Herc Holdings Inc (HRI) 2012 Q4 法說會逐字稿

Hello and welcome to the Hertz Global Holdings fourth quarter and 2012 earnings 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 fourth quarter results issued this morning, and is in the risk factors and forward-looking statements Section of the Company's 2011 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'd like to remind you that today's call is being recorded by the Company and is available for replay starting at 12.30 PM Eastern time and running through March 11, 2013. I'd now like to turn the conference 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 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 the IR calendar, we'll be presenting at the JPMorgan Leveraged Finance Conference in Miami tomorrow, the JPMorgan Gaming and Lodging Conference in Las Vegas on March 8, and the CSFB Global Services Conference in Phoenix on March 11. And then on April 2, we'll be hosting our 2013 Investor Day and Financial Modeling Workshop in New York City. The agenda and registration information will be sent out later this week.

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, Hertz International; and Lois Boyd, Executive Vice President and President of the 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. 2012 was a remarkable year for Hertz on many fronts. Through organic initiatives and acquisitions, all of the strategic pieces of our portfolio are now in place.

Let me start on slide 5. From a strategic perspective we have four sizable growth businesses that recorded another year of double-digit revenue improvement, exceeding their respective market's growth rates. Leisure Value Rental Car, on slide 6, is the fastest-growing segment of the US airport market. It's a segment where we've wanted to operate on a national level for some time. In 2012, after an unusually drawn out regulatory process, we finally were able to acquire Dollar Thrifty, which closed on November 19. As we work through the early stages of the integration, we found a well-run company with strong human resources and opportunities for additional synergies particularly in the areas of Fleet and IT, which I'll talk about in a minute.

These brands have a lot of potential for Hertz. Therefore we expect to continue to generate double-digit growth in the value segment as we did with our recently divested Advantage brand. Despite little to no investment in 2012, Advantage US revenues were up more than 25% and its adjusted pretax income nearly doubled. The scale and brand cachet of Dollar Thrifty, along with its higher price point and national scope, upgrade our position in the airport value segment while presenting new opportunities off airport and overseas.

Moving to the next slide. Another recent acquisition has already generating double-digit growth. We fully integrated Donlen leasing business in 2012, cross training our respective sales forces, launching five new products and services, and securing run rate revenue of about $45 million from new accounts. As a result Donlen's total revenue increased 16% to $471 million last year, exceeding the commercial leasing markets' 4% estimate growth rate.

Off Airport Rental Car, on slide 8, is another significant opportunity for us. It's an $11 billion market, growing anywhere from 5% to 10% annually depending on the segment. We added 348 net new Off Airport Rental Car locations last year for a total of 2,523, supporting the brand and broad demographic coverage of our national insurance customers and expanding our accessibility to neighborhood renters. Insurance replacement in the US revenues grew 14.3% in 2012.

Moving to slide 9. Our Equipment Rental revenue out paced the industrial recovery and also benefited from our tuck-in acquisition strategy. Last year we benefited from the acquisition of three rental companies that extended our reach into new geographic and end-user markets like oil and gas, entertainment services, and pump and power. US Equipment Rental revenue finished the year up roughly 20% on double-digit volume improvements and sequential year over year quarterly price increases. In addition to revenue initiatives, strategic cost initiatives are driving performance.

If you turn to slide 10, you'll see that 154 of our global Rental Car and Equipment Rental locations had gone through our Lean/Six Sigma efficiency programs as of December 31, 2012. This represents about 42% of total revenue. We are building a culture of continuous improvement throughout the organization. In addition to the process efficiencies, we're lowering our fleet cost as you can see on slide 11.

In the US, we sold 17% more used cars in 2012 as a result of the higher risk vehicle mix, a shift to lower-cost vehicles, and the expansion of our used car sales force. Of those sales, 53% were through higher return dealer and consumer-direct channels versus 44% in 2011. These actions supported an 11.8% decline in US monthly depreciation per vehicle per 2012. In total we generated $483 million of cost savings in 2012 through process improvements and consolidated revenue per employee increased 1.8% over 2011.

Moving to slide 12. Our sources of high margin growth are hitting on all cylinders and as a result we're driving earnings like never before. In fact, in 2012 we had our best year ever across all profit measures. For the consolidated company, adjusted pretax income was up 32.5% on an 8.7% revenue gain driving 180 basis point expansion in adjusted pretax margin. Corporate EBITDA increased approximately 18% driving a 140 basis point improvement in margin. Adjusted earnings per share was up $1.33, up 37% over 2011.

Benchmarks were also set in US Rental Car last year. This is on slide 13. Full-year record revenue of $4.9 billion was up 9.6% over '11, driven by strong Off Airport revenue, the double-digit increase in Advantage revenue and a 1.5 month of incremental Dollar Thrifty. Total transaction days reached an all-time high in 2012, increasing 12.6%. The volume was partially offset by a 3.1% decline in rental revenue per day for all US Central Car. But, the trends are improving.

For example on slide 15, in December our Hertz brand rental revenue per day for both commercial and leisure airport rentals was up 1.6%. The positive pricing continued with 6% growth in January. You can see on this slide that Dollar Thrifty also saw positive year over year pricing in recent months. The mix of revenue favorably supported a 2.2% increase in rental length last year. This in part helped drive fleet efficiency up 40 basis points year over year to 80.3% the highest annual rate since becoming a publicly-traded company.

You can see that on slide 16, in the US Rental Car monthly depreciation, it reached a record low of $225 per vehicle in 2012, as a result of more diversified fleet, our ability to share fleet between brands and selling more used cars in the higher return channels. The higher revenue and lower operating costs led to a record $876 million of adjusted pretax income and an all-time high 17.9% margin for US Rental Car.

In Europe, it was a tough year all around, tougher than we expected. However, on slide 17, you can see that European Rental Car represents only about 16% of total Company revenue and just about 5% of total Company adjusted pretax income. So, its impact isn't as significant today. While there was no good news in the majority of the European economies, there were several positive developments at Hertz that helped us in 2012 and should set the stage for growth in 2013. We opened 14 Advantage locations bringing the total to 37 sites for our value brand. Advantage revenue in Europe increased 86% year over year, excluding foreign exchange.

Going forward, our plan will be to rebrand the existing Advantage locations. Also, following the US lead, we launched a dealer-direct and retail-sales platform online in six countries. We are already starting to see a benefit from these higher contribution channels. Most significant was the franchising of our operation in Switzerland to the Emil Frey Group at the end of September last year. In order to get an apples-to-apples comparison of the operating metrics, we've taken out the Switzerland results for the 2011 fourth quarter. With that in mind, adjusted European Rental Car revenue for 2012 fell 4.3%, excluding the impact of foreign exchange, with transaction days down 2.7% and pricing down 2.9%. Excluding Advantage and the currency impact, pricing was down 1.1%.

Despite low residual values across much of the continent, we believe our fleets are fully aligned with demand. Industry fleets, however, are still relatively loose causing continued pricing pressure. Yet, we expect that easier year over year comps, incremental revenue from Dollar Thrifty, lower priced new fleet, and continued process improvements will position us for earnings growth in 2013 for Europe.

On the next slide, our North American Equipment Rental business, which represents 92% of Worldwide Equipment Rental revenue, delivered strong results in 2012. It was especially encouraging to have closed out the year with a 25% increase in rental revenue in the fourth quarter. The full year was equally impressive in North America. Equipment Rental revenue increased 19% over the prior year. Pricing was up 4% over 2011.

Volume increased 13.5%. Fleet age was down 11% to about 42 months. Time ute improved by 370 basis points, even with 11% more fleet in 2012. Finally, dollar utilization was up 260 basis points. It was quite a year considering that nonresidential construction hasn't yet recovered from the recession.

On the domestic front US revenues grew 20.4% year over year. Pricing was up 5.1% in '12, tempered in part by national accounts. US non contract pricing was up 7.3%, with national account pricing up 3.2% for the year. On a worldwide basis, Equipment Rental Corporate EBITDA increased 20% with margin up 190 basis points over 2011.

Now let's talk about cash flow because it's become a key focus for the Company now that our portfolio of products and services is complete and major acquisitions are behind us. On slide 19, in 2012 we delivered Corporate cash flow before acquisitions of $226 million, about $300 million greater than 2011, higher earnings before depreciation. Proceeds from franchising Switzerland more than offset fleet growth expenditures. We spent $2.4 billion on acquisitions and acquisition-related costs last year, including Dollar Thrifty, which is the largest acquisition in the Company's history. We also invested in new fleet for both Equipment and Car Rental last year. We are more prudent with demand outpacing fleet expansion in both businesses.

In 2013 we'll reduce our gross investment in Equipment Rental fleet by about 20% compared with 2012. The pace of recovery in Equipment Rental is steady and we expect another double-digit volume increase this year. In Rental Car, our new fleet cost in both the US and Europe are expected to be down slightly versus last year. Organic growth and lower fleet investments will create significantly higher Corporate cash flow trends going forward.

With that, let me turn it over to Elyse so she can give you some details around the fourth quarter and other capital management initiatives.

Thanks, Mark. Good morning, everyone. Let me begin on slide 21 by reviewing our fourth quarter financial results. On a consolidated basis we achieved a record fourth quarter revenue of $2.3 billion, an improvement of 15.1% over the prior year. This record stands even if we exclude the 45 days of revenue earned from the November acquisition of Dollar Thrifty.

On a GAAP basis, we recorded a pretax loss of $40.3 million in the fourth quarter, which includes $144 million of acquisition costs related to the Dollar Thrifty acquisition and sale of Advantage. These costs represent $0.24 per share on a GAAP basis. If you back out those costs, instead of a $0.09 loss it would be $0.15 of earnings. Adjusting for these costs and other non-cash and one-time items, we delivered record adjusted pretax income of $213.5 million, an increase of 29.3% over the similar 2011 quarter. In addition to the benefit from revenue growth, we improved depreciation expense as a percent of revenue by 230 basis points as monthly depreciation per unit for Worldwide RAC was 14.5% lower than the fourth quarter of 2011. Direct operating expense increased slightly as a percent of revenue reflecting the addition of Dollar Thrifty. We also had a difficult comp in the 2012 fourth quarter due to a large property sale gain in the prior year.

Adjusted net income was up 35.5%, resulting in adjusted earnings per share of $0.33 a share, an increase of $0.09 or 37.5% over the 2011 fourth quarter. The 2012 three-month earnings were calculated using 421 million shares. In instances where we have a GAAP net loss we are required to use a basic share count. The opposite is true when we record GAAP net income. So for example, the full-year share count is fully diluted for all four quarters even though the first and fourth quarters reflected a GAAP loss.

Now let's move to slide 22 where I'll briefly review the fourth quarter results for the business units. Worldwide rent a car revenues increased $1.9 billion, up 14% in the quarter, which included Donlen revenues of $124 million. In US rent a car, total revenue in the fourth quarter increased 24.5% reflecting only 1.5 months of Dollar Thrifty revenue and favorable volume offset by decreased pricing. Rental revenue per day was down 1.7% year over year and sequentially better than the third quarter of 2012. The good news is that December delivered strong revenue per day, as Mark mentioned. Volume increased 25.4% reflecting double-digit increases in both Airport and Off Airport businesses.

Rental length expanded for each of our businesses in US rent a car culminating in the total increase of 4.1%. Longer length rentals drive utilization up and operating costs lower. Revenue for Hertz On-Demand, our hourly car rental business, grew 30% globally with transactions increasing 33% over the prior year. Membership also grew in the fourth quarter increasing 40% over 2011. These revenue and efficiency drivers led to an adjusted pretax income increase of 39.2% over the prior-year fourth quarter and a margin improvement of 180 basis points. An important contributor to the strong earnings results was a 20% decline in the monthly depreciation per vehicle achieved through all the strategic initiatives that Mark outlined. The fourth quarter marks the 14th consecutive quarter of year over year reduced depreciation per unit expense in the US.

Moving to slide 25. Europe's Rental Car revenue for the fourth quarter declined 9.8%, or 6.6% excluding the impact of foreign exchange. Franchising our Swiss operations accounted for about 3 points of the year over year decline. But on a positive note in the challenging European economic environment, revenue for our leisure value brand grew about 66% in the fourth quarter excluding FX. Pricing and volume were down for the fourth quarter over the prior year. Through fleet strategies we improved efficiencies 60 basis points and reduced monthly depreciation per vehicle by 1%.

Now let's discuss the Equipment Rental results on slides 26 through 29. Our North American business performed well in the fourth quarter delivering strong revenue growth of 25% over the prior year with pricing and volume increases of 4.1% and 15.9% respectively. Our Worldwide Equipment Rental revenue grew more than 21% in the fourth quarter. The increase reflects 3.8% higher pricing and 14.6% volume expansion. This solid performance in North America drove a 25.7% improvement in Worldwide Equipment Rental's Corporate EBITDA and 160 basis point margin improvement. Adjusted pretax income in the fourth quarter was up roughly 33%, while the margin increased 190 basis points. Margin improvements reflect revenue growth, improved dollar utilization of 350 basis points and reduced maintenance associated with the younger fleet.

Our full-year growth spend was about $773 million of which roughly $120 million was spent in the fourth quarter. On a net basis the capital expenditure was approximately $588 million. For full-year 2013 we expect gross fleet investments to be between $600 million and $700 million. At year end, our fleet age averaged 43 months compared with 48 months at the end of 2011. Younger fleet drives demand at improved pricing levels and reduces maintenance costs. Corporate EBITDA flow-through was about 54% for the quarter. For 2013 we're expecting flow-through in the range of 55% to 60%.

Moving to slide 30. The fourth-quarter consolidated cash interest expense was relatively flat versus the fourth quarter of '11 despite incurring $12 million of post-acquisition interest on $1.9 billion of Dollar Thrifty acquisition financing. On a full-year basis cash interest was $20 million below 2011 despite higher fleet levels and the additional acquisition financing. This reflects the continued reduction in rates as we refinance our debt. At year-end 2012, our weighted average interest rate was about 4% down 65 basis points from year-end 2011. Other expense of $35.5 million for the full year primarily was the result of a loss on the sale of Advantage and expenses associated with the Dollar Thrifty divestitures.

Moving to slide 31. Due to the higher concentration of US profits as a result of the Dollar Thrifty acquisition, our normalized tax rate will increase to 35% from 34% in 2013. Cash flow from operations in the fourth quarter was $799 million up $133 million when adjusted for the Dollar Thrifty acquisition. Corporate cash flow was negative $1.6 billion in the quarter reflecting the completion of the acquisition on November 19. The total cash outlay for Dollar Thrifty was $2.175 billion as outlined on slide 32. Excluding acquisitions, Corporate cash flow for the quarter was positive $526 million. To fund the transaction we raised $1.95 billion through permanent financing and the remainder was funded with cash from Dollar Thrifty and our liquidity. We expect the acquisition to be credit neutral in one year.

We continue to maintain a healthy liquidity cushion as shown on slide 33. At December 31, we had almost $1.7 billion of Corporate liquidity available. Our net Corporate debt to Corporate EBITDA ratio was 3.6 times at year end. However, if we include a full year of EBITDA for Dollar Thrifty, the pro forma ratio would be approximately 3.1 times. If we also include the full run rate of synergies, the debt ratio drops to 2.7 times.

The fourth quarter and first quarter debt related activity is summarized on slide 34. You can see we are continuing to reduce our borrowing costs and improve financing terms. We have a strong balance sheet with no meaningful near-term maturities and we'll continue to pursue opportunities that improve our debt profile as you can see on slide 35. With that I'll turn it back to Mark.

Thanks, Elyse. As you can see we made substantial progress on the actions we outlined last year to further penetrate Equipment Rental end-markets, generate revenue synergies with Donlen, expand our insurance replacement network and add a national value brand in Rental Car. We've never been in a better position strategically in the Rental Car business. We've long enjoyed the number one premium preferred brand. And now we've added two established, value brands, which we can grow across Europe and through our travel partnerships and use to accelerate our Off Airport business. And in the Off Airport business will also be incorporating and rolling out new technologies that enhance our car sharing model this year.

Company wide, we'll drive growth and further improve profitability by continuing to make smart investments. While very disciplined in our approach to capital spending in 2013, we expect to invest in new disruptive technologies for Rental Car that are in line with our asset light strategy and will ultimately reduce costs and drive revenue through greater customer satisfaction. Additional investment will be made to grow our Equipment Rental fleet, sales force and location network as the cycle continues to advance. Of course, in 2013 we'll also be spending on the integration of Dollar Thrifty, which we now think can deliver an estimated $300 million in cost synergies and another $300 million of revenue synergies. The additional $100 million of cost synergies will take longer to realize than two years because a good portion of them relate to technology opportunities that have a longer implementation period. Timing of the revenue synergies are tougher to forecast because we're only just beginning to test the waters.

Now, let me walk you through the rest of the guidance and talk about some of our other assumptions. I'm starting on slide 38. With two months behind, us we estimate consolidated revenues will increase 20% to 21% year over year to between $10.85 billion and $10.95 billion. This includes a shift of about $20 million of Corporate revenues to franchisees. Our franchise strategy is has been modified, as many of the low performing Corporate locations that had been targeted for franchisees are now in line with or exceeding the division's pretax margin. Therefore, franchising becomes more about filling whitespace, expanding our brand and leveraging asset-like growth then about selling Corporate locations. The revenue forecast also assumes total revenue per day for Worldwide Rental Car to be essentially flat this year.

We expect continued pricing pressure on contracted rates year over year. However, we made a strategic decision to minimize our participation with less profitable commercial accounts. In January commercial revenue per day was actually positive compared with the prior year. While contract rates should continue to improve from 2012 levels, we still expect pricing in this segment to be slightly down overall this year. Volume for Worldwide Rental Car estimate to be up 21% to 23%. For Worldwide Equipment Rental, we're modeling a price improvement of 2% to 3% on 10% to 12% higher volume.

In terms of adjusted pretax income, we expect growth of between 40% and 48% and Corporate EBITDA improvement of 35% to 38% versus last year. You can see on slides 39 and 40 that among other things these profit estimates assume investments to modernize facilities, increase the number of video kiosks globally and additional spending on in-car technologies. $80 million to $100 million of cost synergies from the Dollar Thrifty acquisition are also included. We've further improved our 2013 estimate for Rental Car monthly depreciation per unit.

In the US, monthly depreciation per unit is expected to be down 4% to 5% this year. The improvement will be significantly weighted towards the first quarter, which has the easiest comp. The second and third quarters will be more difficult as comps as we make adjustments to depreciation each of those quarters last year. The 2013 depreciation per unit assumes 46% more used cars sold versus 2012, a 110 basis point increase in cars sold through retail and dealer direct channels and lower new car prices in the US. In Europe we expect monthly depreciation per unit to decline about 2% on an easier comp and lower new fleet prices. We expect Worldwide Rental Car depreciation savings to continue into 2014.

Corporate free cash flow, on slide 41, is expected to come in between $500 million and $600 million in 2013. This is higher than previously projected but the key areas of investments are the same. Spending for both Rental Car and Equipment Fleet is estimated to be lower this year than in 2012. As I mentioned, we'll be stepping up our non-fleet investments this year to upgrade and modernize rental facilities at new Equipment Rental locations and continue to advance our technology initiatives for greater fleet and operating efficiencies and to capitalize on customer relationship management.

Finally on slide 42, we show a table that highlights the performance of key metrics over a five-year period. This provides you with a quick snapshot of the growth and value we've delivered since the downturn. It's quite a turnaround. We have solidly beaten every pre-recession measurement and are poised to further accelerate returns. From my perspective, this Company, with the synergies from Dollar Thrifty and all the other key growth initiatives, has three years of solid double-digit earnings growth ahead of us. We'll look forward to detailing our long-term plan with you at the upcoming investor day in April. With that let's open it up to Q&A. Operator?

Thank you.

(Operator Instructions)

Brian Johnson, Barclays.

Good morning. Just want to drill down on pricing, a housekeeping question and then a market temperature question. On the housekeeping, when you say Worldwide pricing flat year over year, is that to the as reported Hertz Corporation or RAC, or is that to as if you had owned DTG and divested Advantage?

It's just everything. Yes. I mean, everything, Brian. So, it relates to all the above. And it's saying that in the Europe and -- it's as reported, I guess that be the best way to define it. Anyone else in the room want to --?

It's RPD year over year.

Yes.

Okay.

Michael Millman, Millman Research.

Regarding prices, well, you said January was up 6% for Hertz. And for the year, you kind of talking about flat, so could you talk about whether you think that January, basically easy comp and not continuing? Or are you being super conservative? Or is there something else that we should be aware of?

Well, I guess in terms of our assumptions, we've built that into our assumptions and then you can judge what you want. Obviously January was a high watermark, but what you need to understand about January is that we finished the year with longer length rentals and a strong holiday season. The actual revenue per day actually flowed into January as well. So, it kind of inflates January a little bit more than what January probably actually was and that's true of all rental car companies. While January looked really great, we would expect some of that was artificially inflated. February, we believe is strong as well. Where this thing goes? No one knows.

We're always try to be conservative on pricing, because what we don't want to do is mislead investors. The assumptions are what they are and it's based on what we see going forward. Hopefully, environment is more positive than what we see. At this point, it's a positive environment. We're hopeful, as I've said in the past, usually when fleet costs go up, pricing goes up with it. Usually when residuals go down, pricing goes up. We're hopeful the overall environment continues to be positive.

Christopher Agnew, MKM partners.

Good to see you emphasizing free cash flow story. I just wanted to dig into your '13 guidance. You talk about raising non-fleet investments. Can you quantify, how much above what would maybe be a normalized pace are those non-fleet investments in '13? And then very quickly, any update on your goal to become investment grade? Thank you.

I think we're spending $200 million more year over year than we normally would spend. Then in terms of investment grade, I don't know, we feel like we still have the two to three year trajectory where we'll be investment-grade statistic wise, maybe faster than that depending on the free cash flow. We think the Company -- if you were to get rid of some of the investments that we're going to be making this year and next year, absent that, we're probably $800 billion a year cash flow, free cash flow company. We expect to get at that level in the near-term future, near term being the next two to three years. Feel pretty excited about cash flow generation of the Company and while we make these strategic investments, a lot of them are asset light and actually get us more profit and revenue than the existing business model does. So, they're investments but they'll pay back in a higher ROI way than some of our traditional capital investments do.

Rich Kwas, Wells Fargo.

I'll sneak two in. Mark, what's the -- first of all what's the US GDP assumption for the year? Second question is, on '14, CapEx I know you're not going to give guidance for '14, but just so we think about HERC gross CapEx that's going to be down in '13 year over year. If there's a non res pick up later this year, do you feel you have to spend a significant amount more money, significant more money, to get the fleet right sized for a resumption of growth in the non res sector?

Okay. So you did US GDP growth assumption was about 1.5%, for this year. In terms of the HERC fleet growth, I'm trying to get the exact number here for you, but --

For '14? I don't have a number for '14 but -- what we're going to do is work both on really watching the market and also on utilization, our utilization metrics to really improve performance around fleet.

Yes. In terms of fleet growth, we're really trying to drive more productivity on the assets. Rather than grow -- actually just, as you will, kind of build a field of dreams, hope -- throw fleet at it and hope it comes. It really depends on the non res construction growth. If non res comes back hard, obviously we're going to fund that growth, but at this point, pretty modest fleet growth this year. In fact, actually less than last year and we'll see what '14 holds depending on the non res opportunity.

Afua Ahwoi, Goldman Sachs.

Just switching targets a little bit. On the Dollar Thrifty $300 million revenue synergy, I understand you're still early in the process, but could you maybe help us identify from all the buckets you've found to get you to that $300 million number? Thank you.

Yes. Some of the big buckets would be, obviously, the travel partnerships that we have. They all want Dollar Thrifty, so I have -- we have a high share of airline partners, a high share of hotel partners, a high share of AAA. All those partners will get Dollar Thrifty in one way or another. So, those partnerships represent 30% of our revenues today at Hertz. Now, we don't expect them necessarily to represent 30% of Dollar Thrifty', but again that will be an area of synergies. Secondary of synergies will be the number of locations that we have today. Some of them will get Dollar Thrifty as a brand. Today we have 3,000 locations in the US, in Europe, probably 1,000 to 1,200. We're not going to put them in every location, but a lot of our Off Airport locations will have it. Then there's the brand that we had, which was Advantage, and that brand in Europe is certainly being replaced by another brand. It's going to be Dollar Thrifty in some cases. We expand in Europe significantly this year with the Dollar Thrifty brand.

Then, I guess, the only other thing, in terms of the revenue synergies that we're adding that I think is noteworthy, is the fact that we'll be giving some technology to Dollar Thrifty, which the fleet policies we have with them and the way we work Hertz and the technology solution between two companies is going to drive revenue growth. We are already seeing Dollar Thrifty grow significantly off of their base rate the last couple years. Their growth today is probably triple what the growth was in the fourth quarter. They're having very strong growth rates and our fleet sharing is helping that. The fact that we're over fleeted on the weekends and that they are -- that's their peak. That's really driving revenue growth. That's going to accelerate, we think, this year as we come up with our interim IT solutions. So that's going to be a big area of just plain organic growth for Dollar Thrifty through the fleet sharing that we're doing between the two companies and they have counter cyclical fleet demand levels.

Fred Lowrance, Avondale Partners.

Good morning, everybody. Two-part question, here. Mark, you already mentioned your fleet costs are going to be down in 2013, but then you've also done a good job in recent quarters. Here on this call you're noting that generally when fleet costs are up pricing is up and vice versa. So with the backdrop of fleet cost being down this year, one, how much of that year over year decline is just a mix shift on Dollar Thrifty? If you could quantify that? And then secondly, when you've got at least one of your peers greatly incented to push pricing higher this year because of a huge fleet cost headwind, how are you thinking about where you are on the market share basis at this point? And how that might impact your strategy on pricing? Thanks.

Yes. I guess on fleet costs, one of the things that I think the -- just to make sure we get our point of view on fleet costs for the industry this year. We decided to try to look at the Manheim Index, MMR, which was down in December and in January. Down -- when I say down it was down sequentially from 124 in December in '12 to -- down to 123.4 in January 2013. It was also down year over year. Hertz residuals, however, on a year over year basis are up 300 basis points in January. That's our residuals on the cars we sell. Okay? So we went from 71.2% to 74.4% unadjusted.

I guess the only point I'm making on this is that while the Manheim Index, and while people are forecasting this headwind, we are not experiencing it. It's due to the shift in channels, where we're selling the cars and how we're selling them, and that's improving our fleet costs. It's just lowering depreciation per vehicle. Yes, you're right, Dollar Thrifty, their fleet costs, their average rate of depreciation rate per vehicle was lower than ours. That's helpful to us as well. But the other piece is, our cap costs, which is what we buy our cars that in the US, are lower year over year. They're lower by over 1%. We bought our cars for this year. We bought them right and bought them from a wide variety of OEMs, so our overall fleet costs are down there.

That's why we were bold enough to say that 2014 is another year that we'll see fleet costs being flat to down again. We're not -- this is not like a one-time thing for us. Our channel shifting is helping a lot. So, feel pretty good that we're in good shape on fleet costs for the foreseeable future and that we're bucking maybe some industry information that you see from Manheim.

Second part of your question, about pricing, we certainly are willing to give up customers that on a commercial level are not profitable or barely profitable. We are trying to really focus on profitable customer segments and profitable customers. That's where we're trying to grow our share. There's a lot of energy around that in our organization. We're actually willing to give up share and retention in some cases. We're not really looking to -- in terms of pricing, just be there where the market is. Take price wherever we can and chase profitable segments going forward. We were chasing profitable segments last year, but we'll probably raise the bar a little bit and our hurdle rate a little bit from where we were in the past.

Adam Jonas, Morgan Stanley.

Hi, thanks. Good morning, everyone. I want to go back to fleet costs again. You had previously guided to depreciation flat to be down 1% or 2% as recently as the Detroit Show and now expecting down 4% to 5%. Just wondering, specifically, what drove that change over the course of the last month? And I believe in your prepared comments you said that you're, within the assumptions of fleet costs, that new prices meaning your acquisition costs for fleet should be down. Could you be a little bit more specific on what your assumption is of the underlying used market and ex the DTG mix impact, would you still be able to target lower fleet costs year on year? Thanks.

Absolutely. Yes, we would be able to target lower fleet costs year over year ex DTG. No question about it. In terms of specificity, there's about 15 moving pieces. I tried to give you that in just the last minute or so before your question. Hopefully, that provided enough color for you to understand it.

I gave you a 300 basis points improvement in our year over year residuals, which is not being experienced, my guess is, from competition or other people. Our strategy is what's driving it. The depreciation lower-cost depreciation of Dollar Thrifty vehicles drove it as well, but probably equal parts. I don't want to give you an exact number, because like I said, there are a lot of moving pieces. Feel really good that regardless of whatever happens in the next 12 months, the next 18 months are going to be very good for us. Hopefully that gives you about as much information as we have right now that we're disclosing on this.

Jordan Hymowitz, Philadelphia Financials.

Most of my questions were answered. One quick question is, is there a limit on debt to EBITDA that you guys have?

No.

Okay. Thank you.

No limitation.

Thank you. With that, that's all the time we have for questions today.

All right. Listen, thank you all for listening in. And, appreciate the support that we've had from investors. Our plan is again to announce an investor day here this week and fill you in in a little bit more -- in a lot more detail, actually, when we have our Investor Day in April. Thanks, everyone.

Thank you. Once again, today's conference call is available for replay beginning at 12.30 PM Eastern time and running through March 11 at midnight. You may access the replay system by dialing 800-475-6701 or internationally, 320-365-3844 and enter the access code of 280527. Again the numbers are 800-475-6701 or 320-365-3844 with the common access code of 280527. That does conclude our conference for today. We thank you for your participation. You may now disconnect.