Herc Holdings Inc (HRI) 2010 Q3 法說會逐字稿

Welcome to the Hertz Global Holdings third quarter 2010 earnings 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 relayed on this call speaks only as of this date, and the Company undertakes no obligation to update that information to reflect changed circumstances.

Additional information concerning these statements is contained in the Company's press release regarding its third quarter results issued yesterday, and in the risk factors in forward-looking statements section of the Company's 2009 Form 10-K, and second quarter 2010 Form 10-Q. Copies of these filings are available from the SEC, the Hertz website, or the Company's investor relations department.

I would like to remind you that today's call is being recorded by the Company, and is also being made available for replay starting today at 12.30 PM Eastern Time, and running through November 17, 2010.

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

Good morning, and welcome to Hertz Global Holdings 2010 third quarter conference call. You should all have our press release and associated financial information, which we issued last night. This morning, we've provided slides to accompany our conference call, they can be accessed on our website at www.hertz.com/investorrelations.

Let me give you a quick update on our IR calendar. We'll be attending Northcoast Fall Management Forum on November 9, and Barclays Global Automotive Conference on November 16, both in New York. Hertz's annual financial modeling workshop and investor day is scheduled for December 6 and 7 in midtown Manhattan, and more detailed information on that will be sent out next week.

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 Hertz International, and Gerry Plescia, Executive Vice President and President of Hertz Equipment Rental. They'll be on hand for the Q&A session.

Before we begin, I need to remind you that today we'll use certain nonGAAP 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 nonGAAP 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 our press release.

Now I'll turn the call over to Mark Frissora.

Good morning, everyone, and thanks for joining us. Let's start if we can on slide five. As you saw in our preannouncement a couple of weeks ago, we delivered a solid third quarter performance despite the slower pace of the economic recovery. Revenue from our US Rental Car business grew faster than our public competitors for the fifth consecutive quarter, benefiting from a relatively healthy pricing environment this summer, as well as higher demand in the commercial market. Our European Rental Car revenue growth neared double-digit levels when you exclude the effects of currency translation. And the Equipment Rental business turned the corner, generating 33.7% higher adjusted pretax income in the quarter, and year-over-year revenue growth that was positive for the first time in nine quarters.

Turning to slide six. For the Company as a whole, our balanced strategy that focuses on diversified growth, and continuously improving our cost structure, paid dividends in the third quarter. We generated 29.9% higher adjusted pretax income on 7.1% more revenue compared with last year. A significant profit improvement was generated despite higher interest expense, $3.7 million of negative currency exchange rates, and continued investments in our expanding advantage leisure business and our off airport operations. Third quarter 2010 adjusted pretax margin for the entire Company increased by 200 basis points year-over-year to 11.6% as we continue to benefit from ongoing cost saving initiatives.

In particular, we're seeing strong flow through of the savings in our US Rental Car business, where on slide seven you can see that the adjusted pretax margin was 160 basis points higher in the recent third quarter. And adjusted pretax income was $14.5 million higher than in the third quarter of 2007, which was a historic peak period for Hertz. This stronger profit was achieved in the face of today's macroeconomic pressure that resulted in 2.4% less revenue than the similar 2007 period. This is a noteworthy achievement.

We continue to identify valuable cost savings opportunities using Lean and Six Sigma tools that further improve process efficiency and labor productivity, while enhancing customer satisfaction. You'll see that as the economy progressively improves, and internal growth initiatives mature, the annual margin benefit from cost savings for the entire Company will be more obvious, and even more compelling.

On slide eight, our consolidated revenue grew 7.1%, or 8.9% when you exclude currency translations, as a result of improving volume trends across both of our business segments. In terms of pricing, there was also good news across the board. Equipment Rental pricing pressure's abating, with year-over-year pace of decline improving each month as we near neutral. In Europe Rental Car in the third quarter, we secured a 1.5% price increase from higher revenue per day in each of the commercial, replacement and leisure rental car markets. And in US Car Rental, revenue per day, or RPD, increased 2.4% for our Hertz classic brand, or 1.7% when you include Advantage, with the greatest contributions coming from our off airport business, which was up 4.8%, and airport leisure business where the revenue per day increased 3.6%.

Total Company adjusted direct operating and SG&A expenses as a percent of sales declined by 160 basis points despite the fact that we have higher maintenance costs for our older equipment rental fleet, despite the fact that we have 18 more Advantage airport locations open versus last year, the fact that we have an additional 247 net new off airport locations to our rental network over the last 12 months, and that we've had further expansion in China, and an 8% increase in employee training and development investments as a percent of payroll and benefits.

It's important to note that while we're recognizing the costs associated with a fairly rapid expansion of these businesses, we have not yet fully realized the revenue potential given the newness of the locations. However, same-store revenues for both Rental Car businesses are up double digit year-over-year. Monthly rental car depreciation per unit is down 5.6% worldwide on lower vehicle acquisition costs, and a larger portion of vehicles being sold through higher return non-option channels.

In the third quarter, Corporate EBITDA was up 12.7% year-over-year, driven by a 20.5% improvement in worldwide rental car earnings. Total Company Corporate EBITDA margin expanded by 100 basis points to 20%.

Turning to slide nine. In total, we generated permanent cost savings of $89 million in the third quarter, bringing September year-to-date savings to $330 million. We recently increased our savings target for 2010 to $410 million, 7.9% higher than our earlier goal. The cost savings are split relatively evenly between direct operating and depreciation expenses, with about 10% of the cost savings coming from SG&A.

Our more efficient processes led to greater productivity at Hertz. Consolidated revenue per employee was up 8.5% in the recent quarter over the same period last year. From our inception of Lean Sigma back in 2006, through the last 12 months ending September 30, revenue per employee has increased 27% despite $590 million less revenue.

Now let's take a quick look at the third quarter performance by operation, starting on slide 10 with US Rent-A-Car. In the most recent third quarter in the US, total rental car revenues was up 11.4% in the quarter compared with last year. Of the growth, on the right-hand side of the page, total Hertz airport operations contributed 49%. Of that, the contribution from commercial business was 37.1%, and leisure airport business was 11.9%. Advantage accounted for 15.8% of the total revenue increase, and off airport represented 35.1% of the increase. Inbound revenue, which is included in each business unit's revenue, and is a strategic advantage for us, was up 20% from last year on strong demand from Europe and Latin America.

Commercial rentals on airport, which are made up of large corporate customers, government and small business account programs, delivered a 15.4% increase over last year. Airport leisure revenues were up 3%. Off airport revenue growth was up 15.8%, driven by the leisure and insurance replacement markets. Off airport same-store sales rose 14%. Increased investments in advertising also supported the top line expansion.

On slide 11, revenue per day, or RPD, which encompasses both price and mix, was up 2.4% 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, airport leisure RPD was up 3.6% in the third quarter, but it's volumes were 1.5% lower. At the same time, our off airport operations RPD was up 4.8% on 10.4% higher volume. While off airport rentals have about a 24% 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.

Traditionally, we've reported revenue per day excluding ancillary revenues, which is what you're looking at on slide 11. This time, in order to give you more transparency around the contribution from ancillary sales, and enable you to compare our revenue per day on a more apples-to-apples basis with our public competitors' RPD, we've provided additional data on slide 12. You can see that the Hertz classic reported RPD for the quarter was up 2.4%. But when you include ancillary products and services, the fully loaded daily rate was actually $52.13, up 2.9% in the third quarter.

On slide 13, even with the higher RPD, our US airport market share is increasing. According to the latest data available for July 2010, our market share for Hertz and Advantage brands combined, increased 150 basis points over the July 2009 period. From what we've seen, this trend continued throughout the third quarter.

On this next slide, [USB] deficiency was roughly flat at 82.2% in the third quarter, despite 9.4% more fleet than last year, and the comeback of the midweek corporate traveler, which represents a larger portion of the revenue mix year-over-year, and therefore negatively impacted airport fleet efficiency by 2.8 percentage points. Monthly depreciation per vehicle in the US was 2.5% lower than the 2009 third quarter's level, driven by strategic fleet management actions including developing more profitable remarketing channels, optimizing our portfolio mix, and procuring better new car pricing from the OEMs due to stronger negotiating leverage as we diversify the supply base.

On the used car front, residual values remained stable at normal seasonal levels. And our net promoter scores in the US is up 8.5% over the prior year, reflecting the appeal of our fleet mix, and the higher service standards of more productive employees. In particular in the areas of vehicle condition, speed of service, and staff courtesy, our promoter scores went up by 33%, 13% and 10%, respectively.

Our US Rental Car adjusted pretax margin increased 100 basis points in the third quarter versus last year. Corporate EBITDA also expanded in the quarter in US Rental Car, benefiting from the strong off airport demand, recovering corporate volumes, and disciplined cost management.

Turning to our European Rental Car operations on slide 15, the third quarter reflected the benefits of our cost reduction programs, account gains in seasonal growth. Our customer satisfaction scores improved by 17% in the third quarter, supporting a 70 basis point increase in market share. When you exclude the impact of foreign currency translations, revenues was up 8.3%, driven by 5.8% higher volumes that benefited from 1.9% longer average rental length, and a 1.5% increase in revenue per day. European commercial RPD has now increased year-over-year for the last 11 months consecutively, as a result of a very successful account renegotiation activity. With a majority of our business accounts having annual contracted rates, we expect that trend to continue.

We also achieved a double-digit improvement in monthly depreciation, fleet depreciation per unit, lowered our adjusted direct operating SG&A expenses 180 basis points as a percent of sales, and increased our revenue per employee by 7.4%. As a result of these accomplishments, Europe delivered a 22.9% increase in adjusted pretax profit from last year, and a 200 basis points improvement in adjusted pretax margin when you exclude currency effects.

Now let's talk about the Equipment Rental business on slide 16. We saw continued improvement across all metrics from a sequential monthly perspective. During the third quarter, we benefited from a stabilizing environment, a favorable year-over-year comp, and the continued growth of the industrial market driving higher utilization. Revenue turned positive in the third quarter, driven by a 3.2% increase in volume year-over-year. The trend is definitely moving in the right direction, in fact, 2010 third quarter revenue was up 5.8% over the second quarter. And in September, we saw volume jump 5.4% year-over-year. Since then, October's volumes nearly doubled to 10.5%, as momentum in the industrial, government and petrochemical markets continue.

Pricing declined just 2.9% versus 5.9% in the 2010 second quarter, and 8.6% in the 2009 third quarter. The industry is becoming more rational as demand recovers. However, we're still seeing pockets of deep discounting in certain geographies and equipment types, as well as in segments where competitors are protecting share from newcomers.

Time utilization improved 450 basis points to 59.9% over the 2009 third quarter, and was 530 basis points better on a sequential quarterly basis. In October, we saw another dramatic improvement with utilization nearing 65%. Comparatively, our peak utilization was 70.2% in the summer of 2006. So there's still opportunity to improve as demand recovers, our equipment mix expands further into industrial and new fleet management strategies to drive greater efficiency.

Adjusted pretax income increased 33.7% over last year, with a margin improvement of 300 basis points in the quarter. Now that the Equipment Rental business has begun its turnaround, we should continue to see double-digit adjusted pretax earnings growth going forward.

Corporate EBITDA margin for Equipment Rental was 40% on improving topline trends, and a lower cost structure due to Lean Sigma initiatives. While SG&A was lower as a percent of sales, direct operating expenses were partially impacted by higher maintenance cost year-over-year, as we reached a historically high average fleet age.

In the third quarter, maintenance costs as a percent of sales were 7.5%, compared with a normalized maintenance margin of 5.5% when our fleet age averaged 34 months in 2008. The maintenance costs will come down in the fourth quarter and over time, as we more aggressively refresh the fleet. Last quarter, we purchased $125.3 million worth of new equipment, some was to replace our oldest earthmoving pieces, and the rest was to secure industrial equipment related to new business.

Now let me give you an update on slide 17, 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 overseas traveler, we continue to expand our global offering with Greenfield Hertz locations in China, the introduction of Advantage in Italy and Spain, and an hourly rental option through Connect by Hertz in Paris, London, Madrid and Berlin.

Inbound rentals to the US, Europe, Latin America, Canada, Australia and New Zealand generate revenues of about $800 million annually for us. Year-to-date, September 2010, our US inbound revenue is up 20.7% year-over-year, with 7.2% higher revenues per transaction. Despite volatile economic conditions around the world, and unpredictable currency rates, global travel into the US is forecasted to be up 6% over last year, with similar annual growth rates expected through 2014.

Being the only true global provider in the industry is a significant competitive advantage for us. Global brand awareness builds a loyal base among leisure customers across the continents. And our large corporate accounts want to be able to rely on Hertz's speed, service and vehicle selection everywhere they travel.

In a $10 billion US off airport market, we opened up 27 net new locations in the third quarter, primarily co-locating with body shops, hotels and repair facilities, to serve the needs of the local market customers. This brings our net new store openings since September 30, 2009, to 247. Our off airport volume continues to expand in the third quarter at a double-digit rate. Off airport rentals, which include leisure and local business rentals, replacement rentals and monthly or multi-month rentals, are typically priced lower than airport rentals on a per day basis, but have a longer average length of keep, which drives revenue per transaction. In the third quarter, US off airport revenue per transaction increased 5.5% year-over-year.

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, fewer labor hours required, a more economic fleet, shared facilities, and no concessions fees, which are considerable at the airports. In the third quarter, adjusted pretax margin for off airport increased more than 650 basis points over the prior year. Total US ancillary revenues, including upselling car classes and marketing additional products like insurance coverage, roadside assistance, damage waivers, never lost and refueling, increased 16.2% year-over-year in the third quarter, as both airport and off airport locations focus on this revitalized program.

Moving on to slide 18. Our Advantage Leisure offering, which we acquired in April of 2009, has surpassed our expectations for market share, margin and volume. Today our Advantage business is profitable with 41 airport locations covering 38 major US leisure destinations, including those recently opened in Boston, Louisville, Milwaukee and Dallas, and three leisure destinations in Europe. We have plans to open up six more airport locations by year end.

In the third quarter, same-store sales grew 39.6%, adjusted pretax profit tripled, and fleet efficiency improved 695 basis points. Utilization for Advantage is exceeding our early expectation. At Hertz airport locations with a mature Advantage facility, we're on track to increase utilization in 2010 by 1.1 percentage points through sharing fleet, and capturing both the corporate midweek demand with Hertz, and the weekend surge with Advantage. We believe worldwide rental cars utilization will continue to improve as the Advantage brand is rolled out in more locations, and its network matures.

Finally, and most importantly, we are investing in our employees, innovating our product offerings, and refreshing our fleet. As a result, our service scores are climbing. We're successfully executing a growth plan that is positioning us to deliver even more for our customers. With that, I'll turn it over to Elyse for a more detailed financial review.

Thanks, Mark, and good morning, everyone. Let me begin on slide 19. We are very pleased with the third quarter financial performance. On a consolidated basis, we generated $2.2 billion of revenue, a 7.1% or $144.9 million increase over the same period last year. GAAP pretax income of $158.3 million reflects a 108.8% year-over-year improvement due to improved operating earnings, and lower restructuring costs, offset by higher interest expense, and costs related to the proposed Dollar Thrifty transaction. GAAP diluted earnings per share of $0.36 for the 2010 third quarter represents a 140% improvement over the prior year period's $0.15 per share.

Adjusted pretax income of $253.6 million, as Mark mentioned, was up 29.9% over last year's third quarter, reflecting a margin improvement of 200 basis points. On an adjusted basis, EPS increased 29% in the quarter to $0.40 per share, compared with $0.31 per share in the third quarter of 2009. The increase in earnings was driven primarily by higher revenue, cost savings, including improvements in monthly depreciation per vehicle, and higher labor productivity, as Mark showed you earlier.

Let me give you some more detail on the performance trends by business segment. On slide 20, our worldwide Rental Car revenue for the quarter of $1.9 billion was up 8.3% year-over-year, or 10.5% excluding the effects of foreign currency translation. US Rental Car revenue increased 11.4%, while the European Rental Car operations experienced 8.3% growth in revenue excluding the impact of currency translation. As you know, revenue is a function of volume and revenue per day. Volume, as measured by transaction days, grew 8.9% in the US, and 5.8% in Europe.

RPD, as Mark mentioned, was up in the US and Europe with increases of 1.7% and 1.5%, respectively. And excluding Advantage, US RPD was up 2.4%. The total RPD increase in the US was driven by a 4.8% improvement in off airport, and 3.6% higher year-over-year airport leisure pricing, partially offset by the impact of the expansion of Advantage causing a shift in mix toward lower RPD businesses.

Worldwide Rent-A-Car generated Corporate EBITDA of $339.6 million in the quarter, a 20.5% increase versus the prior year. The reported earnings represent a $57.8 million year-over-year improvement. This improvement was driven by the revenue growth, lower per unit depreciation per month, and the realization of cost efficiencies across all jurisdictions, all of which contributed to 150 basis point adjusted pretax margin improvement during the quarter.

Turning to worldwide Rental Car fleet efficiency on slide 21. As you know, the entire rental car industry was underfleeted last year, when leisure volumes strengthened throughout the third quarter. The supply/demand imbalance enabled us to achieve very high fleet efficiency rates last year, which consequently made for a tough comparison this year. With this in mind, we're pleased with the 81.3% worldwide fleet efficiency.

In both the US and Europe, fleet efficiency was essentially flat against last year's strong levels. And as Mark mentioned, this occurred in spite of the rebound in commercial travel, where demand peaks midweek, and transaction length is typically only three to four days. Given that the leisure and off airport businesses generally average about five to six days in length, fleet efficiency is benefiting from the expansion of our off airport and Advantage network nationally. In addition, the use of direct to dealer, and direct to consumer used car sales channels, enables us to keep the cars on rent right up until the point of sale, positively impacting utilization.

Now let's take a look at Rental Car's fleet costs on slide 22, measured as a monthly net fleet depreciation per unit. As Mark highlighted, our year-over-year worldwide fleet costs were 5.6% lower last quarter. In Europe, monthly depreciation per car also continued to improve, falling 11.8% in the quarter from third quarter 2009 levels on a constant dollar basis. And just like US Rental Car, our stronger procurement strategy, and better mix management, are helping to counter the stabilizing but still low residual values across the continent. While residual values have fully recovered in the US from recession lows, residual values in Europe are still 15% below 2007 pre- recession levels.

In the US, we reduced fleet cost on a per unit basis by 2.5% from a year earlier. Our domestic monthly depreciation costs have been decreasing since the end of the second quarter of 2009, when used car residual values were extremely low. In the third quarter, our fleet costs were 4.6% below third quarter 2007 pre-recession levels in the US. The sequential quarterly increase in depreciation in the 2010 third quarter reflected a richer mix of fleet during the summer season. We expect the fleet to return to a more normal mix by year end, as we defleet in the fourth quarter.

Year-to-date, US Rental Car monthly fleet depreciation per unit is down more than 10%. The improvements are credited to strong residual values, our execution of disciplined fleet sourcing strategies, improved portfolio management, and leveraging alternative sales channels in the domestic used car market.

On the next slide, you can see that only 54% of our US car sales were executed through the auctions in the third quarter, which is down from 67% at year end 2009, and 87% at year end 2007. Our goal continues to be 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. For the full year, we now expect worldwide monthly depreciation per car to be down between 7% and 8% compared to 2009, excluding the effect of FX rates.

On slide 24, at quarter end, risk cars in our US fleet represented 63.6% of the total domestic fleet. In Europe, the risk cars in our European fleet represented 53.4% of the total European fleet. The risk percentage is below the US risk level because many European OEMs offer only program cars. But as we shift our supplier mix toward Asian and Korean OEMs, we'll be able to bring more risk cars into the mix.

Now let's turn to the results of our Equipment Rental segment on slide 25. In the third quarter, Hertz reported revenue of $281.2 million, and Corporate EBITDA of $112.5 million. Mark has already walked you through the year-over-year revenue improvement that materialized with volume turning positive for the quarter. And while pricing is still competitive, its decline is easing each month.

Hertz has always been disciplined and tactical in its pricing strategy. In the third quarter, pricing was down just 2.9% year-over-year versus a decline of 8.6% last year. Comparatively, our two year decline of 11.4% is anywhere from 180 to 240 basis points less than our peers. We expect to see a continued sequential monthly improvement in pricing in the fourth quarter, with pricing nearly flat year-over-year by the end of the period.

As Mark mentioned, seasonal demand increased in the third quarter for industrial and especially earthmoving equipment, requiring additional maintenance spending of $5 million over last year, in order to get underutilized fleet ready for rent. This had a 180 basis point negative impact on corporate EBITDA margins, which was still a robust 40% for the quarter.

Revenue from our industrial business was up 20.6% in the recent quarter. As you can see on slide 26, our strategy to shift more of our equipment mix to this category is benefiting us as facility maintenance, petrochem refining, energy services, and oil and natural gas exploration continued to add new products and restart deferred projects. In the third quarter, industrial represented 25.6% of our total North American revenue, up from 21.5% a year ago.

At September 30, our worldwide equipment fleet age was 49 months, an increase of less than one month from the second quarter, and almost seven months higher than the year ago third quarter. We intend to stabilize our fleet age at the 49 to 50 month level over the next few quarters. And as the business continues to rebound, we are anticipating increasing fleet purchases to both meet demand and lower the overall fleet age.

On slide 27, you can see that our Equipment Rental fleet on a net book value basis was down 11.2% year-over-year. Third quarter Equipment fleet purchases were $125.3 million versus disposals of $101.9 million on a first cost basis. This compares to third quarter 2009, where additions were $18.6 million, and disposals were $45.9 million on a first cost basis. Year-to-date, gross spend on fleet was $188.1 million, and gross equipment sales were $263.5 million on a first cost basis.

Now let's move to slide 28 for an update on our recent financing. It's been a rewarding quarter for us in the capital markets. In July, as we discussed on our last call, we closed the refinancing of our European fleet debt, and priced approximately $750 million of three, five, and for the first time ever, seven year rental car asset backed notes. Then in mid-September, we obtained amendments to the corporate credit agreements related to our asset backed loan and term loan facilities that allow us flexibility to opportunistically refinance outstanding debt to lower our interest expense. Immediately thereafter, we completed the issuance of $700 million of 7.5% senior notes due in 2018. Our plan is to use the proceeds to pay off our existing 10.5% subordinated notes due in 2016 when they become callable in January.

As a result of the high yield offering, from October through December we will incur incremental interest expense until the subordinated high yield debt is extinguished in January. This represents a negative impact of approximately $0.02 of adjusted earnings per share in the fourth quarter. As we move forward, however, the lower coupon debt will benefit ongoing interest expense by roughly $15 million each year through maturity.

Moving to the next slide. For the rest of the year, from a balance sheet perspective, we are focused on completing the international financings in Brazil and Australia, which are expected to close this month. We are also evaluating an early renewal of our US 2009 $2 billion variable funding note facility, given the conduit market is in great shape. And we are finalizing our strategy on the corporate credit facility financing, which we expect to renew in the first half of 2011 given they mature in 2012.

On slide 30, let's take a look at cash flow. Cash from operations of $904.7 million in the third quarter improved by $295.9 million versus the same period last year, driven by higher earnings and improved working capital. This year, there are large variances in quarterly year-over-year comparisons of cash flow after fleet growth, due to timing differences in the fleet rotation, the fleet debt refinancings over the last several months resulting in lower advance rates, and the capital raising activity in 2009.

Therefore, let me focus on the year-to-date cash flow, which provides a more normal view of cash flow performance. Levered after tax cash flow, before fleet growth, was a positive $452.1 million through September, and improvement of $143.6 million in spite of $529 million of proceeds received from the 2009 equity offering, making it a tough comparison. The improvements are driven by higher earnings, and improvements in working capital.

Levered cash flow, after fleet growth, was a negative $141.6 million, compared to the positive $178.1 million reported last year. This reflects the higher year-over-year investment in rental car fleet, which is up 13.4%, to meet increased demand. While cash flow after fleet growth is typically negative in the third quarter as we fleet up to meet peak travel season demand, the fourth quarter is consistently a strong cash flow quarter, due to the high amounts of defleeting activity. We expect to see strong fourth quarter cash flow in spite of a year-over-year increase in Equipment Rental fleet investment.

We expect full year 2010 advance rates to be 8 percentage points lower than the 72% 2009 level, reflecting the full impact of changes in credit enhancement levels on ABS fleet debt financings in the US and international markets. We ended the quarter with total net corporate debt of $3.8 billion, total net fleet debt of $6 billion, and $1.5 billion of unrestricted cash on our balance sheets. At September 30, 2010, corporate debt increased $729.1 million from June 30, 2010. Nearly all of the increase is related to our recent high yield offering, which as I said, will be offset by the paydown of high coupon existing debt in January. At the end of the quarter, we had $2.3 billion of corporate liquidity available to fund our growth initiatives, and to take out the subordinated notes in January.

Turning to slide 31. Interest expense net of interest income was $200.8 million in the quarter, up $32.6 million over last year, driven by the higher fleet levels required in the third quarter, as well as higher European fleet financing costs. Our estimate for incremental interest expense for 2010 versus 2009 is now $90 million to $95 million, only $5 million to $10 million higher than our earlier estimate, despite $13 million of incremental interest in the fourth quarter from the recent high yield offering.

Restructuring and restructuring-related charges in the latest quarter were $15.2 million, of which $10.7 million will be settled in cash, compared with $47.1 million of restructuring and related charges in the same period last year. These charges mainly relate to Hertz facility closing costs as we consolidated underperforming branches.

For the third quarter, the GAAP income tax benefit was $3 million compared with an expense of $6.9 million last year. Cash income taxes paid in the quarter were $10.8 million, $4.1 million more than the prior year. We estimate cash taxes to be $40 million to $50 million for the full year of 2010, versus $31.3 million in 2009, the increase is primarily due to higher earnings. As a reminder, in calculating adjusted net income and earnings per share, 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 32, you'll see that we comfortably met both of our corporate financial covenant tests in the third quarter. In fact, our corporate consolidated leverage ratio was 4.2 times, well below the maximum 5.25 times allowed. And our corporate interest coverage ratio was 3.57 times, well above the minimum required of 2 times. These ratios exclude the convertible debt issued by Hertz Global Holdings in 2009 since the covenants only apply to the Hertz Corporation results.

With that, I'll turn it back to Mark.

Thanks, Elyse. Let's move to slide 33, if we can. While the consumer sentiment rose slightly in October, it remains at historically low levels. Despite this, we're cautiously optimistic about the macro trends going forward in both of our businesses.

If you turn to slide 34, you'll see a 20-year industry trend represented by the yellow line, that validates the expected continued growth in the rental car industry. A lot of people ask us how closely we correlate to airline travel, and while it's certainly a driver of our growth, you can see our market has moved independent of the airline industry as a percent of the GDP. Off airport rental revenue, which is represented by the blue line on the chart, is the biggest driver of the rental car industry's overall growth. This supports our strategy of off airport market penetration, and gives us confidence that we're focusing on the right things as the industry shows positive macros going forward.

For the fourth quarter in particular, we're seeing a typically seasonally low quarter for leisure demand. However, on slide 35, the global environment for commercial travel remains strong. Moreover, our growing US off airport business will continue to make healthy contributions to both revenue and profitability. And our value leisure product advantage continues to rapidly expand its presence nationally, at the same time existing locations are adding to market share and margin growth. In the US and Europe, industry fleets are currently right sized for demand, and worldwide we expect to deliver at least 200 basis points of year-over-year utilization improvement in the fourth quarter.

Pricing remains the only real wild card. Right now, we have strong leisure pricing in place for the holidays, which will help us as we pace a tough year-over-year leisure pricing comparison. Competitive pricing pressure on the commercial accounts continues. And the negative mix of Advantage and off airport's lower rental rates will be reflected in RPD as these businesses continue to grow rapidly.

Growth from new business opportunities, and the additional cost saving initiatives in the fourth quarter, should counter any potential pricing headwinds. Our Lean Six Sigma project that we call Lighthouse, will have been implemented in 15 North American and eight European airport locations by year end, and there are other opportunities to turn some cost ideas into savings, and new account wins and incremental ancillary revenues into revenue.

For Equipment Rental, we expect the pattern of sequential monthly pricing improvement to expand as utilization improves. We're not expecting pricing to be positive, however, until the first quarter of 2011. As our fleet age nears 50 months, maintenance expense will remain higher than average through the end of the year. Regardless, our Equipment Rental business is on track to deliver corporate EBITDA margins of 42% or greater in the fourth quarter on double-digit volume growth, and rising fleet and labor efficiencies.

We continue to invest in acquisitions to expand our presence in the Equipment Rental market. On October 1, we purchased Western Machinery, which gives us a position in the Hawaiian market. And a second acquisition is being executed to expand our presence in the entertainment service industry. This is our second acquisition in this market since developing the opportunity more than a year ago.

In Equipment Rental, Lighthouse will have been implemented at 13 equipment rental branches in North America by the end of year, and 18 more are slated for 2011, of which three are launching in Europe. For the third quarter, Lighthouse actions helped US Rent-A-Car and European Rental Car reduce direct operating expenses by 350 basis points, more than non-Lighthouse locations. And adjusted pretax income at Lighthouse locations was 114 basis points higher year-over-year than non-Lighthouse locations. We're seeing tremendous progress in this initiative.

As we look forward, we expect to deliver solid revenue growth in Rental Car that exceeds industry levels, and growth equal to industry levels for Equipment Rental. On slide 36, you can see that our goal is to return to peak 2007 revenue as quickly as possible. We now have positive growth momentum for all of Hertz business units concurrently for the first time in three years. We believe our fundamentals are finally all in place for nothing but positive earnings growth into the foreseeable future.

With that, operator, let's open the call for questions.

(Operator Instructions) First question comes from the line of Brian Johnson, Barclay Capital. Please go ahead.

Hi, Brian.

Yes, good afternoon, had it on mute. Couple questions, just want to get a sense of some of the market share momentum in the corporate travel market. A, what's driving it? And B, how do you think that's going to play forward into pricing as you go into the contract negotiations? It seems like there's a clear preference for the business traveler for your brand and the question is can you translate that into contract price increases?

Yes, well, Brian first of all the market share improvements both in leisure and commercial, probably in equal segments, so I want to make sure you're clear on that. In terms of contract negotiations, we have a couple hundred every several months. Where that goes is wherever the competitors go, right? So we protect our share, we're at 99.3% retention rate, so we're not going to give that up. I mean that will continue to be our retention rate. So pricing pressures less than it was a year ago, it continues to be in the neutral to down 1% or 2% range. When does that improve, I don't know, I really don't. For me to forecast the would be like crystal balling and I just don't know. But hopefully as volume improves, you would think that the pricing and commercial will begin to improve with that. So hopefully we would expect sometime next year we start getting some positive price growth, if you will, in commercial business.

On the one hand are competitors going to get more desperate if they see share going to you and cut price further, or on the other hand at what point can you just take a firmer line with the procurement departments and travel departments in saying we should be rewarded for what your employees want to rent?

Well I don't-- first of all, there's nothing-- nothing's changed. Our market share growth is built around those pieces that you saw, we showed you the growth and distinct segments, right? So I mean it's clear that the share growth is coming from a broad base return to value proposition that we've established. We've had higher customer satisfaction scores. We're not doing it with pricing. I mean I'm not growing the business through pricing. We had positive RPD growth in the highest volume quarter of the year and--

No, I was suggesting do competitors cut price further to make up for their perhaps brand disadvantage with the corporate traveler?

I-- for me anyways, I think the competitors have all settled on market share numbers that they're at right now. I don't think anyone in the industry is looking to cut price. I think the fleets right now are fairly tight, I mean I wouldn't call them tight, but they're adequate, they're certainly where they should be right now. So we feel pretty good about the fact that the industry is very rational. We haven't seen return to irrational times or anything at all because the markets not that great in terms of absolute demand. It's still not at 2007 levels.

We're doing better than most because of our growth programs. So we're driving double-digit growth because we've got areas to grow double digit. But in general, theres a general demand level is still below 2007 levels in most markets so you still got a pretty rational industry right now. We're not seeing what you're indicating as some irrational competitors trying to gain share, we don't see.

Well speaking of that, since one of your growth initiatives is off airport and we would assume that some of that off airport share, if not a large part of it, is coming out of Enterprise. Are they at the point where you've gone from being a gnat to a mosquito or a bee? Are they noticing what's going on with this success off airport? And what does that mean could they potentially retaliate on airport or at corporate against your growth in off airport?

I think there's always been healthy competition between Enterprise and Hertz. So there's nothing new going on there. And the competition is exactly as you've outlined. It's on airport is where they've always tried to grow and we've always tried to grow on off airport, this has been going on for about ten years. And the reality is that we feel like we're going faster than the industry in off airport and it's because it's a huge market, it's $10 billion, just as big as on airport. And there's been 80%, 75% market share held by one person and that one person has-- can only-- if a formidable competitor comes back and establishes a network and we become a second choice, we're just going to keep growing.

I mean I think it's obvious, right, that there is going to be market share gain when there's been almost a monopoly in one particular market. So I think we have a big opportunity there to continue to grow without creating a pricing situation. Frankly, it does no one any good to create pricing problems. You saw our off airport grew on pricing, we were up about 450, 480 basis points on pricing year-over-year in off airport. So I think in terms of what's going to happen, I think it's more of the same. I don't see anything really changing. We both compete based on value and whoever provides the best value to the consumer ultimately wins in any market.

Okay so they're not saying we're bothered by what your doing off airport and we're going to take it out against you in airport pricing?

They don't-- I don't know what they're saying they don't talk to me that's for sure. So--

But you're not seeing it in terms of how they're showing up at the corporate bid?

I think I've answered the question, we'll have to move on.

Okay, thanks.

All right.

Okay, thank you. And the next question comes from the line of Emily Shanks, Barclays Capital. Please go ahead.

Hi, this is [Mike Perez] on behalf of Emily. Mark we're wondering if you could comment on your overall view of Rent-A-Car fleet levels in the industry? And related to that what's your view on pricing power going into 2011?

I just did in that last question. I'll repeat it. Okay and what I said was I think industry fleet levels are adequate, they're right where they should be. We don't see a lot of over fleeting anywhere. We think they're right where they need to be. The pricing environment for us, I said in my call, it's the wild card, right? So it looks good in the peaks, and in the trough areas it looks fairly stable, so that's the best way to describe it for fourth quarter. Positive in the peaks, a little tougher but stable in the trough periods.

Okay thanks. I'm sorry for missing that. Second question, if I could, is what are Hertz gross and net CapEx plans for 4Q 2010? And do you have a preliminary view for full year 2011?

I do. So I guess in terms of net CapEx for Q4, it'll probably be right in line with Q3 approximately $80 million. For 2011, our net CapEx will be in the range of $300 million to $400 million. I don't have a gross number, we look at everything on a net basis.

Okay. Thank you very much.

Okay, thank you. (Operator Instructions) Next question from the line of Rich Kwas, Wells Fargo Securities. Please go ahead.

Hi, good morning, can you hear me?

Yes, hi, Rich.

Hi, Mark, how are you?

Good.

Depreciation per unit, you continue to see nice declines there, you're getting to that mix level in terms of disposition mix that you're achieving of 50% or so, how much do you think depreciation per unit per month as (inaudible) as you look at the next several quarters?

Well I mean I can't really forecast that for you I guess the way you'd probably like me too. But in general, it's going down. Net depreciation per vehicle will continue to go down throughout the year next year. So we're confident in saying that. And it'll be significant. So we're doing an awful lot as you know on the remarketing side where we can take that we think down to like 20% at auction longer term. I think that's kind of our goal.

And then on top of the remarketing, some of the programs we've got in place with car manufacturers are very attractive. We bought a wide range of fleets. And we've gotten attractive range of prices, so our Cap cost we believe will also have an impact to that in the depreciation line. So we feel pretty confident that you'll continue to see from Hertz on net depreciation per vehicle improvement throughout 2011.

That's good, great. And then just quick follow up, on Advantage RPD was down 7%, 8% year-over-year in the third quarter. Was there anything driving that how should we be thinking about RPDs move into next year? I don't know if that's inclusive of everything, is that a same-store number, but if you could provide some color on, that'd be great.

Sure. I mean Advantage is a brand new brand, it has very little volume. We were at a run rate of about $160 million roughly a year right now. And what you've got is, last year when you were looking at it, very few locations, those locations we did have we were yielding up. Obviously with Hertz, sometimes we had no cars in the industry and because the industry was tight fleeted, Advantage had cars and we were getting rates of $50, $60 a day. Now that Advantage is more mature and we don't have that same condition with tight fleets, I mean everyone seems to be more right fleeted this year, Advantage is returning to the RPD rate that it always has been. So there is no deterioration of RPD per se in Advantage, it's right about where it always has been. And it's just a vagary of what happened last year versus this year of having a very tight fleet last year in the industry and we were able to take advantage of that with the Advantage brand.

Great, that's helpful. Thanks so much.

Thank you. Next question from the line of Chris Agnew of MKM Partners. Please go ahead.

Thanks very much. Good morning. First question on Equipment Rental. The government and engineering services, which are about a third of your business, just maybe could you shed a little light on what the drivers are there and what activity your seeing as you're heading into next year?

Gerry feel free to answer that question.

Sure, it's actually about 8% of our business, Chris. One third of our business is what we call fragmented and that's about 20% of that pie. But we're seeing stimulus money start to have an impact on the road construction, on transportation terminals, municipal work and that's where we're seeing the money start coming to our industry. And it appears that that level of spending, the increase we've seen lately, will continue into the first half of 2011. So some of the impotence behind the earth moving improvement that the industry has seen, we expect to see into the first half of 2011.

Thanks. And then a quick follow up on China. I know it's very small, but you're in there in Equipment Rental and Car Rental, I mean what do you think the opportunity is there and is this something we'll be talking about more in one to two years or is it more sort of three to five years?

Well we just hired actually a general manager to run operations there, a well-respected Chinese professional. And we put together a fairly aggressive strategy in China for both Equipment Rental and Rent-A-Car, we've now got four locations in each. I mean what revenue growth we get it will expand rapidly as we open up the stores. Everywhere we open up, we've been successful. We're making money in Equipment Rental already and the growth is double digit very rapidly once the stores open and established in that area.

So on the Rent-A-Car side, again big opportunities more of a chauffeur-driven a fleet-- what we call a fleet leasing model. So there's a little different business model than in what you traditionally think about in Rent-A-Car, but it's very rapidly growing as well. And we've made good connections with the Chinese Government, the mayors in the different cities in order to expand the business model with licenses that we need in order to grow the business.

Our strategy in China for Rent-A-Car is to open up in the top 30 airports and have a corporate store open at each store-- at each major airport, all of those being larger than O'Hare. And then actually expand on a spoke-- in a hub and spoke concept so that we end up having local Chinese franchise, own those franchise and get trained at that corporate location that's at the major airport. So we can deploy that kind of strategy actually fairly rapidly.

But in terms of your actual question, I wouldn't look at significant revenue as probably occurring for three to five years. Although we'll get nice revenue growth the next two, I think it's more of a three to five year time horizon where you start seeing a much bigger piece of our revenues coming from Asia/Pac.

(Operator Instructions) We have a question form the line of John Healy, Northcoast Research. Please go ahead.

Hi, good afternoon. Mike, kind of a longer term question, when you look at the performance HERC and RAC on the pretax margin front this quarter, I think the highest we've seen in a number of years. I was wondering if you could give us some thoughts of where you think longer term the pretax margin potential of the Company is today kind of in light of a more disciplined pricing environment, the internal initiatives you've put to reduce costs in the strong used car market, where do you think kind of over the next couple of years we can march to on the pretax margin side?

Yes, well when we look at kind of the 2007 levels of pretax margins for the Company and the corporate EBITDA margins, our expectation is to move I would say 300 to 500 basis points higher than the 2007 levels which were historic for us. And we think that's very achievable over the next two to three years, that we'll be higher than 2007 pretax and EBITDA margin levels by 300 to 500 basis points. So that's kind of the longer term strategy. We're developing for the investor day kind of an outline of revenue growth and margin expansion and cash flow generation for all the models for the investor day that we're hosting for investors, and we'll be more clear on that and try to give you some more-- some framework around that. But the good news is that again, much higher margins and-- both on EBITDA and pretax side based on our current trajectory and the cost take out that we've had over the last three years.

Okay, look forward to it.

Thanks.

Thank you. The next question from the line of Steve Kent, Goldman Sachs. Please go ahead.

Hi, thanks. This is Neil Portus for Steve. Good morning. I just want to follow up somewhat on a prior question, could you just talk about some of the ways that you've been able to drive the sequential increase in commercial rental car pricing? I think in the second quarter it was down about 2% but this quarter it was up 0.5%. Thanks.

Yes, so on commercial pricing it involves a wide range of accounts, right? There's like a Fortune 100 list, Fortune 200, a Fortune 1,000 list. What we're finding is that in the very competitive top 50 accounts, pricing pressure continues to be high, however it's getting more flattish, right? So-- because we had to have some large reductions a couple of years ago. In middle range businesses, again good pricing pressure but if you provide more value added there's obviously more opportunity for pricing growth.

So kind of in the mid range, small range accounts more opportunities on pricing growth. Top range customers continues to be competitive, but we believe we're getting in some cases value equations where we're increasing because we did lower our prices so much over the last two years in order to save market share, so we feel pretty good. Small accounts are (inaudible) accounts, these are very small local businesses that we sign up in off airport locations oftentimes, that pricing, that RPD was actually up 1.5%.

Okay.

Thank you. Next question from the line of Michael Millman of Millman Research Associates. Please go ahead.

Thank you. Could you give us some idea of the cost and maybe frame it in operating expense plus SG&A for the different components for example airport, commercial, leisure, off airport Advantage?

You mean like DOE, direct operating SG&A by segment or something, is that what you're asking?

Yes, exactly.

I don't have that off the top of my head.

Or at least give us some ranges if you could, or--

No. I mean Michael I wish I could answer that question, I don't have it. I mean typically the way we look at our segments, we have off airport and airport. Certainly in off airport, our operating expenses are lower than on airport probably by a factor of I would say maybe 20% to 30% lower in that range roughly. 20% to 30% lower on a DOE SG&A basis. And then you asked about off airport and airport and what else did you ask about?

Well I asked about airport, leisure and commercial.

Well see now that's blended. I mean we-- so I've got a cost center at the airport, and the DOE and SG&A is one cost center and I'm handling leisure and commercial together. In terms of which is more expensive, a lot of it depends on the customer, right? So the leisure traveler in general we can get a higher fast RPD growth than we can with a business traveler. Business travelers rent typically cars that are a little nicer medium-size full-sized cars, so sometimes we get a better rate there. Leisure travelers and an airport like Orlando, as you know, that's a very competitive market. So again it's more price competitive. In a Midwest market though, we can typically do better with leisure and some of those markets than we can in the highly competitive markets.

So really is kind of airport specific in terms of the margins we make on the businesses. But in general, a business traveler with a two or three day rental it's more difficult to make a higher [RONA] on that, turn on net assets, than it is on a seven day or a leisure or a five day or a 13-day rental in off airport. So-- and that's just because it takes more labor as you know. Every time I do a two-day rental, I've got to-- and if that's all I'm doing is a two-day rentals with a business traveler, I've got to turn that car 15 times a month, I have to relocate that car, I have to clean that car, I got a lot more labor associated with it. So that's why the off airport growth strategy makes a lot of sense for us and it's very helpful we think longer term from even in a margin enhancement standpoint for us.

That's exactly what I was looking for. If you could give a little bit of quantification for what that two day extra costs. And also Advantage was the other name.

Yes, Advantage-- again for Advantage our operating expenses typically are probably I would say somewhere around 35%, probably 40% lower roughly, 40% lower on operating expenses. And then in terms of fleet cost, the fleet cost there are, let's see if I do the math on this, we're around I mean $300 kind of per day versus on Hertz classic versus $240 per day, and that's appreciation per month, excuse me, on Advantage. So that's about 20% to 25% lower, so that's what we're seeing in terms of Advantage in terms of cost comparisons.

Okay, thank you very much.

Thank you.

Thank you. Your next question from the line of Chris Doherty of Oppenheimer. Please go ahead.

Good morning. Elyse, you guys have been very successful at tapping the market, the debt markets, recently and you said that you were going to use the proceeds from the 7.5% to take out the 10.5%. What about-- I mean you've sort of leapfrog one on the maturities which are the 8.875% and those stepped down in January aren't call price basis. What's the thought that coming to the market again?

Well we're definitely looking at it, so we're keeping tabs on where the market is and when we think the timing is right, we could potentially tap the markets again and refinance those as early as well.

And just Mark in terms of the net CapEx for HERC, where are you right now in terms of a time utilization standpoint? Or can you absorb more demand without growing the fleet at this point?

Yes, I mean we certainly can. I mean Gerry, you want to expand on that a little bit?

Sure. Where we have room is in aerial and material handling, we still have room in that segment of our fleet. Earth moving and industrial power pump, some of those areas is where we're more highly utilized that were purchasing fleet into. So it's really buy it by type of fleet. We can absorb more demand in aerial and material handling, we have to buy some more in the other specialty categories to grow utilization.

Great. The 300 or 400 that Mark mentioned of net CapEx in 2011, does that assume any growth or is that just pure maintenance?

It assumes some growth as well. We're expecting closer to double-digit growth overall in volume next year, so there would be-- about half of that would be for growth.

Great, thank you.

Okay, thank you. And the final question comes from the line of Fred Lowrance of Avondale partners. Please go ahead.

Thank you, good morning, guys. Just a brief one on the off airport business. You've obviously drawing that pretty quickly and gaining a lot of traction, just interested to know if-- just how quickly those off airport locations mature? And maybe if you could compare that to sort of the timing that you're seeing with your Advantage expansion?

So I'm going to have Scott-- I'll have Scott answer that. Scott Sider, whose President of our North American, South American operations for Rent-A-Car.

So the locations are profitable within the first year. And I would say they get to full maturity in terms of margin, it takes about three years. But the first year-- within the first 12 months, they are turning a profit for the location.

Okay.

Thank you.

Next question.

That was the final question.

Great. Okay. Well listen thanks, everyone for attending the call, look forward to talking about more good news from Hertz. Thank you, everyone.

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