the RAC comments you made, Mark. Do you think that -- it sounds like it is extremely tight. You guys have quite a bit of flexibility around being able to grow your fleet I would imagine to meet that demand. Are you seeing or do you expect to see you guys would take market share going into the months of July, August, September given -- ?

Yes, we do. We anticipate increased market share. We already saw it in June data on GDS market share, which you can see on a realtime basis. Our market share which has generally been flat negative was up almost 1 full point in the month of June through the first three weeks. Again, we are seeing improvements in market share and expect to have market share improvements due to the fact we have more flexibility on the up fleet if you will.

Great. Best of luck. Thanks.

Thank you.

Next question comes from the line of John Healy with Northcoast Research. Please go ahead.

Good morning. A question for you, Mark philosophically. With financing starting to come back to the Rent-A-Car business, what is your level of confidence that the fleet discipline, the pricing discipline is something that's sustainable in 2010 and maybe beyond? I'm trying to just understand in a way you are thinking about the industry going over the next year or two once people start to lend to this business again.

I think -- I'm pretty confident that there will be more discipline as a result of this recession. I think if you look at other business models historically, what's happened, you'll find that the industry leaders end up learning lessons, right, about how to maintain tight pricing and fleet discipline and environments after they go through and feel the pain, if you will, of having sloppier discipline. So my guess is based on history and what I have seen in other industries, as well as even this one, they will be more disciplined over the long haul as a result of what we experienced in the last 12 months.

Okay. Great. Then for the defleeting process, I was hoping you could talk about what your plans are for this year, when you guys might decide to start defleeting if you are planning on doing so maybe a little bit earlier than you did last year, just to make sure that you are able to get out of fleet for the beginning of the fourth quarter? And if there is anything that we should anticipate from a program or risk car standpoint as we head through the third quarter into the fourth quarter?

You are right. We typically will, after the summer season, begin defleeting. But we are probably in the mode that we actually may increase the overall size of the fleet due to demand levels we think will happen in the fourth quarter. We feel pretty comfortable. We have a lot of flexibility where -- obviously if we need to hold some cars, we'll hold them. But we have a lot of flexibility with the program buys we have made with a couple of our key OEMs. We have pretty much all the new cars we need and we want to rotate actually a lot of new cars in because of the fact that our cars have aged. And so we expect our depreciation to go down because these cars are at lower depreciation rates than our current ones, and our maintenance costs would go down as we are able to rotate some of this older fleet with new fleet. We actually plan to rotate as many new cars in as we can during the end of the third and the fourth quarter, and the overall fleet size instead of maybe being down 15%, again I signaled that it would be down maybe 5% to 8%, again depending on demand. But obviously that means that we are going to be just rotating, but yet keeping the levels up there because of the demand as it increases.

Then just two quick questions. Mark, can you give some color on maybe what you saw geographically in HERC this quarter? Maybe more color than already you did? And the acquisition activity -- two quarters in a row you guys are picking up some interesting assets. Is that something we should to continue to expect from you guys in the next couple of quarters and what your pipeline looks like for that and what type of properties you are looking at?

Yes -- I guess are all these questions related to HERC?

From the acquisition side, either RAC or HERC, maybe where there is more priority.

I guess either one. We are looking at small strategic acquisitions that are accretive immediately. So there is lots of opportunity on the HERC side as you look at smaller deals. We are trying to increase our ability to do deals faster in small acquisitions. So we built an infrastructure around that and built some relationships, so we can do that a little quicker. Because we think that will get our revenue streams moving quickly. In terms of growth overall, Gerry -- I'll let him comment on this, but overall there are several regions where we are actually showing improvement year over year, but western Canada is a region that actually is showing deterioration. So between the improvements and deterioration, essentially it's been stable and flat for the last 30 days. Gerry you want to make some comments on that?

Sure. From a regional basis, we saw the regions that were previously the worst, the western half of the US and Florida, start to become less negative. The ones that went into the recession deeper fastest have seen some stabilization. The industrial side of the business where there is now a downturn in industrials -- affecting western Canada offsetting some of the improvement in Florida and the western region. We are encouraged overall that the volume that occurred month by month through the first quarter overall has been virtually stable from the very end of March really through the present-day. Those dynamics are giving us a little bit of encouragement that we are finding the bottom.

Thank you, guys.

Thank you.

Our next question comes from the line of Rich Kwas with Wells Fargo, please go ahead.

Hey, Mark.

Hey, Rich.

On corporate pricing, business pricing -- I know you mentioned volume stabilized here. What is your sense from when you comped the worst of the pricing issues there?

As soon as our rational competitors decide to act and behave rationally. I mean, we are protecting our national accounts. We are protecting share there. And we are hopeful that the pricing levels that we are seeing will flatten out and improve. Year over year comps will begin to improve as you know on the equipment rental side -- especially as we move into third and fourth quarters, the comps will become easier. Gerry?

The fleet balance is a big issue, as fleet becomes more balanced with demands. Obviously that is a big driver, and then internally as each rental company gets hold of their own initiatives, it is really internally driven. We have a yield management program. We are very selective. We do protect our largest and best accounts. It is a give and take between fleet balance and what is happening in the industry. So we haven't seen that improve in the second quarter, but we are hopeful lately the last three or four weeks of quoted new contracts are going out, are about stable with the prior months. So there is a little light at the end of the tunnel.

And the pricing on the Rent-A-Car side, Rich, really becomes much better on business accounts once we get through our September cycle. So the year over year comp there becomes easier as well, because that is where we saw a precipitous drop in -- I would say 3 to 5 points in dropping some of our business pricing, our large corporate accounts, and that becomes a much easier comp as we move through September into October.

Okay. You answered both. I had a question on the HERC side when you answered as well. On the fleet size, Gerry -- it was mentioned that several quarters before the fleet size for the industry really meets with where demand is. What are we talking about here? Well into 2010? Or what is your best guess on when things are really rightsized in the industry?

I would say it's anybody's guess as to when the volume demand will start to uptick. Based on current conditions in the gap in utilization through the industry, I'd say we have to get through the winter most likely, and as we head into the summer season or the peak season, probably around the second quarter, mid 2010 is the best guess at this point. You'll start to see construction start to improve. Stimulus package monies should start to impact some of that. And just general improvement in demand should help balance it, but that would be a best guess at this point.

Okay, so is it fair to say pricing and equipment rental should continue to deteriorate from here on out over the next two to three quarters until we get into the middle of next year?

I don't think we'll see continued deterioration based on the volume trend we see now. As that starts to balance and the comps get easier, I think we'll see sequentially possible improvement off of these bottom rates. I don't think it will continue to deteriorate from current levels at a significant pace.

I think to answer your question specifically, Rich, fourth quarter versus third quarter, you should probably see some pricing improvement -- that is our best guess right now, okay.

And last question, Mark. In terms of the guidance you mentioned that being -- you think it is going to be up in the upper end of the range there that you provided, what would derail that forecast now knowing what you know?

Not a whole lot. I mean we are pretty confident. So I guess we feel like our assumptions we built into the fourth quarter for US Rent-A-Car seemed to, as I mentioned to all of you on the call, seemed to be very conservative based on what we are seeing.

Okay.

So I mean, that would have to -- like I said, we build in conservative assumptions to build our guidance, right? So unless the bottom were to drop out, in the US and Europe Rent-A-Car markets, and we were already very conservative, assuming continue volume degradation year over year into the fourth quarter. Unless again there is something that crashes and burns here, we feel pretty comfortable with our guidance.

Some meaningful macroshock?

Yes, exactly.

Thanks so much.

Next question comes from the line of Sam [Epibonya] with Colonial Management. Please go ahead.

Hello, Sam. Sam, are you there?

Okay, moving onto the next question, it comes from the line of Matthew [Spurr] with Strategic Value Partners. Please go ahead.

Hey guys, how are you?

Hey, Matt.

A quick question about where you saw the defleeting that's been going on. I think you mentioned it briefly, but the associated depreciation and amortization or the depreciation on the fleet itself, and how you saw trending for the remainder of the year? If you saw -- ?

Are you talking on Rent-A-Car.

Yes. Sorry, on Rent-A-Car. How you saw depreciation changing with respect to the size of the fleet? If you saw depreciation if you saw the fleet was going to be about 15% smaller for the remainder of the year, would you expect that depreciation should follow that?

No, I did not say. I said that if in the fourth quarter, and probably part of the third quarter, that our fleet size would, instead of being down 15%, would be down in the range of 5% to 8%. And that in terms of our year over year depreciation, we expect that to be down year over year in the US on a full year basis, probably in the neighborhood of 1% to 2% down year over year for the full year in the US by the time we get through with our fleet rotation into the fourth quarter. Okay?

Okay.

As you know, depreciation per vehicle was up in the second quarter somewhere in the range of 7% to 15% in Europe, which if you look at the slides, you'll see that. Now we are saying you can do the math on this -- if we are going to be down for the full year down 2% depreciation per vehicle in the US, that is showing significant improvement in depreciation costs per vehicle we anticipate going forward.

Sure. But in aggregate, depreciation should continue to come off for the entire fleet as the size of the fleet decreases, even if there is going to be small upticks?

Yes, that's correct.

Okay.

Yes.

I think that addresses it.

Okay, great. Thanks a lot.

Okay our next question comes from the line of Gentry Klein with [Cedus] Capital, please go ahead.

Following up on the last question on the RAC side, I know you obviously expect depreciation to be down meaningfully for the rest of the year on a per vehicle basis. Can you break it out in terms of whether that -- the decline is how much of it's based on mix versus an increase in resid values?

In terms of the mix, we are not changing it that much. It's changed in the last 12 months because of the leisure market. But a lot's just declined in the overall price of the vehicle and you are right, residuals will certainly be stronger over year than they were in the third and fourth quarter. So I don't have an exact number for you.

The model year mix will improve as we cycle in more 2009 model year cars and less 2008, that's going to drive that depreciation per car cost down.

I guess what I'm wondering is how much of the decline in depreciation is due to the new model year versus the increase in resid values on your current fleet. Do you have a sense that have?

Probably if I were to guess it probably 50-50. 50% of it is due to the decline of the pricing of a new fleet and the other 50% would be due to better improved residual values -- I'm hazarding a guess here, doing rough math, okay?

Got it, thanks. You said you gained market share. Can you tell us who you were taking it from?

No I don't try to talk about competitors or market shares. In GDS, there is something out there we can get realtime market share on. In June, we looked at GDS third party market shares, which is about -- in US Rent-A-Car probably 30% to 35% of our volume. We are showing improvement, right? That is not an area we typically improved in because it's third party stuff. But we had 1 full point improvement in the month of June, which is significant for us.

Okay. Thanks a lot.

Next question comes from the line of Chris Dougherty with Oppenheimer and Company. Please go ahead.

Good morning. Mark, can you just clarify your comment in terms of HERC demand seasonally? Is that you are not seeing the historic pickup or you are not seeing any pickup at all seasonally?

If we are talking second quarter, what we saw was flat, right? So instead of having a pickup in the second quarter like you would normally expect, right, it was basically a flatten violent where the deterioration year over year did not change. It stayed at a constant rate of deterioration. That has continued actually into July. So we have had a fairly flat environment where the year over year decline is the same. It's flat. We were hoping, obviously, that in the second quarter we'd start seeing a pickup with the season, and we did not see that, okay?

All right, but in terms of actual volume Q2 was better than Q1?

It improved versus Q1 sequentially a little bit. No?

Volume was down, because we did see the decline monthly through the first quarter.

Pricing drove about -- probably how much of it declined?

About 300 basis points.

300 basis points of decline was due to pricing for the second quarter versus the first quarter.

That's right. Volume at the low point of the end of the first quarter flattened out the rest of the quarter, so on average we had lower net volume and net price.

Did you hear Gerry?

Yes.

Okay, good.

It is just a question -- I know there was some disclosure in the press release yesterday for change in accounting for CapEx. Can you just clarify that? My understanding is that right now when you buy a piece of equipment it becomes a CapEx item. And then when you pay for it, the fact that you pay for it or don't pay for it is a balance sheet item in working capital. Now -- and that being cash flow from ops. Now what you are going to do is net that together in CapEx? Is that what the plan is?

Well, it is actually -- what we do today is exactly what you said. So the working capital piece goes in the operating cash flows and the actual equipment pieces in investing. We are going to now include them both in the investing category. So in a sense, you gross up the investing piece when you buy the equipment and then the working capital piece gets filtered out when you actually pay for it.

No change to overall total.

On the net cash flow it doesn't have an impact.

It would whether it's cash from ops or from CapEx. If you would have done that, stayed with the old accounting, can you tell us what that effect would have been for this quarter?

Do we have that number for this quarter? I don't think there was -- I don't know if we calculated, but it would have been small for this quarter. I think the biggest difference is in the first quarter, and that is going to be fully disclosed in the Q.

One last question in terms of rotating the flat. I think Mark, yesterday, you made a comment in your interview that you are bringing down the average age of the fleet sales from around 20 plus months to around 14 or 15 months. How much of that started in Q2?

What we are saying is we typically aged the fleet at 20. From an amortization standpoint, it's been around 20 months, 21 months. What is the exact age?

20.5.

20.5 right now. What I said was over the next 12 to 18 months, that age is going to come down, probably in the neighborhood of 17 months, roughly. Again, it's hard for me to get real prescriptive on this, because it will be based on demand, and if demand improves it will bring it down faster. But at this point our plan would be the age of the amortization, which means the fleet becomes if you will, newer, would be going from around 21 to about 17. And we'd make it faster than that again if we had higher demand.

Will that negatively affect your working capital in that you'll have to -- you are going to have to sell more of it quicker, in which case which may go to AR and stay there for a period of time? I know it also has to depend on the what the prices are, and the prices are probably different versus selling 20 months versus 15 months.

I don't have an answer on that. We can get with you after the call. If you want to call us, call Elyse, and we'll answer the question and do the math with you on it. But in general, certainly cash flows on a total net basis have improved because we have defleeted, right? So if you start growing the flat again, there is lumpiness quarter to quarter as you grow it -- in one quarter, receivables and payables become out of balance and then they fix themselves in the subsequent quarter.

So one of the reasons for our stronger cash flows certainly over the last couple of quarters has been twofold. One, because we have been defleeting and selling them. That generates cash. We have been buying less fleet in HERC, which has generated incremental free cash flow on a year over year basis. But also we have had lower, we have been improving in some cases depreciation. So it's helped in that sense as well. Residual values have improved significantly.

So I'm just trying to give you the moving pieces. In general, the company was generating probably before the recession, free cash flow on a basis of $400 million a year. We think it will be improved from that once we get out of this recession and we get to normalized volumes. But that was the steady state free cash flow in this business model before we started seeing a recession. Does that help?

Yes. Thank you.

Next question comes from the line of Myra Lee with [Freesh]. Please go ahead.

One of my questions has been answered. My other question has to do with -- can you give more color on the business volume? You said it is stabilized? Are you going to maybe use price to maybe gain more business or wait it out? Thanks very much.

Well, I mean in terms of business volume, again did you talk Rent-A-Car or HERC?

Sorry. Rent-A-Car.

On Rent-A-Car? Well, again on business volume. My best way of explaining it I guess without giving a forecast of revenues, other than what we have already given out there, is to tell you that the fleet is going to be less down in the fourth quarter. It's down 15% now and the US transaction days were down -- what in the second quarter in the US? For the quarter, do you guys have that?

Down minus 10.8%.

They were down minus 10.8%. Minus 11%. Okay, so transaction days, which is what you use to calibrate your fleet, right? They were down transaction days, which is a good measurement of volume. They were down almost 11% and our fleet was down 15%. So if you do the math, our fleet's going to be down 5% to 8%, that means transaction days are going to be down accordingly. Probably keep that correlation the same, because we have about 300 basis points of fleet efficiency we think will continue to bleed into the numbers going forward on Rent-A-Car.

All right. Thank you.

Our next question comes from the line of Ryan Brinkman of JPMorgan. Please go ahead.

In regards to the $361 million in cost savings year to date that has allowed the profit retention to perform as well as it has, how should we think about this performance going forward as revenue begins to return? For example, can you help us think about what portion of this cost reduction, especially in SG&A, relates to the permanent removal of fixed costs?

We probably believe that we have around 700 basis points of cost reduction right now. And our breakeven is probably 600 to 700 basis points lower than it used to be. I guess in terms of actual fixed costs, my guess is about 300 basis points of fixed costs have been eliminated, to hazard a guess. I haven't done the math on it, as we haven't taken our cost structure to identify what's variable and semivariable, fixed and semifixed, and done the mathematical calculation. About 300 basis points at least of fixed costs have probably come out of this business. We feel pretty good about our operating level going forward on our increased volume. You are seeing margin expansion on 15% reduced sales in the Rent-A-Car business. Actual margin expansion becomes significant. You can imagine once we get to normalized volume levels like we had 2007, there is going to be significant margin expansion because of the fixed cost takeout that we have had.

Thanks. I appreciate that.

We've gotten better at controlling our variable costs as well in a much more fast way, to flex up and down with volume, okay?

Great. Thank you.

Our next question comes from the line of Yilma Abebe with JPMorgan. Please go ahead.

One housekeeping item. What was the amount outstand, both LCs and any borrowings on the ABL? Is that current?

I think that letters of credit were about $200 million, and there's no outstandings at quarter end, under the ABL.

Great. That's it for me. Thank you.

Thank you. I think that's all the questions, operator.

Okay.

All right. Thank you all for attending the conference call and we look forward to giving you future news. Thank you all.

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.