Herc Holdings Inc (HRI) 2010 Q2 法說會逐字稿

Thank you for standing by. And welcome to the Hertz Global Holdings second quarter 2010 earnings call.

The Company has asked me to remind you that certain statements made on this call -- certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of performance, and by their nature are subject to inherent uncertainties. Actual results may differ materially. Any forward-looking information relayed on this call speaks only as of this date and the Company undertakes no obligation to update the information to reflect changed circumstances. Additional information concerning these statements are contained in the company's release regarding the second quarter results issued yesterday and in the risk factors and forward-looking statements section of the Company's 2009 form 10K. 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 today's call is being recorded by the Company and is also made available for replay starting today at twelve-thirty PM Eastern time and running through August 18, 2010. Later, we will conduct a question-and-answer session. Instruction will be given at that time. I would like to turn the call over to our host, Leslie Hunziker. Please go ahead.

Good morning, and welcome to the Hertz Global Holdings 2010 second quarter conference call. You should all have our press release and associated financial information. We've also provided slides to accompany our conference call, which can be accessed on our website at www.hertz.com/investorrelations. In a minute, I'll turn the call over to Mark Frissora, Hertz's Chairman and CEO. Also speaking today is Elyse Douglas, our Chief Financial Officer. In addition we have Scott Sider, Executive Vice President and President of Vehicle Rental and Leasing - the Americas, Michel Taride, Executive Vice President and President of Hertz International, and Gerry Plescia, Executive Vice President and President of Hertz Equipment Rental. They will all be on hand for the Q&A session.

Today we'll use non-GAAP financial measures, all of which are reconciled with GAAP numbers in our press release 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 Holdings Incorporated, the publicly traded company. Results for the Hertz Corporation differed only slightly, as explained in the press release. Now I will turn the call over to Mark Frissora.

Good morning everyone, and thank you for joining us. As you have seen from last night's press release, despite a changing macro and economic backdrop, we delivered very good results in the second quarter, reflecting the success of our growth and efficiency strategies. The best example of this, on slide five, is the record adjusted pre-tax earnings performance of our largest business, US Rent-A-Car. In the 2010 second quarter, US Rent-A-Car generated $32.5 million of higher adjusted pre-tax income compared with the pre-recession second quarter of 2007. This represent as 350 basis point margin improvement over the 2007 period on 7% less revenues.

Overall, for the Company, higher revenue and greater efficiencies drove an 18.1% year-over-year increase in consolidated adjusted pre-tax income in the latest second quarter. This is on slide seven. The profit increase translated into a 50 basis point margin improvement, despite the negative impact on the quarter from a one-time, $32 million, compensation benefit that we received in last year's second quarter. Additionally, we overcame higher adjusted interest expense and $1.9 million of negative currency exchange rates. Corporate EBITDA was essentially flat, also due to the one-time compensation benefit. Excluding last year's benefit, corporate EBITDA was up 13.3% year-over-year.

You might recall, back in April, the pace of the global recovery seemed to be accelerating, with consumer confidence climbing to its highest level since October of 2007. Since then, however, consumer confidence has weakened. While this adversely affected our leisure business, our commercial business has accelerated. Consequently, while the overall volume rate remained in line with our forecast, the expected mix of rentals shifted more towards commercial business. Our consolidated revenues grew 7.1%, or 7.5% when you exclude currency translations as a result of improving volume trends across both of our business segments. In terms of pricing, equipment rental pricing pressure is finally stabilizing, with the year-over-year pace of decline gradually improving each month, despite a tough year-over-year comparison.

In Europe in the second quarter, we secured 3.9% price increase from the commercial and leisure rental car markets combined. While in the US, rental car revenue per day, or RPD, was a mixed bag, where and increase in off-airport RPD nearly offset weakness in airport RPD. On slide eight, total Company adjusted direct operating and SG&A expenses were up 10.8% overall, but when you exclude the impact from the one-time compensation benefit last year, as well as the incremental advertising spending, adjusted direct operating expenses and SG&A expenses were up just 7.5%, reflecting costs in line with increased revenue.

Additionally, maintenance costs were higher than usual in the second quarter, as we ready our equipment to service the anticipated recovery in industrial and infrastructure demand. And since April of 2009, it should be noted that we added 27 Advantage airport locations, and 298 net new off airport stores to our rental network. It is important to note that, while we're recognizing the cost associated with a fairly rapid expansion of these businesses, we have not yet fully realized the revenue potential given the newness of the stores. Monthly rental car depreciation per unit worldwide are down nearly 12% on lower vehicle acquisition costs and a larger portion of vehicles being sold through higher price, lower cost, non-option channels.

Turning to slide nine, we generated permanent cost savings of $142 million in the second quarter, bringing our first half total savings to $241 million, outpacing our full year goal of $300 million. Today we believe we can capture another $140 million of savings in the second half, split about evenly between the last two quarters, which would reflect a revised goal of $380 million of cost savings for this year. Our more efficient processes led to greater productivity at Hertz. Consolidated revenue per employee was up 7.5% in the recent quarter over the same period last year. From our inception of Lean/Sigma back in '06, to the last 12 months ending June 30, revenue per employee has increased 23.6%, despite $900 million less revenue.

Now, let's take a quick look at second quarter performance by operation, starting on slide 10. In the most recent second quarter in the US, total rental car revenue was up 10.1% in the quarter, compared with last year. Of the growth, total airport operations contributed 45.8%. Of that, the contribution from commercial business was 53.5%. Advantage accounted for 22.1% of the total revenue increase, and off-airport represented 32.1% of the increase.

Inbound revenue, which is included in each business unit's revenue and is a strategic advantage for us, was up 23.2% from last year on strong demand from Europe and Latin America. Commercial rentals on-airport, which are made up of large corporate customers and small business account programs, delivered a 12.4% revenue increase over last year. Off-airport revenue growth was 13.7% higher, driven by the leisure and insurance replacement markets. Increased marketing support, including a new TV campaign, also supported the top line expansion.

On slide 11, revenue per day, or RPD, which encompasses both price and mix, was down 0.4% for our Hertz Classic brand. Of course, as you know by now, pricing varies significantly across our mix of rental options. So, you really need to break down the consolidated RPD to get a clear understanding of the trends across end markets. For example, our off-airport operations RPD was up 2.8% on 10.2% higher volume, driven by both the leisure and vehicle replacement businesses. While off-airport rentals have a 28% lower rental rate per day on average, compared with airport rentals, labor and other operating costs are also significantly lower, and rental length is nearly 50% higher. So, we're excited to be capturing more share in this attractive market.

On the next slide, US fleet efficiency was roughly flat, at 80.6% in the second quarter. We have aligned our fleet closely with rental demand and have been able to sustain utilization in the 80% range, despite 10.8% more fleet than last year, and the come-back of the corporate traveler, which is typically only a three- to four-day midweek rental. Monthly depreciation per vehicle in the US was 13.5% lower than the 2009 second quarter's level, driven by strategic fleet management actions, including developing more profitable remarketing channels, optimizing portfolio mix, and negotiating successfully with the OEMs.

On the used car front, residual values remain stable at a normal seasonal level. Our net promoter score in the US is up 17.2% over the prior year, reflecting the appeal of our newer fleet and the addition of popular new car classes. In our airport market, share is increasing. According to the latest data available in the first quarter, our market share for our Hertz and Advantage brands combined increased 230 basis points over the 2009 first quarter. From what we have seen, this trend continued in the second quarter.

Our US rental car adjusted pre-tax margin increased 70 basis points in the second quarter, versus last year. But when you exclude last year's one time compensation benefit, adjusted pre-tax margin was up 260 basis points. Corporate EBITDA also expanded in the quarter, benefiting from the better than expected off-airport demand, recovering corporate volumes, and very disciplined cost management.

Turning to our European rental car operations, on slide 13, the second quarter marked a significant turnaround. Revenue increased 2.3%, or 9.6% when you exclude the impact of foreign currency translations, driven by price increases across both the corporate and leisure markets. In fact, in the commercial market, we've had positive revenue per day growth for eight consecutive months. Volumes in Europe are also higher year-over-year, despite some fall-off since the European fiscal crisis took center stage in May. Airline travel interruption caused by the volcanic activity in Iceland in the second quarter was offset by an increased number of walk-up and one-way rentals, which capture a highly daily rate.

Overall, revenue per day increased 3.9% over the prior period on a 4.8% improvement in transaction days. While half of the RPD increase in the second quarter was due to the higher number of one-way rentals, the underlying trend remains positive. Europe delivered a 59.4% increase in adjusted pre-tax profit from last year on lower monthly depreciation per unit, while keeping adjusted direct operating and SG&A expenses flat as a percent of revenues. I will also note that the sales -- that the increase includes a $10 million value-added tax claim in the quarter.

Now, let me touch on our equipment rental segment on slide 14. We saw continued improvement across all metrics from a sequential monthly perspective. Revenue was down just 4%, compared with 15.2% in the first quarter. Pricing declined 6.1% versus 8% in the first three months of the year, and rental volume, which improved in the second quarter, finally turned positive year-over-year at the end of June. Utilization improved 430 basis points on a sequential quarterly basis, and corporate EBITDA margin expanded to 35.5% from 33.8% in the first quarter.

Everything continues to move in the right direction, including the industrial market recovery, new infrastructure projects, and national accounts expansion. BP, one of our largest national accounts, has continued to place orders for equipment to support the initial clean up efforts of the oil spill in the gulf. Our current monthly run rate for those orders is roughly $600,000.

As I mentioned before, in the face of the downtown last year, we made a strategic decision to defer maintenance projects for under-utilized fleet, and to reduce work hours for the employees responsible for maintaining those assets. Now we are working to get that equipment back on rent, as we reinvest to capture the expanding demand in the markets we serve. For these reasons, maintenance costs were $5 million higher than last year, despite a 4% revenue decline. These investments held equipment rentals corporate EBITDA margin under 40% for the quarter, but position as well, with more fleet rental ready going into the second half. Over the next two quarters, we expect to benefit from the seasonal peak, the continued growth of the industrial market driving higher utilization, a favorable year-over-year comp, positive revenue and volume growth, and a stabilizing environment. Now that the equipment rental business has gun begun its turn around, we expect to see double digit adjusted pretax earnings growth going forward.

Now, let me give you an update on slide 15 on a few of our growth initiatives to further the diversification of our businesses, markets, and products, before I turn the call over to Elyse for a detailed financial review. For the urban hourly renters we, continued to expand Connect by Hertz, adding seven universities to our car sharing program in the second quarter, bringing the total to 45 schools. Our Connect membership now exceeds 18,000 subscribers worldwide. We began promoting Connect through New York City in the second quarter to build awareness of our new service and expand member utilization. Just since the campaign was launched, we've realized a 400% increase in membership.

Our Advantage Spartan Leisure Offering, which we acquired in April of 2009, has surpassed our expectations for market share, margin, and volume. We're currently on pace to generate an annual revenue run rate of nearly $160 million over the next 12 months. Today, our Advantage business is profitable, with 31 airport locations, covering major US leisure destinations, including those recently opened in Las Vegas, Chicago, San Jose, and Oklahoma City. We have plans to open up additional airports by year-end. At a minimum we should have at least 50 airports open.

In the $10 billion off-airport market, we opened 65 net new locations in just the second quarter, primarily co-locating with body shops, hotels, and repair facilities to serve the needs of local market customers. This brings our net new store openings since April of 2009, as I told you previously, to now 298 new net new locations. Off-airport rentals, which include leisure and local business rentals, replacement rentals, and monthly or multi-month rentals, are typically priced lower than the airport rentals on a per day basis, but have a longer average length of keep, which drives revenue per transaction. Since associated transaction costs are leveraged across a longer rental, the costs as a percentage of revenues are lower than the airports, allowing for similar margins. Additionally, the overall cost structure is lower, with fewer labor hours required, a more economical fleet, shared facilities with no concession fees, which a considerable at the airports. Our off-airport demand continues to expand at a double-digit rate.

Finally, total US ancillary revenue, including up selling car classes and marketing additional products, like insurance coverage, roadside assistance, damage waivers, never loss, and refueling, increased 22.8% year-over-year in the second quarter, as both airport and off-airport locations focus on this revitalized program. More importantly, we are investing in our employees, innovating our product offerings, and refreshing our fleet. As a result, our service scores are climbing. In fact, our service scores in US Rent-A-Car and Europe Rent-A-Car are higher than they have been ever in the history of the Company. We are successfully executing a growth plan that is positioning us to deliver even more value for our customers. With that, I will turn it over to Elyse for a more detailed financial review.

Thanks, Mark, and good morning everyone. Let me begin on slide 16. We are very pleased with the second quarter financial performance. On a consolidated basis, we generated $1.9 billion of revenue, a 7.1%, or $125 million, increase over the same period last year. A 9.3% increase in worldwide rental revenue more than offset a 4% revenue decline in worldwide equipment rental. Adjusted pre-tax income was $95.8 million, up 18.1% over last year's second quarter, which is an improvement of 50 basis points in margin. This was achieved, despite the one-time compensation benefits in 2009 that Mark spoke of.

Specifically, in the second quarter last year, we took temporary wage, bonus, and select benefit reductions to sustain operations through the most challenging period of the recession. These actions were reversed last September, resulting in a tough comp year-over-year for the latest second quarter. After adjusting out these one time savings, consolidated adjusted pre-tax income year-over-year was up 96.3% and margins expanded by 230 basis points. Adjusted earnings per share improved 16.7% in the quarter to $0.14 per share, compared with $0.12 per share in the second quarter of 2009. The improvement was driven by higher revenue, efficiency savings, and lower depreciation costs.

This quarter's GAAP diluted earnings per share loss of $0.06 per share represents a 45.5% improvement over the period last year, when you exclude a $48.5 million pre-tax gain related to the buy-back of portions of our high yield notes in 2009. The improvement in overall business conditions is also reflected in the $235.5 million improvement in cash flow from operations, to $749.4 million in the second quarter, versus $513.9 million in the same period in 2009. I will talk more about cash flow in a minute. For now, let me give you some more detail on the performance trends by business segments.

On slide 17, our worldwide car rental revenue for the quarter of $1.6 billion was up 9.3% year-over-year, or 10% excluding the effects of foreign currency translation. The US, European, and other international rental car operations each experienced approximately 9% growth in rental rate revenue. And as Mark already mentioned, revenue is a function of RPD and volume. Volume as measured by transaction dates grew 10.1% in the US and 4.8% in Europe.

RPD in Europe was up 3.9%, and the US was down 1.2%. As Mark mentioned, the RPD declined in the US was driven by the expansion of Advantage, a shift in mix to lower RPD businesses, and a tough year-over-year pricing comp in the leisure segment. This was partially offset by a 2.8% increase in off-airport RPD. Worldwide Rent-A-Car generated corporate EBITDA of $197.3 million in the quarter, a 13.7% increase. The reported earnings represent a $23.7 million year-over-year improvement. This improvement was driven by revenue growth, lower per unit depreciation per month, and the realization of cost efficiencies, all of which contributed to 120 basis point adjusted pre-tax margin improvement during the quarter, in spite of the one-time compensation benefits achieved in 2009.

Turning to Worldwide rental car fleet efficiency, on slide 18, as you know, the entire rental car industry was under-fleeted last year when leisure volumes strengthened throughout the second quarter. The supply-demand in balance enabled us to achieve very high fleet efficiency rates last year, which consequently made for a tough comparison this year. Fleet efficiency was also negatively impacted by the volcanic ash disruptions in Europe. We had just started fleeting up for the spring and summer peaks in April when the volcanic ash cloud caused flight cancellations. We lost about 175,000 transaction days, which impacted efficiency year-over-year by roughly 170 basis points. And due to the unusually high number of one-way rentals that resulted from the flight cancellations, we had 4000 displaced cars that needed to be repatriated to their respective countries, since regulations in several European jurisdictions require cars to be rented only where they are licensed.

With this mind, we're pleased with the 78.7% worldwide fleet efficiency, which is down only 70 basis points year-over-year. And the effects of lower utilization on profits was more than offset by the improvement in pricing on one-way rentals. In the US, fleet efficiency was essentially flat, with last year's strong level, as increasing advantage in off-airport transactions, which generally average about five to six days, offset higher corporate travel volumes, where transaction length is typically only three to four days. Fleet efficiency is also benefiting from the expansion of our network nationally, and the use of direct to dealer and direct to consumer used car sales channels, which enable us to keep the cars on rent right up until the point of sale.

Now, let's take a look at rental car fleet costs on slide 19, measured as monthly net fleet depreciation per unit. Our year-over-year worldwide fleet costs were 11.6% lower in the latest quarter. In the US, we reduced fleet costs on a per unit basis by 13.5% from a year earlier. Our domestic monthly depreciation costs have been decreasing sequentially since the fourth quarter of 2008, when used car residual values were at historic lows.

In the second quarter, our car costs are 2.3% below 2007 levels in United States. The sequential quarterly improvements in fleet costs are credited to our execution of disciplined fleet sourcing strategies, improved portfolio management, and leveraging alternative sales channels in the domestic used car market. Only 61% of our US car sales were executed through the auctions in the second quarter, down from 67% at year-end 2009. Our goal is to further improve our remarketing returns by bringing auction sales down to just 50% of total car sales by the end of the year. Utilizing direct to dealer and direct to consumer channels, like our rent-to-buy business allows, us to capture a higher sales price, reduce our cost of sale as we forego the auction fees, and increase utilization as I just mentioned.

In the third quarter in the US, we expect monthly depreciation per car to increase slightly due to the seasonal mix of our fleet. In the summer, we carry more special equipment like SUV's, minivans, and convertibles to meet the heavy seasonal demands. These are more expensive vehicles with higher depreciation rates. In Europe, monthly depreciation per car also continued to improve, falling 8.1% in the quarter from 2009 levels on a constant dollar basis. And just like US rental car, our purchasing terms have improved with our latest round of fleet negotiations, helping to counter the stabilizing but still low residual values across the continent.

For the full year, we now expect worldwide monthly depreciation per car to be down between 6% to 7% compared to 2009. On a worldwide basis, our fleet was 59% risk at the end of the second quarter, with an average fleet age of 7.3 months, younger by almost 1.5 months versus the second quarter last year. The average age of the overall US fleet is now 7.3 months, compared with 9.1 months in the second quarter of 2009. At quarter-end, risk cars in our US fleet represented 61% of the total domestic fleet. Of the new cars we brought in during the second quarter, 33% were to right-size our fleet to capture the recovering base demands, as well as to accommodate our own expansion into the Spartan leisure market with Advantage, the off-airport sector, to service insurance replacement accounts better, and the car sharing segment to capture more of the urban and youth demographic.

Now, let's turn to the results of our equipment rental segment on slide 21. In the second quarter, HERC reported revenues of $265.8 million, and corporate EBITDA of $94.3 million. Mark has already walked through the revenue volume and pricing results for the quarter and highlighted that volume turned positive year-over-year at the end of June. Previously, we thought revenue would become positive as we moved into the fourth quarter, but with recent trends, we are optimistic that this could happen as early as the third quarter. While pricing is still competitive, it is finally stabilizing, and we expect it to be nearly flat year-over-year by the end of the fourth quarter.

Pricing in a downward cycle is always challenging, but equipment rental has been disciplined and tactical over the last two years. Our pricing in the second quarter was down 6% year-over-year, versus a decline of 7.4% last year. However, the two-year decline of 13.5% is several hundred basis points less than our peers. We expect to see a continued sequential quarterly improvement in pricing in the back half of the year. We saw demand for industrial and earth-moving equipment beginning to pick up in the second quarter. As Mark mentioned, this required us to further increase maintenance spending by $5 million in order to get under-utilized fleet ready for rent, negatively impacting the 35.5% corporate EBITDA margin by 180 basis points.

Revenue from our industrial business was up 17.8% in the recent quarter. As you can see on slide 22, our strategy to shift more of our equipment mix to this category is benefiting us as facility maintenance, petro chem refining, energy services, and oil and natural gas exploration continue to add new projects and restart deferred projects. In the second quarter, industrial equipment represented 29.1% of our total North America revenue, up from 23% a year ago. At June 30, our worldwide equipment fleet age was 48 months, a 1.5 month increase from the 2010 first quarter. On slide 23, you can see that our equipment rental fleet on a net book value basis was down 15.2% year-over-year. Second quarter equipment fleet purchases were $34.2 million, versus disposals on a first-cost basis of $76 million. This compares to second quarter 2009, where additions were $12.2 million and disposals were $76.8 million on a first-cost basis. And while equipment residuals continued to improve, we are selling only is selectively to delete the oldest pieces.

Now, let's move on to slide 24 for an update on our recent financing. It has been a busy quarter. We completed our EUR1.3 billion European refinancing with the June closing of the EUR220 million resolving credit facility, and the issuance of EUR400 million secured notes, together with the July closing of the EUR400 million ABS securitization in France and the Netherlands. And also in the second quarter, we issued $184 million in subordinated ABS notes in the US at favorable rates, which gives us additional liquidity for fleet and can also be used for general corporate purposes.

And finally, last month, we issued $750 million of three, five, and seven-year US asset backed notes with fixed rates with all-in yield that was below that of the fixed-rate notes issued in 2005. This capital will be used to top off our fleet borrowing capacity in light of greater year-over-year demands. In total, we have raised $5.5 billion in fleet debt over the past 12 months, enabling us to successfully extend and stagger our fleet debt maturities. Just as importantly, we were able to do this at attractive absolute yield levels and with advanced rates at or better than we anticipated. The only remaining refinancings this year relate to Brazil and Australia. These are well under way, and we expect to complete them this quarter.

On the next slide, let's take a look at cash flow. I already mentioned the improvement in cast from operations in Q2 of $235 million versus the same period last year. And the second quarter's levered cash flow, which is cash available to pay down corporate debt, was $145.7 million, versus a negative $154.3 million in 2009, a $300 million year-over-year improvement, despite the impact of increased investment in rental car fleet. In improvement in cash flow in the quarter was due to reduced investment and working capital, as networking capital days improve by 25.7%. In addition, we executed fewer acquisitions compared with last year and had lower cash restructuring expenses. And the issuance of $184 million in subordinated ABS notes this is quarter modestly improved advance rates.

We expect full year 2010 advance rates to decline by five percentage points from the 72% 2009 levels to 67% this year-end, reflecting the full impact of changes in credit enhancement levels on ABS fleet debt financing. We ended the quarter with total net corporate debt of $3.6 billion, total net fleet date of $6.4 billion and $897 million of unrestricted cash on our balance sheet. Year-to-date June, we reduced corporate debt by $83.8 million. And by the end of the quarter, we had $1.7 billion of corporate liquidity available to fund our growth initiatives.

Turning to slide 26, interest expense, net of interest income, was $182.1 million in the quarter, up $19.3 million over last year, driven by higher fleet levels and a full quarter of interest on our convertible debt that was issued late in the second quarter last year. Our estimate for incremental interest expense for 2010 versus 2009 is now $75 million to $85 million, which is lower than our earlier estimate of $90 million to $110 million. The improvement is due to better than anticipated terms and pricing on fleet debt refinancing, and lower short term floating rates.

Restructuring and restructuring related charges in the latest quarter were $22.3 million, of which $8.6 million will be settled in cash, compared with $33.3 million in restructuring and related charges in the same period last year. These charges mainly relate to HERC facility closing costs, as we look to further consolidate under-performing branches. For the second quarter, the GAAP income tax expense was $14.2 million, compared with $22.9 million last year. Cash income taxes paid in the quarter were $6.1 million, in line with the prior year. We estimate cash taxes to be $40 million to $50 million for the full year of 2010. As a reminder, in calculating adjusted net income and EPS, we use a tax rate of 34%, which we believe reflects our more normalized rate over the long term.

Now, if you turn to slide 27, you will see that we comfortably met both of our quarterly corporate financial covenant tests. In fact, our corporate consolidated leverage ratio was 3.54 times, well below the maximum 5.2 times allowed, and the corporate interest coverage ratio was 3.4 times, well above the minimum requirements of two times. These ratios exclude the convertible debt issued by the Hertz Global Holdings in May, since the covenants apply only to the Hertz Corporation results. And with that, I will turn it back to Mark.

Thanks, Elyse. Let's move to slide 28. In second quarter, we delivered strong results across our major businesses, while at the same time taking actions to enhance long-term opportunities. We did this despite significant headwinds, including the slowdown in the economy. And as Elyse explained, we had difficult year-over-year comparables in the latest quarter, due to last year's one-time compensation benefit and significant industry price increases for leisure airport rentals.

This quarter, the price increases that we put in place for our US rental car operation for the summer are offsetting the gap resulting from last year's peak leisure pricing levels. And domestic seasonal leisure demand in July and August continues to be strong, reflecting low double digit expansion. We expect US rental car to perform at record adjusted pretax income levels for the rest of the year. In Europe rental car, high single digit revenue growth will benefit from the price increases for both commercial and leisure rentals that we instituted last quarter.

And beginning this quarter, HERC finally benefits from a combination of favorable year-over-year comparisons and a continued upswing in demand. For the equipment rental segment, we expect positive year-over-year revenue and volume growth in the third quarter, along with steadily improving utilizations. Pricing for equipment rentals is still unpredictable, but if volume continues at its current pace, year-over-year pricing could reflect only low single-digit declines, compared with last year's third quarter when pricing fell 8.6%. These trends should result in double digit adjusted pretax margin improvement for this quarter.

The caveats to our forward expectations are the risk and volatility we're seeing in the global economy, illustrated on slide 29. The slow-down in the US economy in the second quarter is concerning for the rest of the year, and some economists are cutting their growth estimates for the second half based on the second quarter GDP report. We set our current full-year guidance back when the market was much more positive than it is today. The choppiness of the economic forecasts make it difficult to be anything but cautious about the second half of the year, especially for the fourth quarter where we don't have much visibility. We will be monitoring our operations closely, but at this point are still comfortable with our current guidance, which is outlined on slide 30.

Net-net, we are cautiously optimistic about the second half of the year and our ability to do well, in spite of the uncertain economic environment. You will see on slide 31 that we provided a year-over-year sensitivity analysis to earnings for the back half of the year. You will notice that 1% movement in any of the key metrics has a significant upside or downside effect. Obviously, we are hopeful that there will be more upside to downside, but it is too early to tell. As we move into the fourth quarter and visibility gets better, we will keep you advised accordingly. Now let's go ahead and open it up for questions.

Thank you. (Operator Instructions) The first question is in line of Rick Kwas, of Wells Fargo. Please go ahead.

Good morning, Rick.

Mark, on monthly depreciation per unit, the guidance implies that there is a step up in the second half of the year and you're not going to be able to maintain current levels on a worldwide basis. What is driving that step up and how conservative is that estimate?

Step up in the depreciation per vehicle?

Yes. I think you're calling for 6% to 7% year-over-year decline in the monthly depreciation per unit, if I have that correct.

Right.

So, that implies a second half -- there's an increase sequentially, based on what you have done in the first half.

Well, I think part of it is mix of vehicles. Another part of it is, we bring new cars into the fourth quarter. So, we are probably -- in balance we're being conservative on this number going in. So, I think there is some upside here. Again, we are baking in, as you might imagine, we are trying to bake in the fact that we are going to over-deliver on expectations. We always try to bake that in by having a conservative forecast in our assumptions on depreciation per vehicle. There is a higher concentration of prestige and SUVs that are in the mix, if you will, as you go into the fourth quarter. That is basically because you ramp up, as you know, in the third quarter with special equipment to serve vacation travelers. So, that higher mix does put some pressure on the depreciation per vehicle. So, that's the primary driver on it. But I would say you're right, there is conservativism built into the number.

Okay. And then, what are you seeing on corporate volumes here? I know that you will start to face tougher comps in the fourth quarter. Are you still seeing double-digit increases on the business travel front?

Absolutely. Yes. We will see that, and that will continue into the fourth quarter, as well.

Okay.

So we're actually seeing -- I would tell you that business travel sequentially, every single month is strengthened. And we haven't capped out yet. We don't think we've tapped out on that yet. We're seeing numbers in the top, I don't know, 25 accounts that are up 20% -- roughly, 20% to 25%. It's the smaller business accounts that have been slower to increase, but they are increasing now. They were flat about a quarter ago. Now they are up 6% to 7%, and that's building, and once our small business accounts start to ramp up, again, that's just going to accelerate the year-over-year increase going into the fourth quarter.

Okay. And then, last question. If you look at the economy, and let's just say we're stable here and we do GDP's 2.5% or thereabouts for the rest of the year, if you take your incremental cost saves, incremental, is it better than expected or lower than expected increase in interest expense, should we think of it -- that increase or that benefit pretty much flowing through, potentially flowing through if the economy holds in here?

I think some of it will, yes. I think we could think about some of that flowing through, for sure, assuming the economy holds. At the -- what I would call 2.5% to 3.5% rate, yes. For us, we are -- part of our caution is we're pulling back on some of our longer term growth programs to make sure that we have tons of insurance, if you will. But we think about the 2.5% to 3.5% growth rate, I think some of these incremental costs actions will drop through, and we might have some fleet upside, as well. So, we're hopeful that, like I said, once we get some visibility into September and October, we can talk about guidance with more certainty.

Okay. Then last question, equipment rental EBIDTA margin, do you still expect 40% plus in the second half?

For the equipment rental business, you say?

Yes.

I would say that the margins should be in the 40% section. For us, certainly third quarter we kind of feel that way. Going into the fourth quarter, we have volumes that look pretty good. I would say hitting 40% plus is a reasonable assumption going into the second half, both third and fourth quarter.

Great. Thank you so much.

Our next question comes from the line of Chris Agnew, of MKM Partners. Please go ahead.

Thank you. Good morning. I think you just maybe touched on this, but, maybe if you could expand a little bit on the visibility you have today in the car rental business, how that's changed over time, and maybe how that varies across the main businesses within car rental?

Well, visibility on business travel used to be, Chris, probably, we'd get at least two-and-a-half, three weeks notice of a reservation. Now we're getting less than a week. So, we have real trouble trying to forecast 60 days out, kind of, 90 days out because of that window, the booking window has collapsed. Our booking window will show that our revenues in advance reservations should be up 4% and will be up 20% -- this is on business, this is business travel I'm talking about -- because of the lack of reservations that we're getting in advance. So, we're having, again, very low visibility.

Leisure is the same. It hasn't changed much. You might imagine that, on leisure, people are booking last minute more and more because they get better deals in this environment. So, that booking window is very short, as well. So, overall visibility of the business is much less than it was a couple years ago, and it really hasn't improved that much over the last year. Maybe a little bit on leisure, but on business, as businesses come back in a big way, again, that booking curve, that window is very tight. So, that is part of the reason, as you know, that we were not willing to, if you will, forecast something higher than what we forecasted for earnings guidance going into the back half of the year.

And different topic -- are you able to update us on where you are at with respect to antitrust process with respect to Dollar Thrifty?

In terms of -- let me see if I can couch it in the right terms here. In terms of the antitrust piece, you've seen from the press release that we were delighted to receive Canadian antitrust clearance last week ourselves. And here in the US, we are cooperating fully with the FTC, and we're really pleased with the pace at which the FTC's consideration of our application is proceeding. The discussion so far on our behalf with the FTC has been very cordial, constructive, and we really maintain our view that the transaction will receive very timely clearance in the US as well.

We are still in the process of responding to the FTC second request. Can't really definitively say when they will be in a position to make that determination. I think that we told people that we've had a quick review -- what's call a quick look -- which means the time for the second review is less than what it would normally be. A second review can take a long time. And a quick look or a quick review is less time. Giving you numbers on that is difficult, because the FTC reserves the right to do whatever they want for their due process. But we feel good that we are in good shape there.

Excellent. Thanks very much.

Thank you. Our next question is from the line of John Healy, of Northcoast. Please go ahead.

Thank you. Mark, I was hoping you could talk a little bit about the off-airport business. You continue to put up really good growth numbers there, you continue to increase prices there.

Right. Yes, I mean, in general, it is a good business model. It's very stable and has a tendency to grow faster, and has grown faster, than the airport business. So it does have better growth characteristics as a market. Having said that, you are right on the money. It is not growing as fast as we are growing. So, we know that, to some extent, we're either expanding the market or growing share, and we think it is a little of both.

Obviously, as we added 298 stores, net new locations since April of last year, each one of those is like a sales store, right? So, I have three to five or six people in each one of those locations, and they're out knocking on doors, selling local car dealers, local collision repair centers, they're calling on consumers, they're advertising locally, a lot of guerrilla marketing, and they're generating a lot of rentals just by being in the neighborhood. And we offer, from all those locations, the ability to pick up. We will pick you up from any location and deliver you cars. So, it is a great service, and it is a different -- as you know, a different market for us. Because on the insurance side, we continue to penetrate those accounts we've signed up, we have over 190 of the top 200 largest insurance providers in the United States. Because we continue to penetrate those, that just gives us additional growth, right, so, we get in the door. The first year you may get 5% of the business. The second year you get 10% or 15%, but you keep knocking on the doors, and you keep providing really high levels of service, and you grow the business accordingly.

It is a very big market, it's a $10 billion market, the same exact size as the airport market. And we only have 11% of the share there. So, the fact that it's so big, and yet we have such a small share, and it's so controlled by one of our competitors, it provides a very good avenue for growth in the future. We believe we're going to be double-digit growth for the foreseeable future. We don't see that ending over the next three years. It is a double-digit market for us.

Great, that sounds encouraging. I wanted to ask you a little about the HERC business. Great to see that business get to a stable level. If we -- as we move into 2011 -- if we, say, in a environment where we get 3% to 4% GDP type growth, what sort of growth rate do you think HERC could give us coming into 2011? Is this a double-digit growth business next year, or is it very low single digits? I'm just trying to think about how we should feel about the trajectory of that business, now that we come off the bottom?

I think it is fair to say that we believe pretty confidently that next year will be a double-digit business. Maybe mid double-digit range. That's what we're thinking. It ties out with what everyone else is seeing. We pretty much triangulated on the dodge report, coupled with our competitors and what they're saying. Mid-range double-digit looks pretty reasonable for us next year on revenues. So, I think that answers your question.

Helpful, yes. And then just a last question. When I look at the pricing umbrella that you gave for the Advantage brand, it was down a little bit more than I had thought it would be. Can you maybe talk to what you saw, maybe in the Spartan brand segment of the car rentals base in terms of pricing, or is the RPD in Advantage down because maybe you are entering new markets? I am just trying to understand why a little bit of softness there.

As you know, it is such a new brand for us. And there are so many new locations that are in the mix, that the new ones that we've opened, some of them have been pretty big markets. They're pretty big leisure markets that are very competitive. When you go into a larger leisure market and as the store matures, it competes for the business. When you start off in the beginning with a new store and it doesn't have any share, it starts off -- you may get some, just, spillover from Hertz, we can't handle it. And so, it would be a little higher RPD as it starts off.

And then as the business matures and gets into the Spartan segment, the pricing gets under more pressure. It is slightly down in the new markets. Obviously, Fox, Payless, those guys are the bottom. And we are trying to position ourselves higher, and our RPD is higher than any of them. So, believe it or not, our brand is actually pulling higher RPD than what we would call the bottom of the market. But it is not -- as you know at $29 a day, or $28 a day RPD, $29 is where we're settling in at. That's $10 below the levels of the mid-range brands which are at $39 to $40 a day. Kind of more like around the Budget brand and other brands in the mid-tier space.

Got it. Thank you.

Thank you, our next question is from the line of Brian Johnson, Barclays. Please go ahead.

Good morning, this is Emmanuel Rosner for Brian. I wanted to ask you a question about the -- your commercial business. Obviously you are seeing some very strong volume growth there in the recovery. But because it's annual contracted rates, we haven't seen a benefit on the pricing front yet. When do you think that the strong demand could translate into higher pricing?

Well, we are seeing pretty good improvement. If I give you the -- I will give you some numbers here. April, what we call our commercial pricing -- this is contracted pricing -- was down about 3.5%. In May, it was down 2%, in June it was down 1.1%. Weighted, in the second quarter, about 1.8% down. But we're seeing this nice improvement. July is improving from these rates, as well. Maybe down half a point. So, to your point, I believe we are going to get down to flat, we are hopeful, sometime in the fourth quarter, and start increasing prices. We have small businesses that are doing really well right now in pricing. And we expect to translate that into larger scale contracts as we move into the fourth quarter. It's anyone's guess if it's going to be positive, but based on the trending we're seeing, that's a positive sign.

Okay. Then, when I look at the outlook for the rest of the year, clearly you have given us a lot of things that are shaping up better than what you were thinking, three months or six months ago. You talked about equipment rental volumes turning around quicker than you thought, interest costs being lower, as well as cost savings shaping up much better than you thought. Is there anything at all that is actually shaping up weaker than you saw three months ago?

Certainly, I thought I said this, but maybe I didn't. The leisure business did not shape up as well as we thought it would. Once -- once we looked at where we were back in April when we gave guidance, we thought leisure would be probably up in the second quarter, maybe 5 to 6 points. I think leisure on-airport business was actually down over a point in the quarter. Now, what offset that was the business, right? But, again, leisure is typically a little higher RPD business for us. Especially in the summer season where we make a lot of our money. So, there was an impact there on the leisure, even though business and fleet was properly sized and everything else. Leisure being down a little had an impact. That was the one negative, was the leisure business itself.

Now, we've got Advantage brand, which, again, is at the -- what we call the low end of the segment, the Spartan end of the segment, and that is all growth for us, so we are really penetrating leisure. But in what we call the high end of the leisure segment, which is where we participate the most, that end of the segment was flat to down. We were expecting it to be up, probably, I will say, 4% to 5% going into the summer season. So that is where there was a little bit of bad news, but again, the commercial offset it on the volume side. And Advantage and off-airport are growing, nicely, as well. But net-net, we feel pretty good, but that was the big change from when I sat and talked to you guys back in April.

Okay. And then I guess, finally, if I may ask you a question about your bid for Dollar Thrifty. The $180 million in car synergies that you guys have publicly disclosed that you expect, would you be able to sort of break it down into the biggest markets? I know you talked about trend of basis point of possible improved fleet efficiency over time. So that would probably explain, I don't know, $60 million to $70 million. Would you be able to detail where roughly the rest would come from?

Yes. Let me just roughly -- $70 million was fleet. And that is a conservative estimate. $25 million was what we call non-fleet procurement. There was $20 million in IT. That number could be as high as $40. I will say $20 million to $40 million in IT.

In addition to that, there is public company duplicity, as you might imagine, in tax treasury IR functions. There is customer service duplicity. There is duplicity in rental locations in some cases, where there is the opportunity to combine management in the infrastructure of the actual operations themselves. So, that all adds up to $180 million, and that's on the low side of what we think we will get. So, we have it in detail by just a lot of granular detail on that. I'll just put it that way. So, we're very confident on the $180 million. We are not the least bit shy of saying we are more than confident of achieving that very quickly. Probably, my guess is, I think we've said, 70% of that, roughly would be in the first year. So, we are going to get it quick.

Is the $180 million a net number of any potential negative impact on EBIDTA from the divestiture that would be mandated?

No.

So this is the gross number?

That's right.

Okay. Thank you so much.

Thank you.

Our next question is from the line of Steve Kent, Goldman Sachs. Please go ahead.

Hello, good morning. Just two quick questions. One, how should we be thinking about the $80 million more in cost savings that you describe in your press release? Why not raise the overall profit outlook, especially with your third quarter outlook? And then, separately, on commercial pricing, it sounds like you think it is softer. Why is that the case? Is it demand driven, is it supply driven? Is it what competitors are doing? I guess I just don't understand that part of what you are suggesting.

Commercial has been under pressure for a couple of years now due to -- I think it would be clear to say that we have competitors that have been very aggressive in trying to get corporate business. And we have not given up any market share. We keep a 99.2%, 99.3% retention rate ever year. In order to protect that share, we have had to respond in this bad economy. As you might imagine, you go into a -- it could be a General Electric, it could be an IBM, -- big accounts that had airport market share are ripe for competitors to go after if they're trying to gain share. And we've had -- One of our competitors has been very aggressive, and now even a second one is. So, that has been under pressure. And since we've had 45% plus share of the Fortune 500 companies, that has been share we have had to defend.

Now, having said that, it is getting better. We have seen a lot of pricing weakness in commercial last year. Now it is improving. I just went through the numbers. It is now down to 0.5%. So, moving positive probably, or at least flat, into the fourth quarter. But it's still there. The pressure is still there.

Again, remember, that the volume in business today is still off about 15% to 20% off of '07 levels. So we are still not back to '07 levels in commercial. It is one of the big opportunities for us as it ramps up, still. We are up on certain elements, certain segments of business we are up on. Like our small accounts, we are up 1%, 1.5%, 2% right now. But on the large, contracted accounts, that's where we've had the most pressure. So --

I guess what I am asking, Mark, is, fleet sizes sound more rational. So, if I look at other travel industries, whether it is the airline industry or the hotel industry, they are already talking about being able to raise prices into the end of this year and going into next year. And I guess I'm not hearing that as much from you on the business traveler. But, maybe you could explain that a little bit more. Then, if you could also --

There's nothing to explain except for an irrational competitor. That is the best way to explain it to you. If you understand the industry, there is one competitor who has always been the low price leader. They have been very aggressive. I don't want to go into names and talk about pricing too much, because there's obviously antitrust issues, but just in general, we always lead on price. We're the high price leader. We do it every week, every day, day in and day out, and our rates are the highest, because we think we have the highest value to provide. We have the most cars available to rent, the nicest cars available for rent, this is something we've always claimed, and we think is true to this day. But their pricing has become more important in a tough economy.

Whether or not we get price increases next year, we will try and push it, but I'm just telling you right now, we've got some competent competitors that are continuing to price below market in order to gain share. And as long as they do that, I cannot control them. That is the best way I can explain it to you. I cannot control competitors, so I have to respond accordingly to make sure we keep our share. Now, I think, net-net, things should improve. I believe, again, I want to repeat to you that I believe that pricing should start to improve, certainly going into next year. We're hopeful that we will be up year-over-year. But that's very difficult to predict when you are negotiating 200-plus contracts every single month. They are all coming up here, and we do them on an annualized basis.

Your first question, I think, dealt with another issue. It wasn't the commercial issue. You were asking me --

It was about the $80 million more in cost savings. Why not raise full year guidance given that?

Yes. Well. Again, to explain what I said a little bit earlier, you have this issue of visibility in the fourth quarter. Until we get some better visibility, a little bit more certainty, we don't want to take that to the bottom line because there may be risks associated with it. You look at that last page of the slide deck, and you can see the kind of risk we're talking about. One point on all those factors, is $76 million of pre-tax. That's a big number. $6 million of pretax is $0.01 a share.

So, there are a lot of different levers in our business, and to just say, okay, I am going to increase it by X amount, I have to have a little more certainty around it. We just increased guidance, by the way, the end of April, beginning of May. So it was three months ago we increased guidance, and we increased guidance like three months or four months before that. So, we've been increasing guidance regularly. And it was built on a better environment. We saw the environment weakening a little bit on the leisure side because of GDP, so we were just being prudent, that's all.

Okay, thank you very much.

(Operator Instructions) The our next question comes from the line of Emily Shanks, of Barclays. Please go ahead.

Good morning. I had a couple of follow-up questions. My first one is around the vehicle debt. Elyse, you had said once the Australian and Brazilian facilities are done, are you 100% done for fiscal year '10 vehicle debt refinancing needs?

Yes. We're pretty much completed for '10, and then we'll -- our focus then will be on the corporate credit facilities, which come due next year. That'll be the next thing we take a look at.

Okay. And then, are there any significant amounts that are rolling off for vehicle-related debt in fiscal year '11?

We do have a VFN that will be renewed. And obviously some of the financings we've done recently, the three-, five-, and seven-year ABS notes that we issue will have an impact on that in terms of whether we need to renew that full $2 billion or a lesser amount.

Okay, and that's -- you said it's a billion dollar --

It is a $2 billion facility that will come up for renewal.

Okay. What month is that in '11, do you know?

It is the end of the year.

Okay. Perfect.

We also have two other small programs that come due. The Canadian facility mid-year and then our GE facility late in '11.

Thank you. And then I wanted to see if you could give us some color around HERC, specifically CapEx spend expectations. Can you give us a sense of what you are looking to spend for fiscal year '10? Any guidance around --?

About $150 million in total for the year.

Okay. And is that total number on net of asset proceeds?

No. That is just additions.

You want to know something about 2011? Is that what you said?

No. I was curious on '10. But if you want to give us guidance '11, I'd take it.

It will be maybe $200 million for next year assuming a growth rate of maybe 12% to 15%.

Okay. Perfect. Then my last question is just around -- I think, Mark, you had mentioned -- if I caught it correctly, negotiations with the OEM for next year's vehicles. And I wanted to see if you could give us a preliminary view on what you think depreciation costs will do for '11?

They will be down year-over-year. So we are having good negotiations so far. We feel that -- pretty confident that we are going to have single digit decreases next year again, in depreciation per vehicle. Part of that is driven -- I mean, the actual vehicle costs will be down a healthy amount, and then the question will be how much of our sales can come from what we call those new channels, like dealer direct and rent to buy. Both of those things would drive our net depreciation per vehicle down next year. So, our goal is to move the number down. We know that we are going to be able to, the question is how much. We have not really finalized enough of the contracts to give you a hard number on that. But certainly single digit numbers it will be down.

Great. That is very helpful. Thanks and good luck.

Thank you. Our next question comes from the line of Fred Lowrance of Avondale partners. Please go ahead.

Thank you. Good morning, guys. Just two quick questions. First, on the equipment rental side. You've obviously got that business pretty lean right now ready to leverage any sort of recovery. I think in the past you've stated a certain percentage of every incremental dollar of revenue will flow straight through to the bottom line. Maybe you could refresh us on what that is and maybe give us a sense for how long you think you can maintain this kind of leverage until you have to start adding people and equipment to support the growth that you are planning to see there?

Gerry Plescia, who is our President of the equipment rental business, I will let him answer that. Gerry?

There is pretty good flow through all the way through the rest of this year and certainly into next year. But depending on the pace of demand will dictate how much resource we add to it. Historically, we have been able to drop in the first two years out of recovery, 70% to 80% of that increasing revenue to the bottom line. So there has been pretty good leverage one to two years out from a recession. As we get back to 2007 levels and beyond, which is about $1.8 billion in revenue, then there's some more infrastructure and locations and other structural costs we would have to add, but it's a good one to two years coming out of recovery that we can drive a strong return from the revenue growth.

Very helpful, thanks, Gerry. Mark, back to you, one last question, we haven't talked about it, but your Connect by Hertz group there. You've got it as a growth driver. I know there is a lot of competition in that industry. I'm just interested in getting your take on the way things are shaping up there and maybe where you see that business going for Hertz?

Well, for us, we are expanding globally, so we have Paris, London, Berlin, Madrid, and then New York City. The kind of revenues right now, they are growing fast, but they're still on a small base. We were 0 about a year and a quarter ago. So, revenues probably at a run rate of, let's say, $5 million right now a year, we are getting -- we think -- we are focusing on New York City to be profitable there by this year. That is our goal. There are other people in the business that have been in business for ten years and they're still not profitable. We will be profitable, I believe by the end of this year. And then once we have the model really nailed, we are going to expand it rapidly into other cities. So we're trying to take the model and pilot in a lot of it in New York City, changes, tweaks, et cetera. And once we get scaled there, and profitability there, it will go into those other markets more rapidly.

All right. And just, on your expansion plans, quickly, are you thinking that's more organic growth at this point or do you have your eye out for attractive acquisitions?

We will look at acquisitions if they make sense financially. We have a lot of technology that we are going to be launching in the connect space that will enable us to leverage our network, our regular, what we call regular rental car network. We think that with the technology that we are transferring in some areas to the regular rental car network, and being able to leverage the infrastructure, we have a big opportunity to grow much more rapidly. So, for us, the big driver in growth will be technology-enabled. And we'll do that via both real-time kiosks that we can put in places to enable people to connect, as well as other rental car business, as well as having different cars -- more cars available for Connect in more convenient locations, with more flexible rental provisions that we'll provide. So, again, technology will enable Connect to be able to leverage it into the normal Rent-A-Car space, and we think that's going to be a big growth driver for Connect next year.

Thanks. That is it.

Our next question comes from the line of Richard Kwas, of Wells Fargo Securities. Please go ahead.

A quick follow-up on the leisure market. What's the success of the recent pricing increases that you've put through and the industry has seemingly followed? What are you seeing on that front? Are you concerned about pricing and the leisure in the airport market right now?

We believe that pricing is actually holding up very well for us in the third quarter. So, RPD for US Rent-A-Car is holding up very well. And Europe Rent-A-Car is holding up exceedingly well. So we are very bullish right now on pricing in the third quarter. Bullish in terms of our expectation. It's actually probably a little better than we thought. We heard rumors yesterday -- some people were saying it's weakening -- and it's not weakening. You should know that the industry always; by the third or fourth week in August and the first week in September, the RPD's start coming down. That always happens every year. That doesn't mean the pricing environments weakening. That just means it's seasonality. We see our normal seasonal RPD weakening. But, in terms of the relative RPD that we're getting this quarter, versus where we thought it would be, I would say it's probably stronger than we thought. Both in Europe, as well as in the US. We feel pretty good about pricing overall.

So from a competitive standpoint; there are no bad actors out there on airport leisure?

There are always bad actors, man. So, in general, things are pretty decent, and again, the environment is holding. We are able to high school our pricing in place right now without having too much cause for concern.

That implies year-over-year increase in the second half of the year, or are you expecting to be flattish for the rest of the year?

I can't -- we are getting into pricing discussions that are illegal for me to partake in. In general, for us, we believe third quarter will definitely be positive.

Great. Thank you so much.

Our next question comes from the line of Chris Doherty with Oppenheimer & Co. Please go ahead.

Good morning. I just wanted to focus on HERC a little more in terms of, Mark, your comment that is maybe HERC could be up, maybe double-digits next year. How much of that do you think is volume versus rates?

I would say most of it is volume, for sure.

I mean, you look at that chart that you showed, I think you guys are down, call it 13% over the last few years and competitors are down more like 16% plus. Now that guys seem to be getting in the high 60% 70%, do you expect rates to come back soon?

We are seeing them come back every single month. It's not like huge gains, but were seeing it happen right now. We think one competitor has got new pricing discipline, with a new management system they've implemented. That's been helpful. We've seen for discipline. Yes. I feel pretty good that -- we are not making our -- how do I say this? We don't build or plans around price increases right now. They're all built around volume increases and the hope is we get flat here some time by the first quarter, certainly. But, the revenue side continues to be very encouraging for us. Just pure volume is -- industrial markets for us now are 29% of our revenues. And it's growing. And those industrial markets are up year-over-year, I think Gerry is here with me -- was June up year-over-year mid double digits?

For HERC we were up high double-digits, 18% basically.

18%. We were up 18% in the industrial segment year-over-year.

And the industry is up 4%.

And the industry is up about 4%. But our 29% segment of the overall business is up 18%. It was up 18%. We've seen that actually kind of get better. So, we feel pretty good about being positive. And that's different than our competitors. Every competitor has a different mix. We have a lot of new industrial business that we've worked on for two years. That segment is growing more rapidly for us.

And talking about mix and fleet growth, you said this year probably $150 million edition, next year maybe $200 million. If you look at the mix right now, you commented on HERC movements trending well, and also Industrial. The other categories; are you reducing those in terms of fleet, or just maintaining it?

Go ahead, Gerry.

Chris, we are essentially maintaining host of those categories net-net. There are specialty categories like; generators, pump, we are increasing because of the nature. The governmental business, the air processor, the other fleet categories are essentially very slow, single digit growth and maintaining or slightly positive.

One specific is Aerial. Can you talk a little about Aerial?

Sure. There is an excess supply of Aerial in the marketplace. That's one of the reasons we don't expect pricing to be a big mart of the revenue growth next year. It seems that there'll be a one to nine month period where the supply complete adjusted to demand within that segment. There still is excess supply. As that start to mitigate and balance, that's when we'll start to get some better pricing metrics on that part of the industry. I think that'll happen as we get into the second quarter and beyond next year.

Right. Thank you.

Thank you, and at this time we have time for one additional question. And then any closing remarks the speakers may have. That question is from Michael [Schwinback] with JPMorgan. Please go ahead.

Hey guys, thanks for taking the call. I just wanted to talk about the balance sheet a little bit. Given the environment, the debt market; Are you thinking opportunistically as to some of the higher coupon debt? And with regards to overall credit ratings, have you spoken to the rating agencies, and you think that -- maybe you have a feel for their pace and reacting to business results, with or without a dollar edition? I mean, you guys have made a lot of comments about focusing on credit ratings, which as debt investors, we definitely appreciate. Any more commentary on that going forward?

Sure. With respect to the rating agencies, I think we were poised to get an upgrade from S&P. They put on positive outlook and it's really the uncertainty on Dollar Thrifty that's holding them back. So we do envision that we're going to see some positive ratings trends. In terms of looking at the balance sheet, we are looking at the capital structure. The high yield notes, the call premium does start tocome down next year. So, we are looking at how we can improve the overall profile.

If I go, sort of up a level, or down a level, depending on how you think about it from a cap structure; when you're looking at your fleet size and your structure relative to the growth of the Business; do you have an idea fr where you want to get to from a total fleet size, and how much of it would be risk cars? I'm most interested in what sort of LTV's you are seeing the securitization market. It looks like it was 75% through the sub ABS. How does that compare historically for you guys?

What we are looking at for the end of the year is a 5% deterioration in the advance rate.

And total fleet size; as you look to next year, will you be net adding to total fleet size, and what kind of size do you anticipate?

We build fleet to demand. So, we really don't build fleet to be able to fulfill the dreams and hope they come, at all. We actually always fleet below demand. And demand we get typically, I would say we typically probably fleet maybe 3% to 4% at least below what actual demand is, so we have the ability to yield up. So, you'll see us -- it's like predicting what our sale are going to be, trying to predict what our fleet is going to be, right? I can't give you that number. Know that we're going to be investment-grade as quickly as possible. We have a line of sight on that. We think that certainly in the 2012 to 2013 time frame we'll have statistics that look like investment grade. Then it will take the agencies six months to a year to figure that out-- not to figure that out, but they need to see the numbers consistently hit. If I hit the statistic one quarter, they're not going to want to say just say, "okay, they're all of a sudden investment grade". They will want to see two or three quarters, at least, of consistent performance at those ratio levels. But we think we can hit some of those ratio levels, starting in 2012 and moving into 2013, and are hopeful we can get that investment-grade rating.

Sure. We would like to see that, as well. As a follow-up -- do you think you're going to use as a means of fleet liquid, do you think you're going to use additional sub ADS facilities? Or was a new, sort of relatively new way of financing it, probably because of the haircuts you had to deal with, in credits in 2007 and 2008 were a little different. Do you think you'll be using more sub-facilities going forward, or do you think advance rates will recover on a senior basis, so you don't have to trench it out even further.

It's really hard to predict. Our view was that market provided favorable rates. Relatively attractive rates.

What was the incremental cost there is?

We have to cut this off. We can go offline. If you want to call right after the time we can talk to you.

I appreciate your time. Sorry.

Operator, I think we're through with the call. I want to thank everyone for attending this conference call. I look forward to talking about more good news about Hertz in the future. With that, I'll end the call.

Thank you, ladies and gentlemen. That does conclude your conference. We do thank you for joining and using AT&T executive teleconference. You may disconnect. Have a good day.