Herc Holdings Inc (HRI) 2011 Q3 法說會逐字稿

Welcome to the Hertz Global Holdings 2011 third 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 statement are not guarantees of performance and by their nature are subject to inherent uncertainties. Actual results may differ materially. Any forward-looking statement's 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 it's second-quarter results, issued yesterday, and in the risk factors and forward-looking statement 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 made available for replay starting today at 12.30 PM Eastern time and running through November 16, 2011. I would now like to turn the call over to your 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 on the Investor Relations page. 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 the website. We believe that our profitability and performance is better-demonstrated using these non-GAAP measures.

Our call today focuses on Hertz Global Holdings Incorporated, the publicly traded Company. Results for the Hertz Corporation differ only slightly, as explained in our press release. With regard to our IR calendar, we'll be presenting at the Barclays Auto Conference on November 15 and at the Bank of America Merrill Lynch conference in Orlando on December 1. 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 the America's; Michel Taride, Executive Vice President and President, 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. And now I'll turn the call over to Mark.

Thanks, Leslie and good morning everyone. Let's start on slide 6. As you saw last night, we performed very well in the third quarter with strong results from both the revenue and profit standpoint. We delivered 11.3% top-line growth, reflecting expansion across all of our businesses. In consolidated adjusted pretax income increased 38% on the higher sales and $135 million of incremental cost savings.

Importantly, we achieved these balance quality results during a time of heightened and global uncertainty. Which is a testament to our clear and focused vision, our strong brands and solid execution. As evidence of this, in the 2011 third quarter, we delivered our best revenue quarter of any quarter for worldwide rental car. And both on a consolidated basis and for worldwide rental car, we generated the highest GAAP pretax income in the Company's history. More specifically, within our business units, third quarter 2011 highlights include a more than 20% increase in equipment rental corporate EBITDA on a 14.4% revenue gain. This resulted from a 3.4% higher price on 9.9% more volume overall despite a 3.9% volume decline in Europe. This is on slide 7.

The equipment rental profit benefited from a 220 basis point improvement in adjusted direct operating and SG&A expense margin and a 470 basis point increase in utilization as we fulfilled demand with a newer, more targeted fleet offering. In the quarter, we brought in about $213 million of gross new equipment globally, year-to-date through September 30, roughly 75% of our planned buy of $575 million has been delivered. Our net CapEx estimate for the year is $350 million and we are currently tracking at about 78% of that. Another highlight on slide 8 was US rental car 28.4% increase in adjusted pretax income, having delivered 86% incremental revenue flow-through in the quarter. Our discipline lien 6 Sigma programs were implemented in 6 additional airport operations and higher residual values, coupled with strategic procurement in fleet rotation practices resulted in a nearly 19% improvement in unit depreciation year over year.

In Europe Rental Car, we won several new business accounts in the third quarter and resigned approximately 70 existing accounts, of which 90% reflected a price increase over the prior contract. This marks the second consecutive year of commercial price increases. We've also expanded our Advantage network across the continent, with a total of 19 locations in operation at quarter end. And strong fleet management throughout Europe supported higher utilization year over year and contributed to about 9% improvement in adjusted pretax income in the third quarter.

Globally, we are pleased with the growth of our inbound/outbound rental revenue, which was up another 7% on top of last year's 15% increase. Our net promoter score was also a key performance metric of the quarter, with customer satisfaction ratings 460 basis points higher, year over year. And finally, we further improved our balance sheet in the third quarter with the refinancing of our European Securitization program. Where we extended the maturity, reduce the spread and increase to the advanced rate. And we put into place an $850 million 1-year conduit facility to fund Donlen's fleet until permanent financing is executed.

Now, like everyone else, we also had our share of headwinds in the third quarter, as outlined on slide 9. The most impactful was driven by Europe's debt crisis and weakening consumer demand. Our European operations continued to be under pressure due to the volatile situation there. While revenue in Europe rental car was up 4%, when you exclude the benefits of currency, the 7.4% transaction day increase was significantly less than what we were expecting for the quarter. Discretionary leisure business was particularly soft, despite it being the vacation season. Pricing in Europe was affected by the weak leisure demand, longer-length transaction and a higher mix of value-priced rentals as we continue to roll out Advantage. Excluding Advantage, revenue per day was down 2.8% in Europe.

In US rental car, the headwinds we faced in the recent quarter stemmed from weather-related after-effects. The industry came into the quarter over-fleeted, as we all held fleet in the second quarter to protect third quarter peak season capacity. As you already know, we were concerned that the auto-makers wouldn't be able to fill her summer fleet orders as a result of supply chain disruption set in motion by March's Japanese tsunami. Ultimately, the cancellations turned out to be minimal and the industry ended up carrying excess fleet that negatively impacted pricing all summer. Keep in mind, while our assets are highly flexible, it still takes about 60 to 90 days to get out a fleet without diluting used car residual value. As the excess vehicles awaited deletion, we put them out on rent to service increased demand for prepaid rentals and from associations. The higher fleet levels and shift in rental channel mix were 2 key drivers of the decline in revenue per day for US rental cars. I'll give you more color on this in just a minute.

Another headwind we faced in US rental car was Hurricane Irene, which caused widespread rental cancellations across the mid-Atlantic and Northeast. Areas where we previously have high market share. Even the benefit of incremental one-way rentals wasn't enough to offset the peak season cancellations. We estimate that the hurricane impacted US rental car's adjusted pretax income by about $9 million in the quarter.

Finally, in the equipment rental business, while we have a lot of new fleet to attract customers, we were prudent in our capital allocation. Only ramping up orders as we grew confident of demand stability. As a percent of our estimated annual buy, only 36% of the new fleet was delivered in the first half of the year, but an additional 37% was delivered in the third quarter. We got our biggest percentage of new fleet in the third quarter primarily in August and September, favorably positioning us to capitalize on fourth-quarter demand. In contrast, our competitors received more than 50% of their annual fleet by June 30, enabling them to pick up more volume in the third quarter. Regardless of the timing difference, Hertz reported a strong quarter, as recent acquisitions were integrated, incremental revenue streams like entertainment and energy services grew and cost control measures paid off. We put 8 more Hertz locations through the Lean 6 Sigma Process Improvement program last quarter, bringing the total sites completed to 22, supporting an equipment rental Corporate EBITDA margin of 42.1%, an increase of 210 basis points year over year.

Let me give you a little more detail on the US rental car slide on slide 10. Before I turn it over to Elyse, overall, we were pleased to see that rental length improved 4.6% in the quarter. With cars out on rent longer, the cost of turning a vehicle is less and utilization is stronger. In the third quarter, our fleet efficiency was nearly 82%, despite the excess fleet situation. Revenue was up more than 5% on nearly 12% higher volumes. But a tough year over year comparison and the shift in business mix to off-airport rentals weighed on revenue per day.

Let's start with the tough year over year comp on slide 11. Hertz was the only public competitor to secure a significant price increase last summer. This year, we had to overcome a 230 basis point increase relative to competitors. And while revenue per day was down 5.9%, pure pricing was down only 2.2% in the quarter, which we expect is in line with the industry. Just so there's no misunderstanding, let me bridge the difference for you. For Hertz, revenue per day continues to be impacted by our mix shift, which I'm sure you are mostly all aware of. Of the fully loaded RPD, 1.9 points was due to a 4.5% increase in rental life and a change in vehicle mix. Another 1.8 points in the decline was due to segment mix, including the growth of Advantage and off-airport.

On slide 12, you can see the third quarter insurance replacement volume was up more than 21% year over year. The average insurance replacement rental price is below the average off-airport leisure or business rental, due to the benefits of a significantly longer transaction length, which is illustrated in the upper right-hand box on the slide. As insurance replacement continues to grow, it impacts our PD negatively, both for off-airport and total US rental car. But don't overlook the fact that off-airport highly contributory profit is growing significantly as we expand existing business and win new customers. You can see the consistent margin expansion in the lower right-hand box.

Another example of mix is airport commercial and leisure business. On the airport commercial rental pricing continues to feel pressure due to competitive actions in our higher corporate mix. Contract rate was down about 3% in the third quarter. Today, our fleet is tighter, and last month we implemented a national price increase on leisure rental transactions. Additionally, November and December advanced reservation in the US are indicating strong demand. So we are cautiously optimistic about that.

Finally, I want to make a couple of quick comments about US rental car depreciation on slides 13 through 15. The used car market continues to be strong, especially for late model used cars. Overall, used car market conditions in our growth in retail and dealership direct's retail channels are contributing to the higher returns. If you turn to slide 16, you'll see that even more beneficial is our improving fleet procurement and fleet rotation processes. Having a highly diversified fleet gives us greater negotiating leverage with suppliers. Moving to a higher mix of risk vehicles reduces the upfront capital needed to fund the fleet and enables us to put more cars through our new retail channels.

Shifting to make and model of the fleet portfolio to appropriately reflect the needs of our growing value brand and insurance replacement rentals is resulting in a portfolio of more economical vehicles with reduced trim packages and longer depreciation periods. Last, by closely monitoring used car consumer preferences, we tried to match the types of vehicles we sell to the types of vehicles most in demand at any given time. Fleet rotation, when, how often, and what type of cars we buy and sell is a core competency for Hertz. We excel in fleet management and fleet rotation. And these are as important as used car residual values and driving our depreciation improvement.

In a minute, I will give you some insight into operating trends for the last quarter of the year, 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. We are pleased to report our third-quarter record financial results on both the GAAP and an adjusted basis. Revenue for the quarter was up 11.3% to $2.4 billion, growth was experienced across all business units and also included 1 month of Donlen revenues. Our GAAP pretax income of $295.7 million improved over last year's third quarter results of $156.1 million. In addition to revenue growth and cost savings including lower depreciation, interest expense declined16.3% and we also incurred lower restructuring costs in the quarter. This drove a GAAP pretax margin improvement of 510 basis points.

Consolidated corporate EBITDA of $525.7 million was a 20.8% improvement over 2010, and the margin also improved 170 basis points to 21.6%. Worldwide, Hertz corporate EBITDA margin of 42.1% is 210 basis points better than Q3 2010. As we mentioned, our cost efficiency programs have been a key component in improving our margins. Year-to-date cost savings of $343.6 million. Slide 19 shows direct operating expenses, which as a percent of revenue, was down 180 basis points. This trend was driven primarily by improved operating leverage in Hertz and lower damage cost in Rental Car, in part due to higher damage collections.

Our labor productivity continue to increase, with a 3.2% improvement over the third quarter of 2010. Our European rental car business is also a contributor to cost savings. As they continue to see top-line pressure from the economy during the quarter, that business was able to reduce adjusted direct operating expenses as a percent of revenue by 160 basis points, this quarter, through improvements in the damage and maintenance processes, more aggressive supplier negotiations and employee productivity improvements. Our GAAP net income this quarter was 33% better than Q3 of 2010. GAAP-diluted EPS was $0.47 per share, $0.11 better than the prior-year. Adjusted EPS in the third quarter was $0.51 per share, a 30.8% increase over the prior-year. Diluted shares outstanding in the quarter of 2011 totaled 490.9 million.

Now let me give you some more detail on the performance trends by business unit, starting with Worldwide Rental Car, on slide 20 through 22. Worldwide Rental Car generated 10.8% more revenue than last year. The US rental car revenue improvement of 5.3% was mainly driven by off-airport volume growth of 14.8%. We opened 54 net new off-airport locations this quarter, and recorded same-store revenue growth of 8.6%. Advantage volume was up 30.9% in the US and also contributed to revenue growth. Advantage now operates at 75 locations worldwide.

Worldwide Rental Car adjusted pretax income increased 22.2% year over year, and the margin increased 170 basis points. This improvement was driven by revenue growth and declining vehicle costs, slightly offset by an increase in marketing and advertising expenses to promote our expanding profit offerings and by a difficult economic environment in Europe. We closed the Donlen acquisition on September 1, so 1 month of results are included in the quarter. The business contributed $35 million to our revenues and had a small impact on profit. Going forward, Donlen will be reported within our car rental segment. And relative to their historical performance, their ongoing reported profits will vary based on a higher amount of fleet financing and the impact of purchase accounting, as well as the impact of synergy achievement.

Now let's turn to the results of our equipment rental business on slides 23 through 26. Worldwide Hertz revenue increased 14.4%, driven by stronger performance in the US and Canada, off-setting the difficult environment in Europe. Despite a delay in the construction recovery and modest declines in industrial spending overall in the quarter, we continue to increase market share, as indicated by recent American Rental Association forecast. Rental markets in North America for the quarter were estimated to have grown slightly less than 5% and we continue to drive higher market share, leveraging our industrial efforts continue to focus on specialty products such as Pump and Power, as well as niche markets, such as entertainment.

In addition, we believe rental solutions are a more attractive option in an uncertain economy and national players are positioned to capitalize on these opportunities with newer fleet purchases. This improved demand was also supported by growth in government and railroad projects, helping drive time utilization 470 basis points higher, to 64.5%, an increase [doll] utilization 290 basis points over last year to 35.6%. We continue to build our industrial base with the acquisition of WGI Rentals in North Dakota, which provides us with the geographic footprint to take advantage of the industrial petrochemical market in the Bakken oil and gas fields. In October, we closed a deal for Delta Rigging, which further expands our reach into the offshore oil and gas market.

The average fleet age in our portfolio decreased slightly from the second quarter to 48.4 months and we expect to continue to reduce the average fleet age by year-end. We're also seeing improved sales of used equipment as the residual values are returning to stronger levels, as we've shown on slide 25. As you may recall, our estimate from late last year for incremental revenue flow-through for Hertz was 75% and included the assumption that nonresidential construction would be up 4%. As of today, that industry segment is down 6%. And the European affect was not known at the time. As we pointed out last quarter, original full-year corporate EBITDA margin estimate of 42% will come in less and this equates to a flow-through in the 60% range.

Moving to slide 27, for the third quarter 2011, interest expense was $169.3 million. A decrease from 2010 of $32.9 million, reflecting the benefit of our refinancing activities. Cash interest expense was down, reflecting lower rates from refinancing, partially offset by the prior-year positive impact of the ABS interest group swap, which expired last November. For the full year, we've improved our forecast for net cash interest expense to down $5 million to $10 million versus 2010 from our prior estimate of flat to up $5 million. The revision is due to a greater usage of lower cost floating rate fleet debt than previously forecasted, and the lower rate achieved on the European ABS refinancing.

Restructuring and restructuring related charges in the latest quarter were $5.1 million, compared with the prior-year's $15.2 million. These charges reflect the continued effort to streamline the business and rationalize our global workforce. For the full year, we continue to expect these expenses to be between $60 million and $70 million. Moving to slide 28, cash flow from operations improved by $248 million in the third quarter compared with the same period in 2010. However, overall corporate crash was $360 million worse than last year. The major variances this quarter included the acquisition of Donlen of $177 million, increased equity in Rent-A-Car fleet investment of $281 million, mainly due to the timing of program vehicle turn-backs and higher program receivables. And increased HERC equipment cash outlays of $94 million versus third quarter of 2010.

Turning to slide 29, networking capital day trends were a negative 25.5 days this quarter. This is a 35% improvement over the third quarter of 2007. Mark already talked about our debt financing activity for the quarter. Slide 30 provides a little more color for the deals. At the end of the quarter, we had $1.2 billion of corporate liquidity available to fund growth initiatives, as outlined on slide 31. With that, I will turn it back to Mark.

Thanks Elyse. I just wanted to wrap up the third quarter by saying how pleased I am with our financial performance. As we told you, the headwinds this summer were significant, diminishing any potential upside to performance. Overall, trends are still positive, and therefore the disciplined execution of our growth and efficiency strategies keep us on track to deliver the meaningful revenue and earnings per share expansion that we previously guided to for 2011. You will recall that we increased our guidance twice already this year, once in April and again in August.

If you'll turn to slide 33, let me tell you about some of the positive trends we are seeing as we move through the fourth quarter. Starting with the macro, the latest round of US statistics reflects an economy growing slowly but not contracting. It seems general fears of a double-dip recession in the US are waining. In Europe Rental Car, we are beginning to see positive pricing environment in corporate business in the fourth quarter. Operating expenses continued to decline as a percent of revenue to offset the main weakness on the continent. In equipment rental, utilization is improving sequentially in the US in the fourth quarter. Pricing continues to trend positive as we bring in a new fleet. The increasing demand for earthmoving equipment for oil and gas projects, for example, and the growth in our specialty divisions, like Pump and Power and entertainment, are helping to offset ongoing weakness in the construction market.

Direct operating costs continue to decline as a percent of sales as process efficiencies take hold and more than ever, contractors are looking for rental solutions instead of investing their own capital in new equipment. In US Rent-A-Car, our advance reservations for the holiday season are strong. Tracking ahead of last year and reaffirming our believe in the resiliency of the consumer. We entered the fourth quarter in a stronger position than in the summer with fleet and demand now appropriately aligned. As a result of both tight fleets and longer rental lengths, we expect fleet efficiency to improve over last year's 79.1%. In terms of top-line initiatives, we're focusing on driving revenue through higher RPD rental channels.

Monthly depreciation per unit continues to be a good guy. In the US, the used car market is holding seasonably strong and clearly acts as a solid base for lower fleet costs. But as I mentioned before, the biggest contributor to Hertz savings continues to come from better procurement and more optional fleet rotation. For 2112, we expect our US rental car monthly depreciation per vehicle to increase between 2% and 3.5%. The year over year change reflects the $40 million impact of the tsunami benefit that won't repeat next year and our planned purchase of a richer fleet mix versus 2011.

The increase in depreciation should be partially offset by a larger percent of vehicles sold through higher return disposable channels and improved RPD versus this year, given the higher, richer mix of fleet. Also in US rental car, we continue to make headway on our asset-light strategy. With nearly 50 virtual kiosks currently installed, we have plans to add 150 kiosks to airport and off-airport locations in the fourth quarter, reducing labor costs, extending rental hours in off-airport locations, and raising the bar on customer satisfaction.

The biggest risk to our assumptions for the remainder of the year is the global economy and Europe in particular. In Europe, according to the conference board's October 24 report, Europe's own industrial activity has softened. Service sector activity has been modest but steady and consumers sentiment surveys are starting to reflect more nervousness about the prospects for '12. Of course, all this data was published before European leaders announced a plan to control the debt crisis. But as expected, there are plenty of critics popping up to point out flaws in that program. So far, the weakness in rental car and equipment rental demand in Europe continues. Therefore we're being prudent, reducing discretionary spending in areas that won't impact the long-term strategies of our business and putting cost-saving actions in place wherever possible.

Remember that Europe represents only about 20% of the overall Company's adjusted pretax profit. Other risks include worldwide rental car revenue per day, which should improve sequentially but is expected to continue to be headwind in the fourth quarter. We're working to offset the lower pricing as well as the incremental strategic investments by targeting another $55 million of cost savings, bringing our full-year savings projections to $400 million from earlier guidance of $350 million. These investments we are making in emerging markets, off-airport, Hertz on Demand, and Gold Choice, among others, are diversifying our business. They are expanding our customer base and they're driving growth. Not just this year but into the future as well, when we anticipate it generating even greater returns on these investments.

Today, Hertz's financial position is healthy and we're delivering against our long-term targets. All of our attributes, a well aligned management team, healthy brands, strong financial performance and clearer strategic vision, have put us in a position of real strength as we push ahead towards 2012. Before we open it up for questions, I want to quickly mention that we recently issued a press release that provided our most current update on the proposed Hertz, Dollar, Thrifty transaction. We'd like to hold all questions about that transaction until after the FTC process is concluded. Accordingly, we are not making or going to take any questions about the Dollar, Thrifty transaction. We would like to keep today's focus on Hertz fundamental operating performance and strategic initiatives. With that, let's open up the call for questions, operator.

(Operator Instructions) Emily Shanks, please go ahead.

Good morning. My question is about fleet, a 2-piece question. Since we are restricted to one. Around your comment, Mark, that in HERC, you delayed the delivery of equipment until towards the end of third quarter versus your competitors at the second quarter. If you could give us a little color around what drove that decision? And then, secondarily, around the RAC vehicle comment, that the mix impacted RPD? Could you comment if you're seeing consumers trade down to the lower price points or what is happening there? Thank you.

So, Emily, on your first question, there were 2 issues around fleet for us. 1 was the fact that, as I mentioned in the color I gave you, is that we are probably a little bit more conservative in the way we manage fleet. We don't build a field of dreams, like, you know, we get the fleet and they will come. We base it on orders that we are actually going to get. The second driver that kind of hurt us is, we had supply chain disruptions. We put orders in back in March and April, and frankly, there were supposed to arrive in June, a lot of our fleet, it was delayed probably 60 days all in.

Some of our vendors were having issues with demand and we weren't necessarily top of the totem pole in some cases. Some of the fleet miss, in terms of having it there in place, was driven by supply chain disruptions. It's all in now, it's all fixed but it should give us better results as we move forward. And kind of a catch-up results orientation as we move forward.

In terms of Rent-A-Car, your second question, which was about the lower-end fleet, we look at our mix of fleet and we obviously, you know, when we lower, let's just say, the cost of a given car because it's serving a market, that is a lower-cost market, like off-airport. The normal net depreciation per vehicle is much lower in off-airport and much lower in Advantage than it is in Hertz classic airport business for business renters. We've been differentiating that fleet more and more so that fleet is sent to the right channel. And because it's lower, because the fleet is a lower cost, the RPD is lower as well.

We didn't get as much specialty equipment also. There were a lot of minivans, for example, we didn't get. Chrysler did not ship them to us, so we had supply chain disruptions that impacted our summer mix. We would normally drive a higher RPD in the summer than we did because we would have more special equipment. We were having trouble getting Cadillacs, Escalades, we were having trouble getting minivans from suppliers because the short supply in the summer on what we call specialty mix. That's always a strength of Hertz. Because we had that -- didn't have that specialty mix -- it's higher RPD as well, that also impacted the overall RPD for the summer. We don't expect that to happen next year, of course, but that did drive our RPD, for Hertz, down a little further than we normally see it because the mix wasn't as rich as it normally is.

Rich Kwas.

Hi Mark, how are you? Good. I just want to see - wanted to get a little color on the insurance replacement business, on profitability there. How much better is it, versus the, based on airport business? Is it 10% better, 15% better, how should we think about that? On the price side, you explained how RPD there is lower but it would be helpful to understand the relative profit contribution there.

I think on a pre-tax margin basis, we're generally about at the same, maybe a little incremental, versus airport business. Because the whole, what we call, the off-airport network has expanded its profitability so dramatically, we are showing a little higher profit margin. The bigger benefit, probably, is return on net assets calculations, where, when you look at the assets deployed against that business versus the assets deployed against the airport business, we are getting a little higher [ronus] on it and that's where the balance sheet comes in and we start driving just a better EBA equation, if you will, as we move into off-airport and continue to expand it. A lot of that incremental revenue is against a fixed cost basis that's already in place. And it drives, again, a higher EBA for us. We look at it as a -- it's really driven around that asset-light strategy. We have less assets deployed on a per-dollar basis and it drives higher returns for us.

Chris Agnew.

Thanks very much. Good morning. A question on non-rental rate revenue. You saw strong increase year-over-year in the quarter and I'm just wondering if you could give us a little background on what was behind that? And then, maybe another one. Can you give us an update on your franchising strategy? Thanks.

Let me ask a question again. You broke up on me. The first part of your question was the growth in what was it?

In non-rental rate revenue. Ancillary revenues.

Is that ancillary revenue or is that -- is non-rental rate, to you, the HERC business?

On the RAC, car rental.

Donlen is $35 million for the month of September.

For the month of September. We only had 1 month of Donlen results in the operating results and that was September. That was $35 million, just so you know.

Okay. Great. That is disclosed in that line. That make sense. And then, just on your franchising strategy, which you talked about at the investor day.

We have a lot of irons in the fire there. We have about 3 countries in Europe that we are in discussions with a lot of investors in. We have a country here in North America, we have regions all over the United States that we are looking at. I think that, in terms of having a significant impact, that's really a 2012 event. Maybe some announcements in the fourth quarter. But as you know, Chris, that will be very positive for us. It will be a pre-tax positive and we will have much fewer assets deployed against that pre-tax as we move forward. It also starts impacting the revenue growth but our plan is to, every single quarter, give you what revenues that were in our corporate base that moved to franchise. So you'll be able to delineate core operations are growing, versus franchise and the impact of that. Again, that will start becoming much more significant as we move into 2012.

John Healy.

Thank you. Mark, I wanted to talk about the equipment rental business. Good to see the progress continue there. I wanted to get your level of confidence in the trajectory of that business. How confident are you that we are benefiting, not only for some modest cyclical benefits, but more of a secular tailwind in the industry and how you feel that business can progress over the next 4 to 6 quarters? And with that, what sort of incremental margin do you think we can achieve going forward on the current mix of business?

I think we feel good about the equipment rental business. It's going to continue to improve at a double-digit rate on what we call the top line, and then, as we look at the bottom line, again, nothing but positive fleet utilization, dollar utilization numbers. Pricing, we think, will continue to be strong, and we feel that this is a business where the flowthrough will continue to improve as we get the new equipment up and running, and as we continue to grow. We have a lot of growth initiatives that you don't see in our numbers right now. A couple was acquisitions are fairly significant in terms of growth potential. And we have a couple of other acquisitions in the works right now that should be announced in the fourth quarter.

So again, we feel pretty good that we are going to get some inorganic growth in new markets based on the acquisition strategy, that will help grow our top line, and then the margin expansion will continue as the business continues in it's cycle. We are assuming conservative assumptions next year on growth. And again, double-digit is still an order. That is about as much color as I can give you right now. Europe, we think, will recover as well and that is dragging down our operating results more than you would think. We have 10% of revenues that are tied to that, but when Europe is shrinking on us, it does impact the overall numbers by 2 or 3 points. We think that once Europe recovers, and we're working on restructuring Europe, we continue to restructure it, next year that will end up being a boost year-over-year in terms of our operating results and you'll see that in our numbers going forward.

Michael Millman.

Thank you. Could you give us a breakdown of how the revenue compares with -- how the [RDP] compares with profit? For example, you spoke about not having enough specialty mix, which would help revenue per day, but wouldn't that help the bottom line when you take into account their cost -- take into account --

Yes.

LOR and, sort of, relatedly, when you talk about your HERC in revenue per day by mix, how did that really compare on a same-product basis?

It's a good point, Michael. I would tell you that, in general, and I can get a whole lot of specificity here, but by not having probably 10,000 vehicles of a richer mix for us, it's probably worth at least a point of RPD to us. And probably worth a penny or 2, a couple pennies a share of EPS. So it definitely had a big impact to us on the third quarter and so I don't want to understate it. Significant enough that we pointed it out, and like I said, during the summer, really trying hard to get that fleet but as you know, we were able to get it but not until after the summer season was gone. That's the upside for us in the third quarter next year, obviously. But it did impact our operating results on both an RPD basis and a profit basis.

The only thing I would add to that, Mark, is that, although it's a lower RPD and that has a high flow-through to the bottom line, that's really offset by much lower operating costs associated with some of that mix. So, off-airport has lower operating cost than the airport business. So you make it up in the profit margin, which is why the margin is expanded.

Fred Lowrance.

Good morning, Mark and Elyse. How are you all? Just wanted to ask a 2-part question on Advantage. The first, wondering how your absolute pricing on that brand compares to others who participate at the low end? Like an Enterprise? And then, just wondering if you could characterize for us what the recent and current competitive response looks like to some of the rapid growth that you are achieving at Advantage?

We've got John Holt in the room, who runs Advantage. But I think the RPD, loaded, for the quarter, was in the 30s, wasn't it? Roughly, what was the RPD for the quarter? Do you guys have it? $38. (Multiple speakers) Fully loaded were at $38 revenue per day. So it might not have been as low as you would have expected it to be. Without being fully loaded, it was more like, around, $31 so, but if you look at the ancillary revenues and what we sell there, it was $38. In terms of comparison at a rate level to our competitors, John, do want to comment on that?

I would say it performed at or slightly better, and note that our length was up 6.8% of top of that.

Our length was up 6.8% on top of that. Good. We feel like we continue to grow that brand, and it's presence, obviously we want to become less reliant on what we call third party intermediaries as we grow the brand, and more reliant on just getting walk-up rentals as well as generating demand our own website.

We have that, we have a strategic initiative that will be rolled out in the next 2 to 3 quarters.

Next question.

Howard Goldberg.

Thank you and good morning. Your net corporate debt increased sequentially by less than half of the cost of the Donlen acquisition. I was wondering how you were able to accomplish that, number 1, and if you can talk about your plans to drive net corporate debt lower over time.

Obviously, we were able to put in place the $850 million conduit, which is fleet financing. When you look at the actual corporate outlay for Donlen, it was really $177 million. It was very favorable from an equity investment front.

Okay and that, I guess, intensifies the importance of the second question. Which, if the cost-to-net debt, net corporate debt was only $177 million and it went up $400 million in the quarter, what were the drivers there? And what's the likelihood of the net corporate debt number coming down?

A lot of the increase was related to just the year-over-year cash flow. It's the incremental investment in the fleet that I talked about both on Rent-A-Car and equipment rentals.

It's like, $250 million on Rent-A-Car and $94 million on HERC, incremental investments.

And that's seasonal. Our largest cash flow quarter is the fourth quarter so we will see that reverse in the fourth quarter. We'll see strong cash flow in the fourth quarter.

In terms of our long-term plan, in terms of net debt reduction, we are very focused on that. And I think over the next couple of years, our expectation is to be -- have statistics that would be investment-grade within the next 24 months.

Emily Shanks, please go ahead.

Thank you for taking the follow-up. I just was curious if you could give us an update on your thought process around dealing with the 2014 senior notes when they become redeemable at par in January? Both the US dollar and euros?

Emily, we are going to look at that and we will probably act opportunistically.

Thanks.

Rich Kwas.

Just a follow-up on equipment rental performance in the quarter. How did pricing trend, sequentially, as the months wore on and then if you could give the same stats on the utilization front?

Basically, between Q2 and Q3, we were up 3.5% in our calculation on the pricing front.

The most current month. (multiple speakers)

Sorry, Rich, hang on a second. July is not here, so August pricing was up 3.8%, September pricing was up 3.5%. Overall. Our non-contract business continues to grow as well -- if you look at where we were in the quarter, our noncontract was up 6.8% and if we do that in terms of our competitors look at it, it was 9.7% on non-contract business for the quarter as well.

Non-contract business means it's not a national account for the most part. It's local business and what does that represent, Lois, as percent of our overall revenue?

National contract in Q3 is about 51% of our overall business.

Non-contract would be 49%.

And do you have the utilization numbers?

Yes, utilization continued to go up in the quarter. Time utilization in July was at 63.4%, going to 66.4% in September. A nice gain during the quarter. And dollar as well went up. In July we were at 34.3% and in September we were at 36.1%. So a nice gain in both places.

Great, thank you.

John Healy, please go ahead.

Thanks. Mark, I wanted to get a little bit more color on how you feel the operating environment in October shook out on the US Rent-A-Car business? Sounds like it -- inventory levels in the industry are a little more balanced. If you were to adjust for mix in the business, how confident are you that pricing can be similar to last year and maybe have the chance to improve in the fourth quarter in the industry?

We don't believe pricing will improve in the fourth quarter in the industry. Maybe it will. It depends on your year-over-year comp, but in general, the industry is still -- pricing is still very aggressive, being led by 1 competitor in particular. People have to match that competitor. 1 of those competitors is gone on record as saying they will continue to price aggressively for share. And I think as long as you've got a competitor pricing for share, putting pressure, we think it will improve, we think pricing dynamics will improve from where they were in the third quarter, but there will continue to be a headwind in the fourth quarter, given what we see today. That could change. I don't want to say that it can't turn more positive, but at this point, what we are seeing is that there's continued pressure, as what we saw evidenced in October. Although November and December does look more positive but overall, still a headwind.

Thank you.

Michael Millman.

Kind of in the same vein, can you talk about industry fleeting in October, as you see it in November? And December? In US RAC?

We think industry fleeting has improved and we know that we are running our fleets tight. And like I said, the hope is, we've seen, mostly, competitors being more right-fleeted, but again, the bigger issue is that if you have a competitor who is pricing for share, you end up having to respond to that. Again, anyone that's going for share gains is going to cause that condition if they're using price as a way to get share gains. We continue to try to lead industry pricing up with that increase we announced in October and it was, some people matched it, others did not. Again, we will continue to work as aggressively as we can to raise pricing. Overall, the question was whether or not we saw it as a good guy in the fourth quarter year-over-year and I don't want to mislead investors into thinking that it is. At this point we still expect it to be a little negative, but improved from the third quarter.

Improved year-over-year or sequentially?

Sequentially.

Isn't that standard or usual?

No, for us, it isn't. No.

Thank you.

(Operator Instructions)

With that operator, let's go ahead, I'm going to give some closing remarks.

Thank you, no further questions.

As a quick summary year-to-date, I just want to go over that we have expanded our reach by opening up 160 net new off-airport locations. We've added a net 29 Global Advantage locations. We've broadened our used car sales presence to dealers and consumers nationally. We extended our hourly rental service into Boston and soon to be announced in Washington. We've won new commercial contracts around the world. We've acquired a greater presence in the growing equipment rental industrial market. we've taken out $345 million of permanent cost through efficiency programs. And we've generated almost $326 million of adjusted net income so far this year, which puts us on track to potentially deliver more than 90% adjusted net income growth for the full year. We are excited about our progress, and remain enthusiastic about our expanded offering. Thanks for your time and interest this morning.

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