Herc Holdings Inc (HRI) 2012 Q3 法說會逐字稿

Welcome to the Hertz Global Holdings' 2012 Third Quarter Conference Call. The Company has asked me to remind you that certain statements made on the call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of performances and by their nature are subject to inherent uncertainties. Actual results may differ materially.

Any forward-looking statement -- forward-looking information relayed on this call speaks only as of this date and the Company undertakes no obligation to update that information to reflect changed circumstances.

Additional information concerning these statements is contained in the Company's press release regarding its third-quarter results issued yesterday in the Risk Factors and Forward-Looking Statements section of the Company's 2012 Form 10-K and 2012 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 the replay starting today at 12:30 p.m. Eastern and running through November 15, 2012. I would now like to turn the conference over to our host, Leslie Hunziker. Please go ahead.

Good morning. You 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 our website. We believe that our profitability and performance is better demonstrated using these non-GAAP metrics.

Our call today focuses on Hertz Global Holdings, Incorporated, the publicly-traded company. Results for the Hertz Corporation differed only slightly as explained in our press release.

With regard to our IR calendar, we'll be presenting at the Barclays Auto Conference in New York City on November 13 and at the Bank of America Merrill Lynch Credit Conference on December 4 in Florida.

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 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.

Good morning, everyone, and thanks for joining us. I'm going to start on slide six. The third quarter had its share of headwinds worldwide and yet our team delivered strong profitable growth ahead of expectations. We generated 23.5% more adjusted earnings per share in the third quarter than a year ago.

You can see on slide seven that this resulted from increasing our topline by more than 6% on a constant currency basis, as equipment rental pricing and volume growth remained strong and we made progress on incremental revenue strategies in rental car. We're also driving cost down to our technology focus, restructurings in Europe, more strategic fleet buying and selling and Lean Six Sigma process improvement initiatives.

In the third quarter, employee productivity increased more than 170 basis points over last year, representing the 25th consecutive quarter of year-over-year improvement. In the recent quarter, this productivity was part of a 220 basis point decline in consolidated adjusted direct operating and SG&A expenses as a percent of sales. As I said, it was a pretty good performance in spite of the headwinds.

Let me explain using slide eight as a reference. Foreign currency movements in the third quarter had a negative impact of $73 million on consolidated revenues and $7 million on adjusted pre-tax profit. The soft macroeconomic environment in Europe has yet to recover and continues to underperform our expectations. Inbound rental transaction days are good, but pricing is competitive. And finally, a low number of insurance claims this year, industry-wide, compared with last year's significant number of catastrophic claims, had about a 6 percentage point negative effect on insurance replacement revenue growth in the quarter. Regardless, we still generated double-digit growth in this business as we continue to expand our share.

Despite all of this, company-wide adjusted pre-tax income increased 22.5% with margin expansion of 260 basis points and corporate EBITDA grew 15.5% over last year with margin up 250 basis points. On a consolidated basis, both adjusted pre-tax income and corporate EBITDA were the highest in the Company's history, surpassing the 2007 peak.

So, once again, we've proven our resiliency and fortitude in the face of tough market conditions. With a balance focused on diversified expansion and best-in-class efficiency, we've set robust goals for ourselves in our three -year plan on slide nine and our third quarter performance is just the latest evidence that our strategies are delivering.

Now, let's take a closer look at our segment results. In the US, our rental car operations broke several important segment performance records with the highest revenue, adjusted pre-tax income, and corporate EBITDA ever generated in any quarter in the company's history.

If you turn to slide 10, you'll note that the adjacent market growth, innovation and continuously improving customer service scores are generating strong rental demand. Transaction days were 6.1% higher in the latest quarter, driven primarily by a 41.8% increase in Advantage volume and a 6.3% increase in off airport rental demand.

We strategically managed our fleets tighter in the third quarter in the face of a negative pricing environment consciously restraining our growth. On the upside, our utilization level reached a historic high, which I'll talk about in a minute. Total US rental car revenue was up 3.5% year-over-year as volume growth was partially offset by pricing pressure.

On slide 11, you will see the pricing continues to be tough, primarily in the business segment as competition remains aggressive and in the deep value segment where small regional competitors are chasing share in the key Florida airport market. As we said before, this isn't surprising, pricing as reflected on slide 12 is moving directionally with fleet cost, reflecting historical trends and reinforcing the high correlation between these metrics.

Currently residual values remained strong by historical standards with no significant decline expected over the next several years, as you can see from the Moody's chart on slide 13. But it's Hertz execution of more strategic fleet management tactics driving the high-quality pre-tax profit improvement in the third quarter.

For example, on slide 14, our procurement methodology is paying dividends as we increase the number of low cost risk cars in a fleet, shift to a more economic varied mix of vehicles that reflect our diversified customer set and leverage a broader supply base. We're also rotating fleet more opportunistically based on make and model demand in the used car market.

And we're selling more vehicles to higher return sales channels. Additionally, fleet sharing between our premium and value brand is supporting greater utilization on airport via longer rental lengths in our growing insurance replacement and Advantage businesses are further contributing to the efficiency of the fleet.

Compared with the 2011's third quarter, fleet efficiency in the US was 130 basis points higher this year to 82.8%, setting another all-time record. We expect the utilization to continue to improve as we fine-tune our logistics processes through technology, benefit from improving operations and increase our share in the insurance replacement and value leisure segments.

In a nutshell, we're buying better, selling better, and utilizing our fleet better. Slide 15 graphs -- the year-over-year domestic monthly depreciation, which is down 11.3% to $225 per unit. The trend is improving as our percent of risk fleet increases and direct to consumer car sales contributes more to the total return, this is on slide 16. In addition to a 220 basis point improvement in US rental car depreciation expense as a percent of sales, the next biggest contribution of the operating profit expansion was a 180 basis point decline in direct operating and SG&A expenses as a percent of sales.

Total US rental car as adjusted pre-tax income was up about 25% in the quarter with margin expansion of 400 basis points.

On slide 17, let me take a quick minute to update you on the Advantage discount brand, which had another outstanding quarter with US revenues up 32.8% and up 25.9% on a same-store basis.

Advantage increased its US fleet efficiency 640 basis points with average rental lengths 4% greater than last year. In total it was a good quarter across all segments for US rental car.

Over the long term, in addition to increasing the profitability of this business, we're working to further improve our EVA metrics in part through franchising opportunities; this is on slide 18. In early September, we finalized our latest US installment to the strategy by entering into a franchise contract with Penske Automotive Group for our operations in Memphis, Tennessee. This agreement includes 15 airport and off-airport locations.

Penske is a premier brand and will be a strong partner in supporting our objective of further enhancing Hertz's position in the local neighborhood markets. We believe that franchising with owners of car dealerships will drive our off-airport strategy by leveraging their relationships with local businesses, community groups, and collision repair shops.

The commercial and operating synergies between Hertz rental car and Penske's car dealership businesses together with Penske's high quality of service, one is sure of the success of this partnership. Over time, we expect to see our franchising relationship with Penske grow into other select markets throughout the country.

We're also executing on our asset-light strategy in Europe. Late in the quarter, we franchised our rental car business in Switzerland, which is made up of 30 locations. This too is in keeping with our strategy to grow our business through carefully selected partnerships with leading local operators. Emil Frey our newest international franchise partner owns and operates car dealerships in addition to distribution, leasing and banking businesses. Rental car is a highly complementary addition to his growing enterprise. This agreement along with the Penske agreement contributed to nearly $135 million of annualized corporate revenue that we franchised over the last 18 months throughout the US, Europe and Australia.

Turning to corporate operations on slide 19, the European market continues to fall short of our expectations in terms of recovery timing. However, our rental car performance is relatively stable. Sequentially, the monthly year-over-year revenue comps are improving and on the cost side, we increased fleet efficiency slightly in the third quarter and reduced depreciation per vehicle by 2.1%. While Hertz European residual values are down about 5% versus last year, they're finally getting better in the UK. Going forward, we expect to see trough levels in more markets across the regions. On the buy side, we currently negotiate our fleet purchase for 2013 based on a declining new car sales, terms should be more favorable year-over-year. This is a predictable trend.

As you can see on slide 20, as residuals decline so too does new car pricing. The combination of a bottoming used car market and lower new car prices should drive significant improvement in depreciation next year. Another favorable trend in Europe is the profitable growth we were generating through our Advantage brand. In the third quarter, we increased Advantage by 62% excluding currency and opened one new location bringing the September 30 total to 35 facilities. Already in October, we've added two more sites to our growing network.

In the European leisure market, we believe we have the largest opportunity among competitors to expand our share as we further develop our dual brand offering. Our exclusive partnership with Ryanair is already driving differentiation to our value offering overseas. So we'll continue to promote our growing value brand and focus on keeping costs in check as we wait out the economic pressures overseas.

Moving to slide 21, our equipment rental business reported continued improvement across all metrics in the third quarter. In the US, revenue was up 18.6% with the greatest improvement coming from the west and central parts of the country. Overall, North America with 17.1% revenue improvement benefited from robust oil and gas activity, the Gulf Coast cleanup after Hurricane Isaac, strong growth in our Entertainment Services business, especially from Cinelease and the continuation of industrial projects.

In North America and the US, our equipment rental pricing was up 3.8% and 4.5% respectively in the quarter. Of total US equipment rental revenue, 52% came from national accounts in the third quarter where competitive pressure is increasing. While this is higher contribution more stable business, the contracts limit our ability to raise prices opportunistically. Regardless, we move national account pricing up 2.4% over the sequential second quarter. In terms of non-contract accounts, we secured 6.9% domestic price increases over the third quarter 2011 and a 2.2% increase over the sequential second quarter

In North America, [Dollar U] was up 160 basis points and [Time U] increased 310 basis points in the third quarter reflecting sequential year-over-year and monthly improvements. You probably saw that we made another acquisition in the third quarter. We acquired Pioneer Rental, which gives us an even larger footprint in the Oklahoma equipment rental market, access to a broader range of industrial business, particularly in the attractive oil and gas market and positions us for the expected construction rebound. This acquisition will be accretive this year.

Corporate EBITDA for the worldwide equipment rental rose 22.1% over the 2011 third quarter or 23.2% excluding the impact of currency as a result of higher revenue and a decline of 340 basis points in direct operating and SG&A expense as a percent of sales.

Finally, HERC is also participating in our franchise strategy. In September, we closed an agreement to open an equipment rental franchise with a partner in Chile, a roughly $165 million equipment rental market. This is our first penetration into the South American marketplace.

In a minute, I'll give you some thoughts on operating trends for the remainder 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 23 by reviewing our GAAP financial results. GAAP pretax income improved 24.8% to $368.9 million. Net income was up 17.5%, resulting in diluted earnings per share of $0.55, which is an $0.08 increase over the third quarter of 2011.

As Mark mentioned, our strong earnings performance continues to be driven by incremental topline growth and disciplined cost controls. If you move to the next slide, you'll see a $190 basis point improvement in direct operating expenses as a percent of revenue. The direct operating expenses benefited from favorable trends in fleet-related expenses, primarily vehicle damage in the US and Europe, as well as improved operating performance in equipment rental, Donlen's low-operating cost structure and the efficient execution of our cost-saving programs.

Year-to-date consolidated direct operating expense, as a percent of sales, is about 53%, which is in line with what we're expecting for the balance of the year.

Now, on slide 25, in the third quarter, we captured $145 million of incremental cost savings. Of the total, more than 50% of the savings came from direct operating expenses and 41% from depreciation, reflecting in part the fleet management initiatives Mark talked about. Our Lighthouse Lean Six Sigma program was put into practice at another 16 locations worldwide in the third quarter.

Currently, 124 of our global rental car and equipment rental locations, representing about 45% of total revenue, have gone through this efficiency program. Lighthouse drives improved customer service and employee productivity as well as increased revenue. For the full-year 2012, we now expect to achieve $375 million of cost savings.

Now, let's move to slide 26, where I'll fill in some of the details by business unit. Starting with fleet leases, Donlen celebrated its one-year anniversary with Hertz in September. The integration continues to go smoothly. Throughout the first year, we've realized synergies in both revenue and operating cost. The revenue synergies include the benefits of strategic cross-selling, new product offerings like value lease for rent-a-car and equipment leasing options for HERC as well as utilizing key Donlen technology solutions at HERC.

On the cost side, synergies include procurement-related savings, vehicle remarketing efficiencies and other operational improvements. For the third quarter, on a pro forma basis, Donlen revenue grew 17% to $121 million over the prior year. Depreciation remains consistent at around 80% of revenues. So as you can see, Donlen's low-operating cost structure continues to benefit our overall performance.

Since Mark already gave you the rental car details, let's skip ahead to equipment rental on slides 29 through 33. Our worldwide equipment rental business generated year-over-year revenue growth of 14.2% for the third quarter, excluding currency. The revenue increase reflects 3.3% higher pricing and 12.5% volume expansion. The strong revenue supported a 36.3% increase in adjusted pre-tax income.

HERC's 21% adjusted pre-tax margin improved 360 basis points over the prior year, reflecting fixed cost leverage of 310 basis point increase in North American time utilization and a 7% increase in employee productivity.

And on slide 31, you can see that we purchased roughly $215 million of new fleet in the third quarter. Our year-to-date total gross spend was about $630 million. On a net basis, the capital expenditure is approximately $500 million. We now expect gross fleet investments for the full year to be around $750 million.

We brought in extra fleet last quarter to support growth in the industrial and oil and gas markets during our seasonal peak as well as incremental projects resulting from Hurricane Isaac. This helped reduce the age of our fleet to an average 43 months, which is one month younger than the second quarter level and five months younger than last year's fleet age. Maintenance cost also improved due to the younger fleets.

And on slide 32, you can see that equipment residual values continued to be strong and are at pre-recession levels. The strong revenue growth and tight cost controls, including improved maintenance expense as we bring down the fleet age resulted in corporate EBITDA flow-through of 72.4% in the third quarter.

Foreign currency translation also had a 360 basis point positive impact on flow-through. Year-to-date our flow-through was about 55%, which is in line with our full-year expectations. In the fourth quarter, we expect EBITDA flow-through to continue to be strong, although it will be impacted by continuing investments in the sales force and expanding facility network.

Moving to slide 34, consolidated interest expense for the third quarter was $154.9 million, representing a $14.4 million decrease compared to the same period in 2011. Cash interest expense declined $13.9 million year-over-year due to lower rates associated with our refinancing efforts, partially offset by higher fleet levels and the addition of two months of Donlen debt.

Other income of $9.5 million is primarily a gain related to the franchising of our rental car operations in Switzerland. Skipping ahead to slide 36, cash flow from operations for the quarter was $972 million, an improvement of $10 million over the prior year. On a year-to-date basis, cash flow from operations was more than $2.1 billion, representing an improvement of $481 million over last year.

Corporate cash flow continues to improve up $131 million excluding acquisitions in the quarter and $501 million year-to-date also excluding acquisition. The year-to-date improvement reflects higher earnings before interest, depreciation, and amortization, improved working capital and lower corporate cash interest.

At September 30, we had almost $1.5 billion of corporate liquidity available as outlined on slide 37. Our net corporate debt leverage ratio was 2.7 times, an improvement of 0.6 times over the prior year. During the quarter, we extended the maturity on our European Securitization from July 2013 to July 2014. And we obtained commitments for $1.95 billion bridge loan in connection with the anticipated acquisition of Dollar Thrifty, this is on slide 38.

In October, we terminated the bridge loan commitments after successfully securing the acquisition financing necessary for the pending Dollar Thrifty transaction. We recently issued $1.2 billion of new senior notes, split between 700 million of eight-year notes at a yield of 5.875% and $500 million ten-year notes at a yield of 6.25%.

In addition, we amended our senior term facility and increased the loan by $750 million. Drawing upon these financings is subject to the acquisition being consummated as the bond proceeds are being held in escrow and the term loan has not been funded.

Also subsequent to quarter end, we refinanced three fleet facilities. First, we extended and slightly upsized our U.S. ABS Variable Funding Notes facility. The maturity on this $2.2 billion facility was extended to January 2014 and we lowered our borrowing spread by 10 basis points, while increasing our advance rate by approximately 5 points. Second, we extended the maturity of our $1 billion Donlen conduit until December 2013 and lowered our borrowing spread by 20 basis points, while maintaining the existing advance rate. Third, we extended our AUD 250 million ABS facility by two years maintaining the existing terms. And finally, we are well down the path of refinancing our [$195 million sterling UK] leasing facility that matures early next year.

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

Thanks, Elyse. Let's move to slide 40. From a macro standpoint, regulatory, legislative, and economic changes around the world present potentially greater headwinds as we close out the year. Specifically uncertainty regarding the U.S. political election, slower economic growth in Europe, China, and Brazil, and continued rental car pricing pressure warrant some caution in the fourth quarter.

In the U.S. rental car, October volume was up about 11% and advance reservations for November continue to look good. We're optimistic this trend will continue through year-end. But rental car pricing remains weak globally. Worldwide rental car total RPD is down 3.3% year-to-date, which is roughly the level we're now assuming for the fourth quarter. However, we have put in place a national price increase for Hertz rentals effective November 26 in an effort to capitalize on the strong demand. If successful, there could be some upside to the last month of the year.

For the fourth quarter, we've modified our currency rate expectation from $1.32 to $1.29 reflecting the pressure we've had from the weaker euro. On the upside, we believe equipment rental volume should continue to see double-digit growth in the fourth quarter in keeping with the year-to-date trend.

In terms of expenses, the worldwide rental car net depreciation per unit improvement this quarter should be slightly better than the 5.7% run rate through September 30. The net of all of this keeps us within our annual guidance ranges. So we're not making any changes for a full-year 2012 forecast on slide 41. We're just giving you some insight into some of the puts and takes.

Overall, we remain confident in our strategy to grow profitably by expanding our positions in the large and growing off-airport market, vehicle leasing and industrial markets and we'll continue to invest in new products and enhance technology to provide to smart mobility solutions to our customers. At the same time, we will drive margin expansion with reduced capital investments by growing our video kiosk program and increasing productivity to our continuous improvement initiatives, all with the objective of delivering stronger returns to the shareholders.

Separately, we are excited about our Hertz On Demand progress. Global membership is up over 170% to over 160,000 with revenues up globally over 70%, led by transaction growth in the US of 80%. Utilization in the US grew 11% on Hertz On Demand year-over-year and over 20% globally. Our global revenue per vehicle grew in the quarter by over 15% on a fleet increase of 36%. The fleet growth came mainly in New York with the fleet increasing over 80% year-over-year.

Finally, as it relates to Dollar Thrifty, on August 27, we announced our entry into a definitive merger agreement under which we plan to acquire Dollar Thrifty for $87.50 per share. This all-cash transaction reflects a corporate enterprise value of approximately $2.3 billion. We also announced that we have reached an agreement to sell our domestic Advantage business to Franchise Services of North America and Macquarie Capital in a transaction that's contingent upon our completion of the Dollar Thrifty acquisition.

Over the past two months, we have secured permanent financing for the proposed acquisition. We will only receive these funds in connection with the closing of the transaction and they remain available to us through February 26, 2013. I know everyone is wondering when we will get this deal done and you should know that we are trying our hardest to close this transaction as soon as possible. As we stated in last week's press release, the FTC requested more time to review the transaction. We agreed to give them until November 16. The expiration date of our tender offer is November 5. However, if the FTC has not acted by then, we will extend the tender offer.

Hertz and Dollar Thrifty will continue to work closely with the FTC to address matters raised by the commissioners and the staff and we are communicating with them on a daily basis. Rest assured that we are working very hard on this transaction. However, we can't give you any guarantees as to what actions the FTC may take in connection with proposed acquisition or when the FTC may act. As you know, due to our ongoing nature of discussions with the FTC, we are unable to answer any further questions regarding the transaction at this time.

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

(Operator Instructions) Rich Kwas, Wells Fargo Securities.

Hi, good morning everyone.

Good morning, Rich.

Mark, could you give us an update on the fleet sharing and the status of that. Utilization was up nicely this quarter and I know the theory or the approach to the strategy was to rotate more and more vehicles from on-airport to off-airport and vice versa, what percentage of your U.S. locations really are fully utilizing that now and where could that go over the next couple of years?

I think it's fair to say that they are all utilizing it right now, because off-airport is big enough to take each airport, major airport and we were able to work between the two businesses effectively. Advantage is also helping us in certain select airports probably six or seven airports where the Advantage volume is significant enough that we can drive utilization improvement with their longer length leisure rentals and their weekend rentals. So, both are helping and obviously big opportunity going forward, because our plan is to increase our footprint in the off-airport segment to at least 4,000. And probably, if you look at Advantage, if we assume that we kept Advantage, we'd certainly be at least 100 to 120 airports with Advantage pretty quickly whereas today in the U.S., we're only at approximately 50 airports, I think.

So, big upside we think on utilization continues based on our growth in those two segments.

Michael Millman, Milman Research Associates.

Thank you. Maybe you can give us some better insights into why fleets continue to seem to compress and volume seems to exceed fleets and yet the leisure price seems to continue to go down. And also did you say that your price increase was for December 26, I'm not sure I got the right date and maybe how much that was for?

The price increase was for November 26. And so, that will be the effective date. In terms of talking prospectively about pricing, you know, obviously, I cannot do that. I would tell you that, you know we have tight fleets, have continued to be tight through the third quarter for the most of third quarter. And heading in this quarter, we have obviously loosened the fleet, since you've heard that our transaction days were up over 11% in October.

So, the fleet has expanded with new car deliveries that we received. But we're continuing to run tight into this weaker pricing environment. Again, one can only speculate about what the market will do, will everyone have fleet -- tight fleets? We have no idea. We certainly cannot predict competitors' moves. So, at this point, we're hopeful that with the increased demand that we're seeing, it's pretty strong at least through the end of November, that's kind of our visibility window right now that with that, the fleets would naturally tighten. But we again cannot predict competitor movements right now.

Chris Agnew, MKM Partners.

Thanks very much. Good morning. I wonder if you could remind us of HERCs geographic exposure in the U.S. And then also if you could discuss the impact of Hurricane Sandy on equipment rental and the car rental business. Thanks.

Yeah, in terms of our exposure to revenues outside of the U.S., I think that's the question right, Chris? Is that what you're asking? Or our U.S. concentrations of the HERC.

Yes, HERC. So, we're basically North America market. Roughly around 90% of the business is in the --

90% of the HERC business is in North America. And so, I didn't -- I guess I didn't hear HERC, so, he didn't say HERC's, you said, HERC. Okay, okay, good, good and then the second question was the Hurricane Sandy. We believe that when we look at the equipment rental and the rent-a-car business and this is a very influx situation right now. But net-net, it should be neutral to positive.

So -- and we're still counting the impact of having all the flights canceled, which obviously hurts the business. But then in off-airport in the rent-a-car side, we do get longer rental lengths in times like these, and we get a lot of one-way rentals for people wanting to drive instead of fly because there is no flying. So those things kind of offset each other.

The impact of the off-airport piece is just hard to calibrate at this point. But we know it should be positive in November and December. In the equipment rental side, when you look at the generators and the power and the pump business, those are all positive in the region, right now. And we've been sending equipment in via trucks. We started that a week, over a week ago. So that's positive momentum, but at the same time we had to close our operations in a lot of cases in our sites that were in the Northeast.

So kind of offsetting factors, but kind of a net probably on the equipment rental side, probably a net positive. So, that's kind of best case I can give you right now, best estimate.

Next question, operator.

Fred Lowrance, Avondale Partners.

Thank you. And good morning, Mark and Elyse. A question about the other income that reflected the one-time gain for the Switzerland franchise agreement. You also had Penske during the quarter, but no gain was called out there. So I'm wondering if you could just walk us through what that gain is for? And then you call this a "one-time gain", but with franchising such -- going to be such a big part of your strategy going forward, can we expect recurring one-time gains?

Yeah. So, so this particular gain was primarily in Switzerland, and it primarily had to do with the CTA that was on the balance sheet. So, not something that we would anticipate. So it's really -- it had to do with the build up of the currency translation over the life of the period we've held Switzerland. So I would not anticipate seeing something like this going forward unless it's another major European franchise deal.

l think that it's clear to say though that we will have consistent -- every time we do one of these deals, there's typically some kind of a profit gain, but that's allocated usually over the life of the contract. And so you won't see like a big number, but you'll see numbers that are positive in terms of the pre-tax as you move forward every time we negotiate one of these transactions. In Europe, if we -- our plan is to continue to do franchising, and there are several countries that we're talking about right now and yes, you may see something positive on these and you may see something negative, we don't know until we get in to details of each particular deal. But -- so it's, I think, a net positive when we look at things as we go forward, but I wouldn't put anything in to your models around any assumptions around it because it's highly variable on a case-by-case basis.

Okay.

Adam Jonas, Morgan Stanley.

Hello, everyone. Last quarter, you gave a chart that showed sources of depreciation improvement that bridged, how much of it came, of the fleet cost improvement came from better selling, better buying, rotating, didn't see it this time, I was wondering if you could break, if you are in a position to break that down? And just to clarify an earlier question, did you say that the, both RAC and HERC independently would be neutral to positive as a result of Sandy. I just wanted to know if that question was for both combined or each individually? Thank you.

So the question on the Sandy -- both of them would be yes, you are right, I said for both of them, would be neutral to positive. So that was my comment on both of them. Of the two, HERC would likely be more positive than rent-a-car. As it comes to the chart, you're talking about depreciation charge, Leslie, you want to talk to that?

Yes, we had put that in during the times when we were trying to explain the difference between everything coming -- all the profit coming from residual values versus a lot of the work that HERC has done in changing strategies and implementing new ways to drive lower depreciation and a higher return from our initiatives. We hope that we've made our point through those slides. And so we've moved on to talk about other things and that's the reason that we didn't continue with those graphs.

Yes, the numbers didn't change. If anything, if we did those numbers, they'd probably improve, but...

The point was less about the numbers than where they came from and again, we hope that we've made our point and you've seen how much we've moved to the channels into especially consumer direct sales this quarter which was very significant. And again, it was more about making a point than specific numbers.

Next question?

Afua Ahwoi, Goldman Sachs.

Thank you. My question is on the volume update you gave through I think the end of November, the 11% on the rent-a-car side, how does that compare to your expectations before you sort of saw that come through? And if you could sort of maybe parse out through what the sources are -- where the improvement is coming from? Thank you.

I think that it's probably a little bit of upside versus where we thought the business would be. So I'd say the demand is a little stronger; however, the pricing is probably a little weaker. So some offsetting factors there. And in terms of where it's coming from, it's pretty universal across the board in the off-airport and airport. So we're seeing probably of the two, the airport demands a little stronger than we would have thought at this time of the year.

Rich Kwas, Wells Fargo.

Just a follow-up on HERC, in terms of the flow-through, so very strong this quarter, you get some FX benefit and you're saying you're spending some more dollars here in the fourth quarter, that's going to compress the flow-through. But if we think about it beyond this current quarter, how are you thinking about the flow-through because this is a really good quarter and your fleet is younger, pricing is pretty stable. Do you expect to be able to leverage that at a similar level potentially over the next 6 to 12 months?

I think, it's a fair assessment, Rich. I think that you'll see better levels of flow-through as the fleet continues to get younger, as you've noticed, we think we're probably one of the youngest fleets in the industry now. And it is getting younger and that's going to help us in terms of maintenance expense and getting higher flow-through due to, as a percent of sales, DOE and SG&A continuing to improve. So yes, we're hopeful the flow-through next year will certainly be better than this year as we look forward and we continue to build on the increased demand that we're seeing. Next question.

Thank you. And that's all the time we have for questions. Please continue.

Okay. Well, listen, everyone, thank you so much for listening in on the call. And we certainly look forward to talking about our fourth quarter results in the first of the year.

Thank you. And ladies and gentlemen, that does conclude your conference call for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.