Herc Holdings Inc (HRI) 2011 Q2 法說會逐字稿

Welcome to Hertz Global Holdings' 2011 second-quarter conference call. The Company has asked me to remind you that certain statements made on this call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of performance, and by their nature, are subject to inherent uncertainties. Actual results may differ materially.

Any forward-looking information 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 second-quarter results issued yesterday, and in the Risk Factors and Forward-looking Statements section of the Company's 2010 Form 10-K and Quarterly Reports. 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 p.m. Eastern Time and running through August 17, 2011.

I'd 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've also provided slides to accompany our conference call that can be accessed on our website at www.hertz.com\investorrelations.

Today, we'll use certain non-GAAP financial measures, all of which are reconciled with GAAP numbers in our press release and at the back of the slide presentation, both of which are posted on our website. We believe that our profitability and performance is better demonstrated using these non-GAAP metrics. Our call today focuses on Hertz Global Holding, Incorporated, a publicly traded company. Results for The Hertz Corporation differed only slightly, as explained in our press release.

With regard to our IR calendar, we'll be hosting our Annual Financial Modeling Workshop and Investor Day on September 12 and 13 in New York City. We'll also be presenting at the Citi Global Industrial Conference in Boston on September 21, and the Deutsche Bank Leverage Finance Conference in Phoenix on October 13. So, hopefully, we'll see some of you at 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 Renting and Leasing, the Americas; Michel Taride, Executive Vice President and President of Hertz International; and Lois Boyd, Executive Vice President and President of Hertz Equipment Rental Corporation. They'll be on hand for the Q&A session.

Now I'll turn the call over to Mark.

Thanks, Leslie, and good morning, everyone. Thanks for joining us. Let's start if we can, on slide six.

As you've seen from last night's press release, despite an ever-changing macro environment backdrop, we delivered superior results in the second quarter. Consolidated adjusted pretax income was up 92.5% year-over-year, reflecting a 380 basis point margin improvement. Cost efficiencies, in particular, lower rental car depreciation, and the continued rebound in equipment rental, drove the profit improvement and more than offset tough year-over-year pricing comps in worldwide Rent-a-Car, and significant investments, about $16 million worth, in our strategic initiatives.

Some of those investments included the off-airport expansion that we opened up our 2,000th store; the continued roll-out of our Advantage brand; emerging market penetration; employee training and development initiatives; facility upgrades; and the launch of a national advertising campaign.

As you can see on slide seven, for US Rent-a-Car, lower depreciation is one of the key profit drivers in the second quarter. Strong used car values coupled with strategic fleet processes drove US monthly depreciation down nearly 26% year-over-year to $220 per unit in the second quarter. Of the $76 per unit decline, two-thirds was related to improved fleet procurement and planning processes, sales process improvements, and the broader use of alternative sales channels, as well as the overall stronger used car market.

If you'd now turn to slide eight, you'll see that the domestic used car market for the one- and two-year-old car category has always been strong, liquid, and very resilient. On average, over time, we've enjoyed base residual values of 73% to 75% of original vehicle costs on an age-adjusted basis. On top of that, this year, the market is benefiting from a lack of supply of off-lease vehicles in our Aged category of used cars. We expect to continue to see the sales price benefits of this type supplied through 2013 when the 2010 leases expire.

Incremental gains on sales are also coming from the structural changes to our re-marketing strategy that include a higher risk fleet and an increase in sales through non-option channels, which generated much higher return. And in the second quarter, there was an even more favorable impact on used car's values, due to the new car supply chain disruption following Japan's mid-March tsunami.

Now I know a lot of investors are concerned about an inevitable drop in residual values as Japanese new car production comes back online, and new vehicle leases begin to refill the used car pipeline, probably some time in 2013. But on the bottom of slide nine, what you have to remember is that, today, Hertz re-marketing channel shift is only in the very early stages of development. We're building our dealer relationships; we're getting licensed in additional states to sell vehicles to consumers; and planning a national campaign in the fourth quarter to raise awareness and promote sales through our Rent2Buy website. So, as some market residuals eventually return to more normalized levels, we'll continue to accelerate our returns through ongoing expansion of alternative sales channels.

Today, we're about halfway through the work that needs to be done to achieve a 90% non-option sales mix. Additionally, there is a significant opportunity ahead to penetrate direct to consumer channels much more broadly.

Compared to our pre-recession peak performance in US rental car the second-quarter 2011, adjusted pretax income is 105% higher on 2.9% less revenues. Compared to the 2010 second quarter, adjusted pretax income increased 46.8%, primarily due to the lower fleet carrying costs and 4.3% revenue growth. The second quarter revenue growth in US Rent-a-Car was driven by 8.3% higher volume, with transaction days up across all businesses -- airport, Advantage, and off-airport. Volume expansion was supported by the launch of a national advertising campaign and strong customer service, as reflected in a 250 basis point increase in our US net promoter score year-over-year.

On slide 10, you'll see that on a mix-adjusted basis, fully loaded revenue per day was down only 2.4%. Pricing in the quarter was impaired by higher industry fleet levels, which is typical of this time of the year. Atypical, however, was the fact that rental car companies held more vehicles in order to protect summer capacity in case fleet orders were delayed, only partially filled, or altogether canceled due to the Japanese supply chain disruption.

On slide 11, we've illustrated how our diverse business mix affected RPD in the quarter. In particular, the US off-airport business continues to be a bigger part of our revenue. While off-airport growth has a negative mix impact on total revenue per day, its contribution to earnings is compelling, due to its low cost structure and longer-length rentals. In the second quarter, off-airport made up nearly 26% of the total US rental car revenue mix, up from 24.6% a year ago. Its 9% year-over-year revenue increase in the latest three months represented more than half of US rental cars' total revenue increase.

And off-airport same-store revenue was up 9.6%. This is on slide 12. We continue to build out our network, opening 71 net new locations in the second quarter, bringing the total to 2,034 as of June 30. This is a 9.2% increase from one year ago. Through the remainder of 2011, we anticipate strong off-airport volume growth, due to our increasing share with insurance companies, fleet leasing providers, and dealership accounts.

On the same slide, you can see that our Advantage discount brand also is playing a bigger role, with global revenue up 69.1%. We opened six new US and nine new European locations in the second quarter, resulting in a total of 68 Advantage rental car locations and 14 affiliates worldwide. In the US, Advantage total revenue was up 43.3% in the second quarter, due to a nearly 50% increase in volume.

Turning to our European rental car operations on slide 13, revenue there was driven by strong currency rates, corporate demand for Hertz Classic, and the success of Advantage. However, positive commercial pricing was more than offset by negative leisure pricing, resulting in a 4.8% decline in revenue per day. While this sounds significant, the majority of the decline was really due to a tough comp from a higher percent of one-way rentals a year ago, resulting from the volcanic ash clouds' disruption to air travel, and a shift in the volume mix towards lower-price Advantage business. If you add those two reasons together, 90% of the decline was driven by those two factors. The skewed comp, therefore, we don't think will repeat itself. It will be one time.

Monthly depreciation per unit in Europe was down 5.5%, due to the effectiveness of our procurement strategy and an improvement in car sales, despite lower residual values in the UK. I'll quickly point out that Europe's adjusted pretax profit was down 1.4% on another tough comparison, as well as higher fuel prices and $6 million of higher interest expense from last year's fleet refinancing. A year ago, the profit included a $10 million Value Added Tax in the quarter. Adjusted pretax income would have increased 29% if you exclude last year's VAT claim.

Now let me give you some color on our equipment rentals businesses on slides 14 through 16. In line with the industry, we saw continued improvement across all metrics in the second quarter. The overall 13.5% revenue improvement benefited from both stronger volume and pricing.

On slide 15, worldwide volume was up 11.3% over last year, and North American value was up 13.7%, due to general industrial demand, infrastructure projects, and growth in our pump and power businesses. Worldwide pricing increased 2.2% as a result of more rational industry pricing, even for aerial equipment, and our improved yield management models and systems. This was our sixth sequential quarterly improvement year-over-year pricing.

As you probably know by now, we calculate pricing differently than our public competitors. For comparative purposes, we use a peer's calculation, which we detail on slide 16. And as you look at that, HERC pricing was up nearly 5% in North America on the same basis of calculation as a competitor. But any way you look at it, this was a recovery milestone for us, reflecting our first year-over-year quarterly price increase since the second quarter of 2007.

Equipment fleet costs as a percent of revenue declined due to higher utilization and improved depreciation and maintenance expense, as we move more equipment from the repair line to the ready line, and as we begin replacing our oldest assets. In the second quarter, we continued buying equipment to refresh the fleet. As the new equipment is seeded, we expect maintenance costs will stabilize as a percent of revenues. Our fleet age will come down two months, and incremental revenues will flow through to profits at our higher rate. In the second quarter, the flowthrough was about 62% in North American operations, supporting 19.6% higher Corporate EBITDA worldwide, and resulting in a margin of 37.4% versus 34% in the 2011 first quarter.

In a minute, I'll give you some thoughts on operating trends for the back half of the year, and discuss the guidance adjustments; but first, let me turn it over to Elyse to provide more detail on our financial performance.

Thanks, Mark. Good morning, everyone. Let me begin on slide 18.

As you would expect, we're very pleased with our second-quarter financial performance on both a GAAP and an adjusted basis. Our GAAP pretax income significantly improved in the quarter, with a reported $94.6 million profit over last year's second quarter loss of $6.2 million. Cost efficiencies, including lower rental car depreciation, continued improvements in equipment rentals, and lower interest expense, more than offset tough year-over-year pricing comps in worldwide rental car. This drove a consolidated Corporate EBITDA margin of 17.5%, which was 250 basis points better than the same period last year. It was also our best second-quarter Corporate EBITDA margin in the last five years, which includes our peak revenue year of 2007.

Before discussing net income, let me review our cost performance. Slide 19 breaks out the major components of direct operating expense. Our ability to control wage costs and achieve continued improvement in labor productivity is evidenced in personnel-related expenses growing at half the rate of revenue. In fact, revenue per employee in the quarter improved 5.5% from the prior-year period. And higher gasoline prices and the prior-year VAT refund had a negative impact on reported operating -- direct operating expenses as a percent of revenue. Excluding these expenses, the direct operating cost ratio to revenues declined 60 basis points year-over-year.

So, for the second quarter, we delivered $55 million in GAAP net income. Diluted shares outstanding totaled 451.8 million. GAAP diluted EPS, therefore, was $0.12 per share compared with the prior-year loss of $0.06 per share. Adjusted EPS in the second quarter was $0.26 per share, an 85.7% increase over the prior year.

Now let me give you some more detail on the performance trends by business units, starting with Worldwide Rent-a-Car on slides 20 and 21. Worldwide Rental Car generated 9.8% more revenue than last year despite the vehicle sourcing uncertainty in the US and economic volatility in Europe. Revenue in Worldwide Rental Car was made up of 36% airport leisure business; 25% commercial business; and 29% off-airport rentals. The balance comes from other international revenue.

Worldwide Rental Car adjusted pretax income increased 38.5% year-over-year despite an increase in advertising expense related to our new campaign; no Value Added Tax refund this year compared to 2010; and higher gasoline expense, as I previously mentioned. Our Worldwide Rental Car fleet was 65% risked at the end of the second quarter compared with 59% risked in the second quarter of 2010.

Now let's turn to the results of our equipment rental business on slides 22 and 23. With the Industrial segment continuing to lead the recovery, we are pleased to see our industrial mix approaching 30% of North American HERC revenue, driven by the expansion of existing accounts, as well as new business acquired through our ongoing roll-up strategy.

We believe our revenue from the industrial markets we serve in the US increased 14.6%, which continues to outpace the overall industrial market's estimated growth of 12.9%. This demand, supported by growth in our Specialty Pump and Power division, along with growth in entertainment, government, and railroad projects, helped drive time utilization 620 basis points higher to 60.7%, and increased dollar utilization 320 basis points over last year to 33%. As a cautionary note, I'd point out that utilization is another metric that competitors in the industry compute in different ways.

We reduced HERC's adjusted direct operating and SG&A expenses as a percent of revenue by 240 basis points over last year, as a result of improved employee productivity that our operating leverage as volume increased in stabilizing maintenance costs. The improvement in pricing and volume led to a Corporate EBITDA margin improvement of 190 basis points year-over-year. For the full year, we're on track to deliver a 42% Corporate EBITDA margin in North America. However, with a weaker-than-expected European economy and currency volatility, our worldwide margin will probably be a bit lower than previously forecast.

On the next slide, second-quarter equipment gross fleet purchases were $143.2 million, and disposals were $122.9 million on a first-cost basis. We continue to expect HERC's net CapEx per fleet to be between $300 million and $400 million for the full year. The average fleet age in our portfolio was consistent with the first quarter, and we expect to reduce the average fleet age by about two months by year-end.

Moving to slide 24, for the second-quarter 2011, interest expense was $165.8 million, a decrease from 2010 of $23.1 million, reflecting the impact of our refinancing activities. Cash interest was down slightly, as lower rates associated with our refinancings were offset by the impact of the lost benefit of the ABS interest rate swap, which expired in November, and slightly higher [EURIVA] rates.

For the full year, we've improved our forecast for net cash interest expense to flat to $5 million higher than in 2010 from our previous estimate of an increase of $15 million to $25 million. The revision is due to the favorable absolute rates we achieved on our fleet financing this quarter and lower US floating rates than previously forecast. Restructuring and restructuring-related charges in the latest quarter were $36.5 million compared with the prior year's $22.3 million. These charges reflect the closure of 12 underperforming HERC locations and a rationalization of our global workforce. For the full year, these expenses are expected to be between $60 million to $70 million.

Moving to slide 25 and 26, we generated $376.2 million less corporate cash flow in the second quarter compared with the same periods in 2010. Approximately 50% of the variance is due to one-time impacts, primarily the timing of new high yield interest payments; investments in acquisition activity; and a benefit in 2010 from improved payable terms. The balance is split almost equally between growth in the businesses, as evidenced by increased HERC and insurance replacement receivables, and higher non-fleet capital expenditures and fleet investments. Net working capital day trends continue to improve to negative 60.5 days in the second quarter of 2011, which represents a 26% improvement over [2007].

On the next slide, we continued our financing activities in the second quarter, completing two transactions to support fleet growth in the US and Europe. In the US, we issued $598 million of three- and five-year term ABS notes at a weighted average yield of 2.88%, and achieved a 76% advanced rate, almost a full point higher than our previous-term ABS transaction. In Europe, we executed a [$100 million euro] seasonal facility to support our peak summer fleet requirements there. At the end of the quarter, we had $1.6 billion of corporate liquidity available to fund growth initiatives, as outlined on slide 28.

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

Thanks, Elyse. Now let's move to slide 30. As everyone knows, the economic slowdown is causing widespread uncertainty across industries, markets and regions worldwide. For Hertz, however, our 2011 GDP forecast was already well below the consensus, and this modicum of caution has proved appropriate for us.

Despite the macro volatility, we've raised our full-year earnings guidance by roughly 7%, incorporating our strong second-quarter performance and accounting for additional upside to our cost-savings projection. This is on slides 31 and 32. From where we sit today, we think this is a prudent increase; although if the GDP can reverse its recent trend, there certainly could be additional topline benefits.

On slide 33, we've updated our year-over-year earnings sensitivity analysis. I'll remind you that a 1% movement in any of the key metrics had significant upside or downside effect on pretax income. Net-net, we're cautiously optimistic about the second half of the year and our ability to do well, as cost efficiencies, favorable equipment rental pricing, and a sustainable depreciation improvement, should more than offset the risk of weaker rental car rates this summer.

Let me give you a little more insight into the pricing environment. As you know, this spring brought a lot of uncertainty for US rental car companies. There was little visibility to summer demand and significant concerns over the auto-maker's ability to fill summer fleet orders. So, as I mentioned, the industry held fleet that it would have otherwise sold to ensure summer capacity.

When the fleet picture became clear in early May, the industry found itself with more fleet than anticipated, as the majority of OEM commitments were satisfied. Since the industry wasn't able to begin adjusting fleets until late in the second quarter, the excess capacity has bled into the summer season, causing continued pricing pressure. As a result, our efforts to institute a sequential national price increase for reservations, beginning June 1, failed. Another price increase was attempted for July 1 rentals, and we were optimistic as we saw some peers following certain markets; but ultimately, that was not sustainable, either.

The reality is that with spread values at their widest second-quarter margin since 2004, the substantial decline in depreciation per day provides some leeway in pricing, while still allowing for healthy profits. And with the residual values at historic peak levels, we can sell down the assets at very favorable returns while tightening the fleet. Finally, I'd like to point out that between 2008 and 2010, weekly leisure airport pricing was up 13%; so a little bit of pressure on historically high prices makes some sense.

Before we open up for Q&A, I want to highlight the fact that in mid-July, we introduced our strategy to redefine the car-sharing experience and grow this business by lowering costs, enhancing member benefits, adding new vehicles and locations, and deploying the latest in-car and customer support technology. You may have noticed that we renamed this service Hertz On Demand, reflecting increased customer control over the car-sharing experience by utilizing industry-leading technology. We're excited to offer this option to existing rental car customers and for the opportunity to attract a new customer base with hourly rentals.

Finally, let me say that as far as Dollar Thrifty acquisition goes, as we have previously stated, our next milestone is to obtain FTC approval. We remain focused on that process, but unfortunately, for legal reasons, we can't say anything further on this topic.

With that, let's go ahead and open up the call for questions. Operator?

(Operator Instructions). Brian Johnson, Barclays Capital.

Just want to drill down into the North American airport business. Kind of two related questions. Can you break out the pricing mix between -- on the airport side -- between leisure and corporate? You've done that in prior quarters.

And second, can you give us a sense of utilization? That was a very strong metric for you in 1Q, but I don't see any mention of it in the slides there.

I'll take the utilization question. Our utilization was actually down slightly in the first quarter. And that's by less than 1% -- it was down about 80 basis points. But that was primarily driven by the US. And as Mark mentioned, that was a function of the fact that people were holding fleet in anticipation of shortage this summer.

Yes. In regards to, like, mix on the pricing, we give you a lot of visibility on that in the slides. The reality is we don't want to give any more than we're giving right now for competitive reasons. We've found out that our competitors use our conference calls to hurt us. So, unfortunately, Brian, I'd like to answer that but I'm not -- you know, what you see on the slide is a lot of information and we're just kind of sticking to the slides right now.

Okay. And just to clarify what you've given us new on pricing, what you're trying to do on the [2.4] on slide 10 is if you've kept mix constant, here's where pricing would have been, or --?

That's exactly -- Brian, that's exactly right. If we'd had the same mix of business that we had a year ago, that's where pricing would have been, down [2.4].

Okay, we'll follow-up offline for the -- to make sure we've got the algebra right, but thanks.

Chris Agnew, MKM Partners.

You highlighted that you assume macroeconomic conditions remain unsettled in the second half. And I'm just wondering if you could give us a little more color in relation to maybe a couple of areas -- one, the amount of visibility, your sort of -- the visibility window and whether that's changed at all.

Two, corporate travel -- what are your corporate accounts telling you? And what are they thinking about their spending intentions maybe in the second half? And then, just finally, inbound travel, which is an important growth area for you. What are you seeing in terms of booking trends there? Thanks.

Yes. Overall environment, in terms of advance reservations as we look out into September, look pretty strong. I mean, I'd say relatively strong -- high single-digit kind of numbers, double-digit numbers. It floats week to week; but in general, we feel pretty good about overall demand moving into the rest of the year. It's actually picked up over the last couple of weeks.

In terms of commercial travel, I think it's fair to say that single-digit growth in commercial -- kind of mid-single digit. And remember, we've had that big bounce-backs over last couple of year in commercial. So, we start getting tough year-over-year comps as we move into our third quarter and fourth quarter, unlike some of our competitors who didn't experience that rebound as quickly as we did.

And then the other piece is, just in terms of looking at leisure -- you didn't ask for that, but I mean, leisure is looking stronger for us, probably even than commercial. So and off-airport, obviously, is also looking stronger as well. And off-airport, as you know, is 26% of our revenue. So, again, we feel pretty good about inbound in the second half as well. Second half, maybe double-digit -- [8 to 10]. It's hard for me to predict, but we feel it's going to be strong -- high single digits on inbound in the second half based on what we're seeing today.

So, in general, pretty good -- we're kind of above the nature. I know there's been a lot of panic, it seems like, in the market about consumer confidence and maybe about even our business model. We're kind of like of the opinion -- don't worry, be happy (laughter) because we're not seeing it. We're a good indicator of what's happening in the general economy, and we're feeling pretty decent about our ability to do well in the second half of the year.

Great. Thank you.

Emily Shanks, Barclays Capital.

However, this is actually [Casey Overlander] on behalf of Emily. I was just wondering, what is driving the decrease in car rental rate in the US and international separately? And how do you characterize your competitors' pricing rationality, both domestic and abroad during the quarter?

You know, you're really weak on our call right now, it's hard for me to hear you. Would you mind repeating the questions? I didn't hear all of it.

Sure. I was just wondering -- can you hear me better?

Yes.

Okay. What is driving the decrease in car rental rate in the US and international separately? And then also, how would you characterize your competitors' pricing rationality, both domestically and abroad during the quarter?

Yes, well, I mean, the number one issue is excess fleet, right? So fleets are tightening now, though. I think our competitors -- my guess is when they talk on their call next couple of days, you'll hear them say their fleets are tight now. I mean, things have gotten a lot tighter in the month of July, towards the last two weeks. So we're hopeful that there's still opportunity for improvement in pricing. But again, that's -- you can not predict that in this industry. Everyone is tied to yield management systems that are based on demand and fleet levels.

But, in general, the problem on this entire issue was what I talked about in my call, in the early stages of my narrative that I gave you, was the fact that everyone came into the summer holding some fleet because they thought they weren't going to get orders from the OEMs, due to the Japanese tsunami. And everyone thought the same way and it created an over-fleeting situation. And that's kind of what caused the pricing.

In Europe, we had the volcano a year ago. And it's really important to note that drove our RPD up like 7% or 8%, if I remember right. That 7% or 8% -- that's a tough comp year-over-year. It was all driven on one-way rates -- people wanting to go home from the airports and they rented one-way, and we get very high rates on that. So that's really what drove -- probably 60% of the deterioration was just the volcano ash cloud issue last year.

So, the other piece in Europe is the Advantage. Advantage is a much lower Spartan brand in Europe and it's priced at the low end. So that was the other piece that drove the Europe pricing down. So Europe's pricing was really a one-timer. It shouldn't repeat itself. You shouldn't see that kind of pressure that we saw in this quarter. Although pricing is not strong there right now, it's just not as weak as you thought it might be, based on the performance in the second quarter. And we wanted to explain to you those one-offs.

Okay. Thank you very much.

Rich Kwas, Wells Fargo.

Mark, on the unsettled economic environment, does that imply that the second-half US grows 1% or something like that, similar to the first half?

I don't want to predict the GDP. I have no idea. I mean, I don't know what the growth rate is going to go. We had planned, as I told you, for 1.7%, then we upped it to 2%. Obviously, that's too aggressive for the US economy right now -- where's the second half going to go? I mean, I'm just looking at the data that I gave you on my prediction based on advanced reservations of high single digits. That's just based on what we see on our advanced reservation. We didn't put an assumption on GDP.

We've kind of now -- the GDP is so volatile right now, and it fluctuates so much month-to-month, that we're just kind of using our advanced reservation system, our internal data to predict kind of where we're going. So, I'd hate to give you a number, because we're not tying out to anything right now in GDP that has been forecasted or has, in fact, happened from a reality standpoint.

Okay. And then on -- just on price, do you think this situation gets settled here by the end of Q3, you're going to go into the seasonal weak period as you enter Q4, do you think fleets for the industry are going to be pretty much right-sized by September, October?

Well, okay, so just a little bit on the seasonality of the business, the overall business model for Rent-a-Car has you going into selling fleet right after the summer peak. So summer peak kind of ends -- after the first couple of weeks in September, it's fully over. And now everyone is de-fleeting. And as you de-fleet, it puts pressure oftentimes on residual prices. But that's all part of the plan. Right? I mean, that's the way it is every single year.

So, in terms of pricing, again, how people de-fleet and how they plan for volume in the fourth quarter, very difficult for me to predict. Again, pricing for us -- I need to say this out loud -- it's not a concern. I mean, everyone in the industry is obsessed about this, and it's about where we thought it would be, given what the over-fleeting situation was leading into the summer season.

And so because the spread values are so wide for the industry, it allows people to have a little more flexibility on pricing and still maintain healthy profit margins for the industry. And that's what I think the analysts and the investors need to understand. This is not cause to panic. We have this widespread so pricing is under more pressure. And we have a 13% price increase over the last two years in the leisure airport segment. It's important to note that -- that people -- you know, that we have an unusually high pricing structure in place, because the recession hit all rental car companies and everyone tightened their fleets, and allowed the opportunity to raise [a little bit of] price.

So while pricing is off -- it's not that far off of historic levels at all. So we're still in a pretty good pricing environment. People are making really good money on today's pricing environment.

Okay. And then just quick last one for me. Are you still on track to close Donlen by the end of August? And I assume that that's not in the guidance, correct?

Right. No, we have nothing in Donlen. We -- obviously, we'll be talking about Donlen after we close officially. Our hope is to finish by the end of August, absolutely.

Okay. Thanks.

John Healy, Northcoast Research.

Mark, I want to focus a little bit on the equipment rental business. Really impressive results there, despite the second quarter still had uncertainty in it. I wanted to get your thoughts on how you're thinking about that business over, say, the next 12 months. And on previous calls, you had a pretty bullish view on what that business could do over the next 12 to 18 months. I wanted to see if you still felt as strong about the business today as you did maybe a few months ago.

And also, with Lois now at the helm of the Equipment Rental business, was curious get any observations that she might have regarding how the business should be run, or areas of focus, or changes in philosophy.

Yes, we feel good about the business and how it's performing in general. We have a lot of robust processes we've put in place there for growing the business, that allow us to grow it with higher flowthrough rates.

I guess -- I think what's new would be that we've really mapped out some significant growth programs. There are several new product lines we're going to be launching, and then re-emphasizing and reinvigorating existing product lines that we haven't grown as fast as we would have liked -- Pump and Power being one of those.

Lois, do you want to talk about a couple of other platforms or --?

Yes, there are segments in the industrial space where we're going to broaden our portfolio there to take advantage of that market and continue growing that segment. And also on a global basis, revitalizing footprint. So there is a number of initiatives that will help us going forward. In addition, just looking at the processes today and how we make them more efficient and more effective, so we continue to drive bottom line and the top line at the same time.

Yes. There are some plans to increase the sales force. We've already started doing that -- you know, about 80 people. It's pretty significant for us. I mean, that's a big increase. We've reduced the spans of control for some of our managers, so we have more managers involved in managing the sales force.

And so, again, you'll see -- and I think what the competitors will see or even the market will see is just a much more aggressive tone in our selling efforts, because we'll have more feet on the street to sell. And we're also bringing in quite a bit of fleet. We were later to bring in fleet versus our competitors, it's clear. I mean, you can see it in the numbers, but we still have a lot of fleet coming in.

So one of the things you need to note is that our numbers don't include a lot of new fleet like our competitors have. We get the new fleet in, our maintenance costs improve; our growth improves; our growth rate will improve; and we're later to the cycle because of the non-res construction component of our mix, which is the highest of the publicly traded competitors. So we feel pretty good about our position right now.

Great, sounds encouraging. And one housekeeping question. Mark, you mentioned the -- you broke out some color on fleet costs, and how much was from re-marketing efforts and how much was from just the used car market. Could you just re-explain that again? I might have missed a part of it.

Yes, I mean, two-thirds of what we call the depreciation gain, which was like $76, about two-thirds of that was driven by a combination of a lot of factors. I guess three big ones, right? One is we bought better this year on our fleet. Second one is, we're selling in channels that are more profitable. And the third one is just a generally stronger market.

So that -- of that -- two-thirds of our improvement is built around kind of factors that -- it's probably one-third/one-third/one-third in those areas, if I were to chunk it out. I can give you rough math, right? So, we feel pretty good that we're not mature in a couple of those. So we're going to continue to make progress on, we believe, and be able -- now remember that the second quarter had a spike because of the Japanese tsunami. So, I don't want expectation to be that we're going to continue to drive net depreciation per vehicle down the rest of the year. But it's going to be strong -- it's going to be at historically low levels for the rest of the year.

Appreciate it.

(Operator Instructions). Fred Lawrence, Avondale Partners.

A couple of brief questions here. Just first of all, maybe Elyse, can you tell us the realized gains that you had from sale of vehicles during the quarter?

No, it's going to be reported in the 10-Q. I want to say it's about $60 million. Now you've got to keep in mind that it depends on how you depreciate the cars as to what the gain is. So you really can't compare across-the-board company-by-company. But I think what we'll report in the 10-Q is about $60 million in Rent-a-Car.

Okay. And sort of along those lines, Mark, I've heard you say in the past, unit depreciation, you're expecting that to be down again year-over-year in 2012. Is that still the case with sort of the unique situation we've had here in the second quarter? Or how should we think about that next year?

I think it's too early to tell right now. I mean, I think what I'd like to do is see how the year pans out and determine where 2012 is going to go. It may be lower, but I don't want to promise at this point, given how strong residuals have been with the tsunami. The tsunami had a fairly big impact. So we've got to kind of work through the math on our new car buy. And after our new car buys finish, we should be done with most of it in the US probably by September/October. And we'll have a better feel for that. Okay?

All right. And then just a last one, if I could. Obviously, with the rental car business model and what drives profitability, you'd much rather have price over volume, but you take whatever you can get. With the volume that seems to be coming in the door and the revenues that you're driving from that volume, it seems like your ancillary services, those -- that roadside assistance insurance, all of that, is showing some real strength. And being a higher margin maybe giving a little support to margins that wouldn't otherwise be there, considering most of your topline growth is volume. So can you just talk about the trends you're seeing with your upsell activity and other ancillary services?

And then, along those lines, anything that you're doing new -- any sort of new ancillary revenue streams that you're pursuing? That'd be great.

We continue to focus on ancillary revenues. You know, one of the things that's important to note is that where the opportunity for Hertz is, is that we book a lot of things online, and figuring out how to get us our [PB] upgrades off [of] online is something we've worked on and we think we have an opportunity on going forward.

The other piece is, is we book any rates that we have through our kiosk. We now have introduced these, what we call, virtual kiosks, which allow you to interface directly with a customer service person in a face-to-face video screen. That's going to give us upside on SRPD, the ancillary revenue.

So we have two things that we're working on that we think will give us upside on SRPD -- SRPD performance in US Rent-a-Car in the second quarter wasn't great. It was due to a couple of issues. Part of it was the way we booked the rentals. Another part of it was we had -- it's a little tougher year-over-year comps. But we think there's big opportunity moving forward. Scott?

Yes. We were up year-over-year in SRP in the second quarter. Last year, the comps were tough. The mix of business has changed, is really what's made it tougher on a year-over-year basis. But with that said, we're still up. The days are up 8% and the days are what really drive ancillary revenue. So again, the overall revenue in SRPD is strong. And we are starting to offer some new products as well around the country.

Okay?

Neil Portus, Goldman Sachs.

Could you update us on year Rent-a-Car re-franchising strategy in the EU and US -- where that stands and how that's baked into numbers for this year?

We continue to make progress on that. I have a number of franchise agreements that are pending right now. We're weren't able to announce them this quarter; we will next quarter. But they're fairly big. These are fairly large agreements for swaths of geographies. So in terms of what we planned -- I'm trying to remember what we announced to investors -- what did we tell them in terms of revenues this year that we were doing with franchises?

[$100 million].

About $100 million? Yes, so we have no issues. In fact, we'll exceed that goal, in terms of the amount of revenues that we'll franchise this year that were internally our Corporate stores, if you know what I mean. So we'll easily exceed that. And again, it's helpful to the P&L, as you know, in terms of it ends up generating incremental pretax, and then reduces the fixed asset base as well and the requirement for cars.

Okay. Great. Thank you.

Yes. I will point out also, I just wanted to say something to all the analysts at large. I don't think people should try to model in changes in EPS based on Donlen. I think I've seen some of that going on.

I mean, Donlen, while, let's say they have at a point in time a higher pretax, let's say, than in the airport, doesn't mean that incremental would actually add right onto our EPS. Donlen is a different business model altogether. And we're going to be investing and growing that business model, which means, in some cases, we may take business, fleet business, that has a high ROI but lower pretax. And because of that, it may not, let's just say, be perfectly accretive on a pretax basis.

So I just want to make sure everyone understands the Donlen business model. After we close on the deal, we'll explain it more fully, but there are transaction costs that will be associated with Donlen as well. And so, again, modeling incremental pretax into full year, I think is the wrong thing to do. I'll just state that on this call so people don't make that mistake.

Is it going to hurt us? No, it's not going to hurt us. We've included all of that in our guidance. So we feel comfortable with our guidance. But in general, as we understand the Donlen model better, we'll be able to lay out for you the implications of that next year into our guidance. Okay? In Q4, it's more or less a rounding error, so.

Bryan Mortenson, R.H. Bluestein & Company.

Thanks for taking my call. Two longer-term outlook questions here. The first, Hertz On Demand, how do you see that market size playing out? And any idea what that business will be in terms of bottom-line contributor?

And then looking abroad, can you talk a little bit about your Asia-Pacific, ex-Japan initiatives and how do you see that market shaping up?

Yes, on Hertz On Demand, that's a really important strategic segment for us. And we're looking to expand that significantly over the next couple of years. Our biggest issue is getting the technology into more cars. As we've been ramping up on the technology -- I mean, our plan is actually to put that same technology in all of our fleet. So we've had to work with suppliers that can scale up and scale down as we need to.

And so Hertz On Demand itself is not constrained, other than the fact that our own internal constraint, which is to have suppliers with the new version of the technology we're going to install in all cars. So I feel -- I'd tell you that the revenue from that will be all profitable, as we're going to be able to turn each car on or off as a regular rental or a hourly rental. So Hertz On Demand will get a big benefit on fleet costs by only being allocated to fleet costs when it's turned on an hourly rental in densely populated areas. So we will be instantaneously profitable as we implement this into all cars, just because of the allocation fleet costs.

We're already at breakeven pretty much in New York City. We're making money in New York City actually in -- we usually make money in New York City on that model into the third quarter where we have high demand. And we'll actually probably at least come to a breakeven or make money this year in New York City -- quite a bit of money in New York City now.

Having said that, it will be even better as we roll it out to all cars, and we have the car accounting set up so that once you become hourly, you only get that percent of the fleet allocated -- fleet depreciation costs into Hertz On Demand. Members are up right now 145%. And global year-to-date, our revenues are up 115% and it continues to grow. It's on a small base, but it's growing dramatically for us. And we're rolling it out in Boston right now as we speak -- a number of locations now in Boston.

So, again, you'll see that -- it will be a global rollout. And it will be across the US into all vehicles. Eventually, we'll have all 330,000 of our cars that we have in the normal Rent-a-Car fleet will have the technology in it. And we just want to provide really kind of a new business model allows you to rent cars anywhere, anyplace, anytime by the hour, by the month, by the day; or if you want, now with Donlen, we can lease. So that's a four- or five-year proposition.

Okay. Interesting. Thank you.

Bastian Wagner, Old Mutual Asset Management.

Just a short question on your volume development, especially in Europe. Can you give us a bit more color on what you see in the different countries you're operating in? I'm -- yes, I'm particularly interested in the peripherals (inaudible - microphone inaccessible).

In the what?

Particularly interested in what?

Like in the countries like Spain, Italy, and then also compared to that, Germany, the UK.

Yes. Well, I'm going to let Michel Taride, but before he takes over, just kind of talk about it.

In general, our -- we have growth in Europe everywhere. The growth is not as high as we'd like it. So, it's not that we're not growing; we're just not growing as rapidly as we normally would, given the European economic situation, and the issue with the banks and the sovereign crisis that we're seeing on debt levels in different countries like Spain, like Italy, like Greece.

But in general, pretty much in Spain as well as in Italy, we have -- we're showing some growth, but it's just not the double-digit growth that we were hopeful to get. It's driven on weakness. Northern Europe is also a little weaker than it was in the first part of the year.

Michel, you want to add any color to that?

Yes, sure, Mark. I mean, I guess the most challenging country right now, it's Spain, indeed -- even though we're getting some significant share there, helped by Advantage, by the way, but also on Hertz Classic. Actually, Italy is quite the opposite right now. It was a bit soft at the beginning of the year and now we're having a really good season. In fact, we have to add fleet in Italy and by hundreds of units, which for the size of that country, is significant.

Germany is still growing nicely, softening a little bit, but I would say high single digits. Parts of the UK business are suffering. As Mark said, we are growing everywhere, so I don't think there's any country where we're growing more than double digits right now, but it's all between, say, 3% to 4% and 9%, 10% of revenue. On average, our growth right now in Europe is about 6%. Again, Spain being at the low end; Italy and Germany being on the high end; France getting a little bit better.

The pricing environment on the commercial segment is actually quite good and remains positive for the third year in a row. It is getting a bit more under pressure, as you have seen from the numbers on the leisure side. But again, the second quarter was really special -- 90% was explained by both the volcano and Advantage. And also the fact that our business mix is changing. We're taking a lot of long-term rentals, which lower RPD. So from a revenue per transaction standpoint, we're actually flat to positive there.

I hope I've answered your question.

(multiple speakers) -- I mean, we had a couple of profit warnings from the large travel operators over here in Europe. And they were giving a quite miserable outlook. So on the leisure side, you must think -- there must be some pressure going forward?

Yes, that's correct. I mean, the commercial business remains very robust. The leisure segment is the one which is suffering the most. I have to say the UK is a big source market to the other countries, and the UK economy right now and all the spending cuts and tax rises doesn't help. But you see compared to travel operators, we're so much diversified. We should remember, just one number in Europe, more than 50% of our business is off-airport. So it's absolutely non-travel-related. Here we're renting commercial vehicles. Those are not travel-related.

So really, what's travel-related, and in particular, leisure travel is probably less than one-third of our total business. Two-thirds are really commercial travel or non-travel-related. And that helps us a lot, of course.

And how do you (multiple speakers) --

(multiple speakers) We have to stop. We have to stop -- it's only supposed to be one question per person, so anyway.

Okay, okay. Thank you.

And there are no more questions in queue, if you have any closing remarks.

Well, thanks, everyone, for attending our conference. We appreciate the support and we'll talk to you next time.

Ladies and gentlemen, this conference will be made available for replay after 12.30 p.m. Eastern Time today through August 17. You may access the replay system at any time by dialing 1-800-475-6701 and entering the access code of 209052. International participants may dial 320-365-3844. Again, those numbers are 1-800-475-6701 and 320-365-3844.

That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.