Herc Holdings Inc (HRI) 2011 Q1 法說會逐字稿

Welcome to the Hertz Global Holdings 2011 first quarter conference call.

The company has asked me to remind you that certain statements made on this call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are not guarantees of performance and by their nature are subject to inherent uncertainties. Actual results may differ materially. Any forward-looking information relayed on this call speaks only as of this date, and the company undertakes no obligation to update this information to reflect changed circumstances.

Additional information concerning these statements is contained in the company's press release regarding its first quarter results issued yesterday end in the risk factors and forward-looking statements sections of the Company's 2010 Form 10-K. Copies of this filing are available from the SEC, the Hertz website or the Company's investor relations department.

I would now 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 2.00 p.m. Eastern and running through May 11, 2011.

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

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

Today, but we use non- certain non-GAAP financial measures, all of which are reconciled with GAAP numbers in our press release and at the back of the slide presentation, both of which are posted on our website.

We believe that our profitability and performance is better demonstrated using these non-GAAP metrics. Our call today focuses on Hertz Global Holdings Incorporated, the publicly traded company. Results for the Hertz Corporation differed only slightly, as explained in our press release.

A quick note of our IR calendar. We will be attending the Wells Fargo Industrial Conference on May 10, the Barclays Global Services Conference on May 11 in Boston, and we will be doing some investor marketing around Chicago with Barclays on May 17. Hopefully we will see some of you at one of those events.

This morning in addition to Mark Frissora, Hertz's Chairman and CEO, and Elyse Douglas, our Chief Financial Officer, on the call we have Scott Sider, Executive Vice President and President of Vehicle Rental and Leasing in the Americas, Michel Taride, Executive Vice President and President of Hertz International and Lois Boyd, recently appointed Executive Vice President and President of Hertz Equipment Rental Corporation. They will be on hand for the Q&A session.

Now I will turn the call over to Mark.

Good morning, everyone and thanks for joining us.

As Leslie mentioned, I have appointed Lois Boyd, who previously ran our Advantage business unit, to head up our global equipment rental operation. After reviewing her background in the press release we issued, I am sure you agree that Lois has the experience, credentials and track record to take Hertz performance in the next level. Replacing Lois in an interim position at Advantage is Gary Fulena, who has more than 31 years experience, and has been an operations manager with Advantage since 2005. Permanent replacement will be named shortly.

Now, in terms of our quarterly report, let's start on slide 6. I was really pleased with the consolidated operating results in the first quarter after what started out to be a challenging year for US Rental Car, our biggest operating unit. After three disruptive winter storms caused travelers in the Northeast to cancel their rental reservations in January, and early February, the industry had too much supply, and pricing had become competitive in key leisure markets.

By mid-February, however, the fleets were right-sized. And as seasonal demand came back, we were able to increase a airport leisure year-over-year in March. In fact, leisure airport was up 4.5% in the US, excluding Advantage. For all of the first quarter, US Rental Car revenue was up 3.6% with fleet up less than 1%. Volume was 4.4% higher, and the March pricing contribution bringing RPD of near neutral.

We estimate the storms had a $15 million negative impact on domestic revenue. This intra quarter rebound in US Rental Car, along with improved pricing in European Rental Car, and the as-expected double-digit volume growth we generated in equipment rental, all contributed to our strong top line performance of 7.2% revenue growth.

In particular, the US off-airport business continues to be bigger part of our revenue. You can see this on slide 7. In the first quarter, off-airport made up nearly 26% of the total US Rental Car revenue mix, up from 23.5% of the total a year ago. Its 13.1% year-over-year revenue increase in the latest 3 months represented 85% of US Rental Cars' total revenue increase.

In the first quarter, off airport same-store revenue was up 12.4%, as our replacement segment grew more than 15%. We anticipate stronger growth through remainder of the year due to our increasing share with insurance companies, fleet leasing providers, and dealership accounts.

On the next slide, we opened 35 net new off-airport locations in the first quarter, bringing the total to 1963. This is a 9% increase from one year ago. While off-airport growth has negative mix impact on total revenue per day, its contribution to earnings is compelling due to its low cost structure and longer length rentals.

Our Advantage discount brand also is playing a bigger role with total revenues up 47.6% worldwide, same-store revenue up 16.2%, and 5 new US and 2 new European locations online in the first quarter. In the US, Advantage revenue was up 42.4%.

In addition to higher revenue, lower than expected rental car depreciation, and continued cost savings from Lean, and other process improvement programs, those were all key drivers of the resulting profit improvement. We improved adjusted pre- tax by 76.9%, which equates to 330 basis point increase in margin.

Moving to slide 9, in the first quarter we generated $83 million of efficiency savings, or 26% of our updated 4-year goal of $325 million. Our global Lighthouse project was a significant catalyst to these results. We have now transformed 15 US airport locations and are working on turning 6 more into faster, more efficient operations, with higher customer satisfaction, in keeping with the Lighthouse methodology.

A first-quarter highlight was a 35% improvement in damage collection in our Miami facility, which is now sharing its process map for this issue with the other Lighthouse locations. In Europe rental car, as a result of Lighthouse, February's over all net promoter score increased 73% over last year, with a 24% improvement in the staff courtesy component for the six locations currently in the sustainment phase.

In equipment rental, our Lighthouse locations generated a 45.1% corporate EBITDA margin in the latest period. We now have 13 Lighthouse projects completed in equipment rental, 10 of which were implemented in the first quarter.

Another catalyst to the improved profit was lower depreciation expense, driven in part by higher residual values. As you know the industry is getting peak resale value for used cars in the US. This is on slide 9. Our residual values from January through March were a first quarter record for us since becoming a publicly traded company. Residuals were up more than 400 basis point year-over-year.

The higher values are being driven by 4 items. The first one is the lack of new vehicle leasing over the past 2 years resulting in a tight off -lease use supply vehicle condition. We expect this to continue for at least another 2 - 2 1/2 years. Also lower OEM production levels, combined for tight supply, a higher mix of risk vehicles for Hertz and our strategic shift towards more profitable remarketing channels.

Moving to slide 11, our direct-to-consumer car sales are up 23% from a year ago. And direct-to-dealer sales are at 90% higher, representing 45% of all vehicles sold. In addition to a 7.3% improvement in US monthly depreciation per unit, we achieved a first-quarter record for fleet efficiency of 78.3%.

We did this despite the weather issues in the first 6 weeks of 2011. Keep in mind that historically, the first quarter is the lowest quarter for rental demand. This is on slide 12. Our record achievement is a testament to our ability to flex our fleets quickly and evidence of the benefit of off air airports longer rental length and the synergies of fleet sharing between Hertz and Advantage.

While US Rental Car is clearly the catalyst for the company's improving financial and operating performance, it is certainly not the only contributor. For the first time in a long time, we have seen positive momentum simultaneously across all three business units, and around the globe. The pace and level of contribution may vary, but the traction is equally encouraging.

From a financial perspective, we completed the refinancing of a corporate credit facilities in the first quarter, which Elyse will talk about. But from a very high level, over the past 12 months, we have refinanced $10 billion of debt at an overall lower blended interest rate.

Over the 3-year period through 2013, the enhancements to our capital structure should generate approximately $70 million in lower total interest savings. Today, 2011 is trending ahead of plan, and as a result, we have raised our guidance for the full year. I will give you some perspective into the revised assumptions in my outlook, but suffice to say that we are very optimistic if things continue on the current course.

Now, let me turn it over to Elyse for more detailed financial review. >>< Elyse Douglas - CFO HERTZ CORP ><douglaselye> Thanks. And good morning everyone.

Let me begin on slide 15. As Mark said, we are very pleased with our first quarter financial performance. On a consolidated basis we generated $1.8 billion of revenue, up 7.2% or $119 million over that same period last year.

And as Mark mentioned, adjusted pre- tax improved by $53.3 million. This was achieved through lower depreciation expense and strong controls, evidenced by reduced adjusted operating expenses as a percent of revenue in spite of higher maintenance spending in Hertz. GAAP earnings improved in the quarter, with a reported EPS loss of $0.32 per share, versus a loss of $0.37 per share in 2010. The improvement occurred in spite of debt refinancing costs, which had a negative $0.15 per share negative impact in the quarter.

Excluding these costs, GAAP EPS would have improved 54%, instead of the 13.5% improvement reported. Now, let me give you some more detail on the performance trends by business unit starting with Worldwide Rental Car on slide 16 through 21.

Worldwide Rental Car generated 6.2% more revenue than last year despite the rough start in the US and some economic volatility in Europe. Revenue of Worldwide Rental Car was made up of 31% airport leisure business, 28% corporate business, and 30% off airport rentals. The balance comes from international revenue.

Worldwide Rental Car adjusted pre- tax income of $61.3 million increased 126% year-over-year. Adjusted direct operating and SG&A expenses were flat in Worldwide Rental Car. Higher gasoline expense, payroll taxes and vehicle licensing expenses were offset by lower vehicle damage, lower insurance expense, and improved labor productivity. Our Worldwide Rental Car fleet was 73% risk at the end of the first quarter compared with 66% risk in the first quarter of 2010.

Now let's turn to the results of our equipment rental business on slides 22 through 25. Hertz first-quarter revenue increased 13.2% year-over-year. Volume was up 14.3%, with pricing roughly flat in the quarter, but up 0.7% in March. I should point out that we to be calculate pricing a bit differently than our public competitors. Those differences are laid out on slide 23.

Using competitor aid method, our pricing for the first quarter would be up 2%. The industrial segment continues to lead the recovery for the equipment rental industry as the spending was forecasted to be up 20% in the first quarter, according to the Industrial Information Resources. Our industrial revenue grew 23%, outpacing the industry.

This demand along with the growth in other specialty services such as pump and power, entertainment, and the government market, helped drive time utilization 130 basis points higher to 58.3%, as total dollar utilization increased 340 basis points to 30.4% over last year.

In the quarter, we've reduced the equipment rental businesses adjusted direct operating and SG&A costs as a percent of revenue by 110 basis points over last year. Revenue growth and cost controls offset an incremental $6 million of fleet maintenance to the support the older equipment and to get underutilized equipment available for rent to meet rising demand. This held corporate EBITDA margin to 34.1%, up slightly year-over-year.

At March 31st, our worldwide equipment fleet age was 49 months, in line with the fourth quarter of 2010. First-quarter equipment growth CapEx was $171.6 million and disposals were $52.3 million, or $127 million on a first cost basis. We expect net CapEx for fleet to be between $300 million and $400 million for the full year.

Moving to slide 26, for the first quarter 2011, interest expense net of interest income was $195 million, an increase over 2010 of $16.2 million. Next cash interest was up $5 million, as the lower rates associated with our refinancing was more than offset by the lost benefit of the 2009 rate buy down of the ABS interest swap, adverse foreign exchange and slightly higher [eur IMOR] rates.

Non-cash interest was up $11 million driven by the write-off of unamortized debt cost associated with the refinancing of our corporate set-up facilities and redemption of high yield notes. Restructuring and restructuring-related charges in the latest quarter were $5.4 million, compared with the first quarter 2010 of $16 million.

And for the first quarter, the GAAP effective income tax rate was 18.8% compared with 7% in 2010. Cash income taxes paid in the quarter were $11.6 million. The GAAP effective income tax rate is lower than the statutory tax rate, primarily due to losses and certain non-US jurisdictions, for which no tax benefit is realized. On an adjusted basis, we continue to use a normalized tax rate of 34%. We estimate cash taxes to be $48 million to $53 million for the full year 2011.

Now, turning to slide 29. You can see that we continued to capitalize on strong credit markets in the quarter. As many of you know, the bank loan markets were robust during the first quarter. We used the opportunity to refinance our $1.8 billion senior asset-based revolver and our $1.6 billion senior term loan.

The maturities on these facilities were extended to 2016 and 2018 respectively. We were able to obtain significantly greater operational and financial flexibility in the new credit facilities, including the elimination of financial maintenance covenants, while achieving best-in-class pricing. Slide 31 shows you our updated debt maturities schedule. You will note the 2014 reflects a pro forma impact of the April redemption of 8.875% notes.

Turning to the next slide, previously we estimated the full year cash interest expense would increase $25 million to $35 million over 2010. We are lowering the estimate by $10 million as a result of the achieving more favorable terms on refinancing our credit facilities than forecasted, and due to the $500 million high yield prevention in April.

For the full year, we now expect 2011 cash interest expense to increase by only $15 million to $25 million over the 2010 level. As Mark mentioned, the refinancing activity completed over the last 12 months will drive future interest savings. The favorable refinancing rates achieved on the US fleet debt and high yield notes were partially offset by higher international costs and higher interest on the corporate credit facilities. The net savings is about $24 million a year.

However, in 2011, the year-over-year cash interest savings is offset by the loss of interest benefit related to the interest rate buy-down on the (inaudible) that expires in 2010. We ended the quarter with a total net corporate debt of $3.8 billion, total net fleet debt of $5.4 billion, and $1.4 billion of unrestricted cash on our balance sheet. This is on slide 33. However, we carried an excess cash and debt of about $500 million related to the March add on to the 6.75% percent note, which paid down a portion of the 8.875% note in April. At the end of the quarter, we have pro forma $1.8 billion of corporate liquidity available to fund growth initiatives.

With that, I will turn it back over to Mark. Thanks, Elyse.

Although in the beginning much of the year we are challenged by severe weather in the US, we ended the first quarter stronger as a result of quick actions to tighten our fleet, higher residual values and a continued company-wide focus on cost management. Confidence among US consumers climbed in April from a 16-month low indicating job gains are helping Americans cope with the rising fuel costs.

According to the economists, consumers are taking the increasing gas prices relatively well. They say as long as the labor market continues to heal, consumers will continue to spend. At Hertz, we have not seen any impact from the higher gas prices yet. And until it affects the GDP, we don't expect it to affect us. Remember, rental car accounts for only 15% of a consumer's vacation budget, and gas is a small portion of the overall rental cost. So, we don't anticipate a head wind on this front.

We do expect to continue to benefit from the higher used car residual values that we saw in the first quarter. In fact, we are anticipating a short-term bubble in the second and third quarters from incrementally stronger resale prices, as new car production stalls due to the supply-chain disruptions.

For the full year, we now expect worldwide monthly depreciation per unit to be down 6% - 7% compared with our original guidance of down 4%, in addition to the tight used car supply, reduced OEM production levels, and more profitable marketing channels. We've added more economical cars to our fleet, as well, to serve our expanding off airport and Advantage Value operations.

In terms of the fleet situation, industry fleets are a little loose right now. Operators are bringing in cars for the peak season, but also keeping some of the cars they have targeted for sale as a safety cushion against potential shortages. For Hertz, despite the recent pressure on automakers' inventories, we believe we will have a sufficient number of cars to meet demand this year. We have been able to secure incremental fleet from auto dealers and other OEMs, so we feel good about our ability to meet peak summer demand, while also capitalizing on the strong car sales market.

Switching to equipment rental on slide 35. While demand for nonresidential construction equipment has shown only low single digit growth so far, it is beginning to percolate in certain regions, where local lending is becoming less restrictive, particularly in California and Florida. And we should see additional pickup as we approach the peak season of our business cycle later in the year.

The Dodge Report currently is projecting nonresidential construction spending will be down 1.2% in the second quarter year-over-year, up 1% in the third quarter and up 11.5% in the fourth quarter. Meanwhile, we'll continue to capitalize on our shift towards industrial business and refresh our fleet as demand builds. In the second quarter, we are focusing our first year-over-year improvement in 4 years. The corporate EBITDA margin for equipment rental is on track to achieve our goals of 42% for the full-year as incremental revenue closed through at a higher rate, and savings from process improvements partially offset the higher maintenance spending in the first half.

Moving on to slide 36, as you saw, we increased the annual guidance. The main drivers of the improvement are increased cost savings and lower depreciation expenses. Today direct operating expenses are running lower than planned, as returns from our Lighthouse efficiency projects are accruing at a higher level.

We believe residual values in the US will continue to be strong for the remainder of the year. However, they will not be as strong as in the third quarter, which is seasonally our highest period for resale prices. At today's run rate, total cost savings should be about $25 million more than our original target.

Now, let me make a couple of brief comments with regard to Dollar/Thrifty transaction, so that later we can use the Q&A time more productively. Seven months ago there was no deal between Avis and Dollar/Thrifty. They only announced that they will work together to obtain FTC clearance of an eventual deal. Seven months later, there has been no ruling or even a comment from the FTC regarding the matter, in the US or in Canada. Nor has Avis has announced a merger agreement or launched a tender offer.

Against that background, it is difficult to answer all the what-if questions we have been getting. When the shareholders voted down our proposal in September 2010, everyone urged us to stay in the deal until the end of the year, when there would finally be certainty about Avis' antitrust status. In hindsight, it was a smart move to pull out of the deal, as there is still no certainty, and we have been able to concentrate 110% on running our business and increasing shareholder value.

Our lawyers continue to believe that either a brand or a similarly-sized asset sale will be required by Avis before the FTC will agree to a measure. Is that is going to happen? Who knows? We'll just have to continue to monitor the situation. Having said that, I would like to keep today's Q&A focused on Hertz's successful operations and save any merger follow-up until there's something concrete to talk about.

Finally, in terms of guidance and consistent with past practices, we are a bit conservative in our revised expectations because of continued macroeconomic uncertainty. Today we feel comfortable with the new ranges, but we have set the bar higher and will work hard to execute these increased targets.

However, as I told in the past, and you can see on slide 37, a 1% change in operating metrics has a substantial impact in rental car due to its transactional nature. On the cost front, we will continue to leverage a process oriented culture to drive more revenue to the bottom line. In summary, if the economy cooperates this year, I am very optimistic for investors.

Let's open it up to questions now. Operator?

Thank you.

(Operator Instructions)

Our first question comes from the line of Brian Johnson from Barclays. Please, go ahead.

Good morning. I want to focus on slide seven and just get some of the color around the pricing trends of each of those segments. Thank you again for breaking it up by segment, because the minus 1% overall covers a number of different stories.

So, maybe starting with the airport, can you differentiate between the leisure and the corporate business, and in particular are you're getting positive pricing in any segment of corporate business at this point?

You want to know if we are getting positive pricing in corporate?

Yes.

The answer is no, we are not getting positive pricing in corporate. At the, let's say, Fortune 300 accounts, we're getting it certainly in the small business segment, but we don't expect commercial segment to be up this year. We will probably continue to focus down 1% roughly for the commercial segment overall.

But we are getting -- every single month it changes. It's hard for us to predict what the competitive reactions are, every single time we going to bid. At this point, we want to make sure that we tell you what we think can happen and we expect commercial probably to be down 1% overall for the year.

Okay. So that would imply within that retail was up about a couple percent?

Leisure on airport was up 1.3%. Business airport was down 1.8%. Off airport was actually up in Q1 0 .8%, so those are the moving pieces.

And the decline in Advantage. Is that pricing related or is that tied to rental lengths and the discounts given for longer rentals?

It's more related to the maturity of the Advantage brand and the geographic -- new geographic dispersion that we have. As you might imagine, Brian, in Florida, the rates are much lower than they would be in, let's say, Chicago, or what they may be in any Midwest city where we have heavy business. Even in Atlanta, the RPD is much higher.

So as we mature in the leisure markets, and we get more share in leisure, RPD will naturally go down. So that is what is driving it. It's just the maturation of leisure markets of the Advantage brand. That is most of it. A little bit of pricing pressure, but I would say the primary job is the maturation of the brand in those markets that are lower-priced.

And just a related question on efficiency. Very impressive utilization statistics. Any way to bucket the year-over-year gain between the contribution of vehicle sharing across off airport and Advantage? And then on airport efficiency measures and the third bucket being of longer rental times over all?

No. No. I don't have that data available, and probably won't give it to you because it changes so much and there's so much variability to it. It would be difficult for you to even track it and model it. We certainly can find that kind of information but that is so granular that it would not allow us to be productive on the calls. But in general, the trend for utilization will continue to improve ,and it will be improved due to the higher mix of business with longer rental length, coupled with as you mentioned, the Advantage piece.

What I can try to do is for you in the future is maybe we can show you some examples of airports with Advantage and what they were like before Advantage, and what they were like after Advantage. And we would be happy to share those examples so you can get a feel for what the impact Advantage has. Off airport, again that business is so percolated now and integrated into our business that it's very difficult to pull it out separately and show the impact. That has actually now become part of the fabric of the whole DNA. In every single fleet that we have around the country.

Have you made improving utilization an explicit management goal? And was it before, or we get the sense that is holding around 75, 76 was typical mode of operation? So to see this increase, I wonder if you are explicitly managing the business differently?

We're explicitly managing the business differently in terms of yes, utilization. The whole goal is to get up, this is a low quarter, right ? We hit a historic high in a quarter that seasonally has the lowest utilization. Usually the first quarter and the fourth quarter of the lowest utilization quarters. Typically it's the first quarter. So even in this low utilization quarter, with all the misses due to overfleetng, due to weather, we still hit a historic high.

So, you're going to see significant utilization improvement this year from us. Our goal, internally, is to hit something north of 86, 87. That is an internal goal over the next several years as we switch our business mix. That's the kinds of numbers as we move to higher the higher risk fleet and a different business model with leisure as well as with off airport. That's the kind of numbers we think we can experience.

Okay, next

Thank you. Ladies and gentlemen, we do ask you to limit yourself to one question. Next we will go to the line of Himanshu Patel from JPMorgan. Please go ahead.

Hi. Good morning guys.

Mark, could you update us on the level of short falls you are seeing from Japanese OEMs over the next few months in terms of the orders you're putting in for future vehicles?

We pretty much assume that we are not going to get any vehicles from them, although we will get some. I am just letting you know that. We had anticipated a month ago that it would be difficult to get vehicles from them. We've had some cancellations. We are not through negotiations, yet, with some of the Japanese in terms of what the final outcome will be and what vehicles we get. In general, I think there's been a lot of just recent press around Toyota, I don't have -- whatever you heard which we have heard, and talked to, it is the same everywhere. We don't have anything new to report on what is going on with Toyota.

And so, we're kind of in a position for ourselves right now where we've had some cancellations, but we have been able to make up those cancellations with buying cars, direct from dealers in some cases. Secondly, we have gotten some US manufacturers actually to step up with some extra cars, so we are in really good shape in terms of supply for the rest of the year and the summer season. So, we feel pretty good in mitigating any of those cancellations that we have received.

Again, it is still a little unclear which -- how many cars we will get from some of the Japanese manufacturers. We are in the middle of negotiating with them. As you might imagine, we are the largest customer in the world of one of them, and we do have some influence. We're using that the best we can to make sure we get as many cars as we can for the summer season.

And just on a related point, you're talking about the strengthening and potential short-term bubble of residual values, are you seeing that across-the-board on all brands? Or is it really isolated to the Japanese brands at this stage?

I think we are seeing it across the board. Scott, go ahead.

No, Mark. We are seeing it across the board. The imports are higher in the residual value on a year-over-year basis, but we are seeing improvement on all makes and models.

I guess one of the things that I think people, at least investors I have seen have missed, is off lease volumes is -- we're in a down cycle, right? So right now if you look at 2010, there were about 2.6 million vehicles. In 2011they're expecting to be only about 2.1 million; '12 they expect to be down to 1.6 million; '13 goes down again to about 1.5 million. This trend, we got this trend of off lease about volumes that will last at the end of 2013, and this will bode well because it will release less cars into the used car market and create that tight situation.

In fact, if you look at '11to '12, it is the biggest drop that is being forecasted. We expect residual values to hold in their due to that trend alone, let alone this tight supply situation that's going on because of the Japanese tsunami. We're pretty bullish on the fact that through the end of the year, we'll have strong residuals. But second quarter is always the peak. What we don't want people to do it is a straight line it, because second quarter always is the highest. And I think that some people are trying to do that and straight line it ,and you cannot do that because of seasonal peak for us. It's a bubble.

One last question. You guys have been putting out a few press releases on kind of a revamp of some of your car sharing efforts. I know it is a modest portion of the total business, but can you update us on what you're doing here and the timing of the future actions that you may be thinking of?

In car sharing, we're very committed to the market. And we think it is an element of our overall strategy, which is to deliver rental cars to anyone at anytime whether way they want to rent it for an hour, a day or a month. So our overall strategy is really to be really flexible and to be able to do that in the most economical and cost-effective way, so we can get again people in and out of the cars faster.

One of the things that if you look at car sharing, there have been a lot of inconveniences in car sharing, and we're attacking those inconveniences. One of those inconveniences is if you have a problem to the car you cannot talk to customer service right away. Well you can do that with Hertz. Another one is you couldn't rent one way rentals, you have to return to the same spot.

Again, we solved that issue and we continue to expand that flexibility. Another one is not having enough places to pick up the car. Well, right now we have announced 100, that is going to explode, it's going to be a lot more very quickly. In the next 60 days, we will be announcing hundreds of more locations that you will be able to actually pick up a car in New York City.

We have not penetrated Boston. We are going after Boston next. That will happen very quickly. That's a big market potential for us, and we will exploit that market as fast as possible. Again, in terms of our car sharing initiative, it is part of a broader overall theme of being more flexible and fast to make convenience a factor in car sharing, like it hasn't been before. Next question.

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

Thank you very much. Good morning. Can I ask about rent-to-buy, interesting opportunity to structurally lower fleet costs. What's the consumer reaction been? What do you plan to do to increase consumer awareness? And maybe on a per vehicle basis, what do you think the opportunity is for savings and how is that tracking versus your initial expectations? Thanks.

A couple of things on rent-to-buy. First of all, the consumer reaction has been very, very positive. They like idea that it's set pricing, that they can pick up the car basically at any of our Hertz locations. So the convenience of it is excellent, they can do the paperwork from home, and so everything is great on the customer service piece.

We are making significant changes to our website, and those will be launched in early May, which will make it easier for customers to book the vehicles, make it a better, smoother transaction. Once we do that, then we're going to start doing more advertising for rent-to-buy. But the increase in business has been substantial. We've been up year-over-year almost 70%, 80% and we think that will continue.

Right now we're in 30 states, and by the end of the year we will be in 37 states. The 30 states we are in today probably represents probably 85% of our fleet. In terms of economics, the economics are significantly better. It is retail sale versus wholesale sale. The profit difference? You're looking at about $500 to $600 net profit, that's profit difference per vehicle. It is substantial. Any other?

No, that's great.

Our next question is from the line of Rich Kwas from Wells Fargo Securities.

Hi. Good morning. Mark, on the guidance here, you upped the benefit from depreciation per unit, you upped the Euro assumption here. Pricing is kept level in both segments. What would you consider to be -- which segment of the guidance will have the most potential for upside?

Pretty much everything.

Okay.

I mean, I think there is a volume upside, I think there's maybe a little bit of upside in pricing depending on how tight fleets get in the third quarter. We have been anticipating some tightness here. I certainly think cost reduction has some upside to it. Our biggest concern, frankly, is gasoline prices. Are they going to impact the economy and the GDP growth rate? We tie to that. So of all the things, that's what I look at as the thing, the risk that could offset some of the positives we're seeing right now.

As I said in my call, if the economy cooperates and we continue to see progress with the economy. GDP growth that people are anticipating, we will be in great shape. And there will be upside. My fear is there's still a fragile economy still here in the US and in Europe. We don't want to bake in the upside until we know it's there, a little more visibility in the year. That is pretty early for us to come up with the guidance improvement like this, and so we just want to wait until we get more visibility in the third quarter.

What's your GDP growth assumptions, still 2%?

Yes, that is exactly right.

Okay. And then, just on pricing, since that has the most impact, it seems like you did say fleet's kind of loose here for the industry, that probably gets tighter, right ?

But just so we're clear. That's seasonal. I did say loose, but seasonally is usually loose because people are right now building for the increased demand that they see towards May and June. And so it is always a little loose right at this period of time. We think it may be a little looser also because also people are holding cars and anticipating them not getting some cars for summer delivery. So I think there may be some looseness that's contributory in that area.

But incrementally, do you expect fleet to get tighter? Over the next few months.

Absolutely. Fleet is going to get, we think, much tighter over the next 60 days, yes.

And then on HERC pricing I appreciate the comparison with your competitors. You still have zero-to-one there. I know you kind of indicated there is potential for upside. What do you -- of the segments, what are seeing the most opportunity within HERC, in terms of non-resi, aerial, industrial? Where do you have the most pricing opportunity there?

In all of them. Aerial is probably pretty big. I think there's some upside there. Pretty much all segments, we're putting in some pricing discipline ourselves in our organization, that should help hold price. As you said, one of our competitors became very apparent on how they do their pricing. We use the same methodology and we showed in the first quarter we actually pulled 2% price increase.

So we used that same methodology. We compare pretty favorably. And, again, we're turning now in the second quarter, we'll definitely be positive. That is certainly an area of upside for us.

Okay, great. Thanks for the color.

Next we will go to the line of David Lim from Wells Fargo Securities. Mr. Lim, your line is open.

Next call.

Next we will go to the line of John Healy from Northcoast Research. Please go ahead.

Thanks. Mark, the call today seemed like this is the most bold you've been on holding costs in quite some time. I want to get your thoughts on where you think per unit of vehicle depreciation expense can go over the next couple of years for the company? Factoring all the different things you're doing with the disposal fleet as well.

That is a very difficult question to answer. It is going lower it and we know it will go lower this year. We think there's a little bit of upside in what we gave you for this year. And again it depends on the residual values. But we also told people that it will go lower next year as well. And we have not really forecasted how much.

That is difficult to do until we finish our 2012 lines. And we will be finishing those over the next three months in the US and in Europe, you don't really finish them until the end of the year, beginning of the new year. So, very difficult for me to give a feel for that, but it is definitely going lower, and it will be a driver of improved profitability throughout the end of next year.

Okay, great. And then just one housekeeping question. The rental data on airports, down about 1.8% for the Hertz Legacy brand. Do you think that was reflective of the market, or do you think maybe you outperformed or under-performed the market transaction data metric?

It was weather related. I think that was part of it. We have a lot of -- a big piece of our business is business travel, right? So you need to understand that we get hit on weather harder than our competitors oftentimes. They are more leisure than we are. Business travel cancels fast. And it gets impacted because of what happened with the FAA and the new penalties. I think the penalties are like $35,000/$40,000 per passenger, $2.5 million per plane, anything over three hours in the tarmac. I mean, this caused unbelievable log-jams and created a big drain on our volume.

That's, I think, why we may have had a big bigger impact. I'm not sure -- I mean, I don't know what the competitors are going to show on weather, but we had a big impact from weather. And it was definitely a big driver of that decline you saw.

Makes sense. Thanks for the color.

Next we will go to the line of Fred Lowrance from Avondale Partners. Please go ahead.

Thank you. Good morning Mark and team. Just a brief question kind of following up to the earlier ones we've gotten, just on equipment rental. I know in recent weeks, in recent months really, you quoted some pretty bullish sounding numbers on, I assume is just volume recovery, in that equipment rental business and you sort of break it down by West Coast, Central US, East Coast.

Just kind of wondering since you didn't change your volume assumptions for the equipment rental business, if you can give us a little color on what the hesitation is there to take up volume assumptions? Or maybe what it is that I am not clear on about sort of the last seven or eight months of the year that might be holding back those volume growth numbers .

I think the disk the big issue is we are in a seasonally industrial ramp up period right now. So industrial is a market segment, this is the season for that to ramp up. So our increases year-over-year are more dramatic now than they will be as we go into the non-res construction season.

So if you imagine our business, it kind of runs in cycles by industry code. In the beginning of the year, through the first let's say four months, you're looking at industrial and the way it ramps up. It has been very strong as you know. Industrial has been stronger than non-res construction as an industry. We have been showing, and I've been talking about, that the numbers that are fairly high.

As we move into the non-res construction season, which is a big piece of our business, the numbers aren't going to be as high, because non-res construction is percolating at mid single digit, low single digit. Whereas industrial is percolating at double digit, high double digit, 20%, 30% improvement. So that's why we are a little bit more tepid.

We are experiencing numbers that are fairly good right now. But we expect them to come down due to the seasonality and due to the fact that non-res construction then starts to percolate. We don't think it will percolate as high of increases as we saw in industrial. To give you a handle, the West Coast was up 20% last week, Central was up 20%, East was up to 10%. But having said that, that will come down as we move into the season for non-res construction, because that's more of an industrial. Q4 is when industrial starts to pick up again, and moving into the first quarter. Non-res starts to pick up now and moves into the third quarter.

So again, we are just expecting a little bit lower run rate as we move into a more non-res part of the business. Still mid-teens in the US though, US is doing well. You know we've got this European piece which is not doing well right now. Europe in fact is flat to down. Canada is up a little bit but not very much. The US is still looking good and we still expect that to be kind of in the mid-teens. Okay ?

Thanks, Mark.

Next we'll go to the line of Neil Portus from Goldman Sachs. Please go ahead.

Thanks and good morning. Mark, I may have missed this and I might just be asking the last question a little bit differently. You raised your revenue guidance, but your volume and pricing guidance for both rental car and HERC, on slide 37, they are unchanged. So could you speak to what is driving the revenue guidance again?

Yes, it is mostly foreign exchange. We changed our assumption to $1.30, $1.35. So we went from $1.30 to $1.35. That drove most of it. Pretty straightforward the way we did it. Again, that is why I said that I am hopeful that we've got upside. If we don't end up having gas prices go up enough to affect GDP, we already have some upside on the revenue guidance that we did give.

Okay. Great. Is there a Manheim index level or another benchmark that you use to forecast when you put together your depreciation guidance?

Typically, we don't use Manheim because they don't track the unique car class that we sell separately. It's usually a number that sometimes is more ambitious, sometimes less ambitious. Scott, you want to help answer?

Normally, we don't use Manheim. We keep track I think in the slide we used with 2007 we used residual value based on our history of how we how long we keep the cars. So Mannheim does not track because of the age of the cars that we sell versus what the general public would sell.

Okay. Great. Thank you.

Thank you.

Next we will go to the line of Emily Shanks from Barclays Capital.

It is actually Mike Perez on behalf of Emily. Thanks for taking my question. On HERC, regarding new equipment purchases, have there been any changes in availability in payment terms with the OEM?

No, none.

Okay. And additionally on HERC, has the industrial business growth and mostly because of new customers or just existing customers driving organic volume growth?

Existing customers driving volume growth for the most part.

Great. Do you have any sort of outlook as far as rental cars is concerned on the availability of repair parts for the Japanese fleet?

Yes. We've checked that, and we've had that question quite a bit. We really just don't see -- we know what the parts are that are affected and it doesn't really get involved in a lot of repairs that we do. Scott, you want to get--

No, that's exactly right, Mark. You have to realize the amount of parts that are being affected is a very small percentage. Now, a small percentage will impact manufacturing. One part will affect manufacturing. For us the parts that are being affected -- we don't anticipate it being any issue in terms of maintaining our fleet.

Okay. Great. Thanks and good luck.

Thank you.

Next to the line of Michael Millman from Millman Research. Please go ahead.

Thank you. Could you tell us whether you considered, where you're going with a potentially repoing converts, your converts. And also are you seeing any effect from the use of mobiles on your ancillary revenues for GDS, GPSs?

The first question is we are studying converts and what we should do with that? That is something that is an ongoing discussion. We haven't really come to any final decisions.

But we are looking at it.

And then you question was on GPS, the effect of like PDAs, mobile devices ?

Yes.

Yes. Right now our Never-Lost sales are up significantly this year, double-digit. So while GDS is, I'm sorry, PDAs over time we believe will have an impact, obviously a negative one. What we have been doing is trying to drive increased functionality of our Never-Lost program. By -- it's now a touch screen, and now you can get flight information, you can do economy trip, you get weather instantaneously in the area that you are at. I mean, it has tremendous amount of functionality that we've been integrating in the new version that's being rolled out to all cars.

In terms of hand-held devices, we look at that as a positive for us as well for mobile check-in, and we can even -- we're starting to use those hand-held devices. We'll be using those in the summer to automatically confirm that you have a car in slot "A" for Hertz, so you actually know about it. Then we're going to give you an option to text it to you that will allow you to pick another car and upgrade if you want. Once you know what car you have been assigned as soon as you land. So we actually look at the usage of these devices has been able to improve our ancillary revenue as we start to get our systems so that they can actually communicate on a real-time basis with our Gold customers and anyone who signs up with us.

Could Lois talk a bit about what is the next level for HERC?

The next level for HERC. Okay. Lots of opportunities. Go ahead, Lois.

Lots of opportunities there, Michael. We're going to put in processes and disciplines around some of the areas, around our people, our fleet and our pricing, and we think we can, working harder with our customers, et cetera . There's opportunities on all fronts from what we can see around the HERC business, so we are excited to get that moving again, moving upwards. The team is invigorated and it should be good results coming from the

Great. Thank you.

You are welcome, sir.

One thing I will mention, also just wanted to add this. We had the question, obviously from Himanshu about the car sharing. One of the things I failed to mention was that in car sharing, we've waived all fees. So you don't have to sign up as a member. It's free of charge. That is a big deal because in this industry, that has been a $60 kind of item, $80 kind of item a year that people have to pay.

And when you deal with Hertz connect, you don't have to pay any fees, any membership fees, you can join for free. With that, operator, I will turn it back over to you.

Thank you. Next we will go to the land line of Jordan Hymowitz from Philadelphia Financial. Please, go ahead.

Hey, Mark, and everybody. Thank you for the excellent disclosure, first of all. Very quick question. On the Connect by Hertz, can you give a sense of their revenues, because when you look (inaudible) valuation, I want to kind of figure out if you would apply the same valuation clearly discounting an awful lot of your earnings and company at this point.

I mean last year, I think we did $6 million, which is small as you know. But we are -- once we get the mainstream, that revenue growth will explode for us. We are allowing, turning each car that we have into a Connect car over time. So that all of our cars will end up having Connect technology in them. That will allow us to turn the car either to a normal rental or to a Connect rental and you will be able to do that with the flip the switch. We have 320,000 vehicles. Our next biggest competitor or our biggest competitor on this has, I think, a number that is much smaller than that. So that will be a big opportunity for growth.

Because we will be able to offer Connect in just about any city we operate. And we will feature it that way. So whatever quote number you're seeing for 2010, I think we put $6 million. That grew exponentially from nothing. We have only been doing this for a year-and-a-hal. It will explode over the next two years, dramatically, and we would love to get that multiple as we explode that growth. We'd love to get a multiple on that piece of the business that's Connect.

Thank you. Our final question comes from the line of Rich Kwas from Wells Fargo Securities. Please go ahead.

Hi just a quick follow-up on the $15 million of lost revenues in the first quarter, what is the operating income impact, associated income impact? I don't know if you have that number.

I would say probably close to 80%. You have almost all the cost. So it's probably 80% of that.

Okay. Great. Thanks.

The other question -- the answer to the question on the car sharing was this year we expect to do at least $16 million. So go from $6 million to $16 million this year. I think that puts the better answer on their question. Operator any other questions?

No. Please continue.

Well, thanks everyone. Thanks for joining us on the call this morning. And good-bye.

Thank you, that does conclude your conference for today. Thank you for your participation and for using AT&T executive. You may now disconnect.