Herc Holdings Inc (HRI) 2013 Q1 法說會逐字稿

Welcome to Hertz Global Holdings first quarter 2013 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 speak only as of this date and the Company undertakes no obligation to update that information to reflect changed circumstances.

Additional information containing these statements is contained in the Company's press release regarding its first quarter results, issued this morning and in the risk factors and forward-looking statement section of the Company's 2012 form 10-K. 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 it is also being made available for replay starting today at 12.30 PM Eastern Time and running through May 14, 2013. I would like to turn the call over to our host, Leslie Hunziker.

Good morning. You should all have our press release and associated financial information. We've also provided slides to accompany our conference call that can be accessed on our website at www.Hertz.com/investorrelations. Today we'll use certain non-GAAP financial measures, all 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 held 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 Wells Fargo Industrial Conference on May 8 in New York City and the Barclays' High Yield Conference in Chicago on May 21. 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, Group President of Rent-a-Car the Americas; Michel Taride, Executive Vice President and President of Hertz International; and Lois Boyd, Group President of Hertz Equipment Rental Corporation. They'll all be on hand for the Q and A session. Now I'll turn the call over to Mark.

Good morning, everyone, and thanks for joining us. Let's start on slide 5. You can see that 2013 is off to a strong start. Consolidated revenue was up 24.3% worldwide in the first quarter. Clearly the 38% growth in US Rent-a-Car was a big driver to top line increase, primarily to the incremental Dollar Thrifty volume, but we're really operating on all cylinders. US rental car off-airport revenue was 14% higher in the first quarter. Our North American equipment rental business was up 20% when you exclude the effects of currency. And Donlen leasing and fleet management revenue increased 16% to $128 million.

Corporate EBITDA was up 74.2% year-over-year, representing a 440 basis point margin improvement. Profits were driven by strong revenue growth, a 200 basis point decline in total consolidated fleet depreciation expense as a percent of sales -- this is on slide 6 -- and a 180 basis point decline in direct operating and SG&A expenses as a percent of sales, which resulted in 5.4% higher revenue for employee.

On the next slide adjusted pre-tax income was $144.5 million, significantly eclipsing the $29 million generated last year and adjusted pre-tax margin was 4 times higher year-over-year. We reported adjusted earnings per share of $0.21 in the latest period compared with a $0.05 profit last year. Strong contributions in North America from both rental car and equipment rental more than offset soft European results.

Let's review some of the highlights by business unit. In the US, on slide 8, rental car revenue was up 38.1%, supported in part by the incremental volume from Dollar Thrifty which we acquired in November of 2012, higher pricing across the board and robust off air-port volumes. Total US rental car volume increased nearly 32% driven by leisure, airport, inbound, insurance replacement and 51 net new locations off-airport. This higher demand more than offset some buy-in weaknesses on-airport related to weather disruptions, to airline traffic, and because there was one less day in the quarter compared with 2012's leap year.

On slide 10, total revenue per day was up about 5% which is the new and only way we will measure pricing going forward. In this new way, we are matching Dollar Thrifty's calculation, being more transparent, and making it easier for you to compare to our other public competitor. In the new total RPD, we included all ancillary revenue like NeverLost and fuel options. Many people have asked us for the old methodology of rental rate revenue per day which included only a few ancillary items. We don't feel this is a comprehensive view of pricing, however today, using the old methodology, I will tell you that US -- the total US rental revenue per day was up 3.4% year-over-year.

The RPD improvement came from three areas primarily. First is the holiday effect, this year, the first quarter benefited from peak holiday rates in both January and March. At Christmas time, rental demand is typically evenly split between the week before and the week after Christmas, but in 2012, because of where Christmas fell during the week, we experienced higher demand the week after Christmas, and those rentals weren't returned until January. So January benefited from stronger volumes at higher rates.

As you know, Easter fell in March this year verses April last year, which also pulled spring break ahead in most regions. So March got incremental price and volume benefits this year as well. The second, is the rise in fleet costs. Historically as fleet costs rise, so does pricing. The correlation between the two is a 0.72 R-squared. The third driver of RPD was ancillary revenue, where we have been increasing focus on counter sales.

US rental car fleet efficiency on slide 11 was down about 1 percentage point from last year. A 4.4% longer average rental length, driven by more leisure and insurance replacement transactions was offset by some fleet inefficiency as we were still transferring the Advantage fleet in the quarter after having already taking on the Dollar Thrifty fleet. So in effect we were operating three different fleets last quarter. As we continue to work through the synergies we'll be able to realize more of the potential fleet efficiencies.

On slide 12, you can see a higher level of retail car sales inventory also had a impact on utilization due to the roughly 30 day pre-sale holding period. Adjusted pre-tax margin on slide 13 was 15.9% in the latest period, a 520 basis points increase over last year. This earnings performance had multiple catalysts, higher revenue, longer rental lengths and 80 basis points decline in total operating expenses as a percent of revenues, and increase in revenue per employee and a 290 basis point improvement in fleet depreciation as a percent of revenue.

Moving to slide 14, while the US economy continues to grow, operating conditions in Europe remain challenging. Having said that, employee productivity is up. Our fleets are tighter, rental length is expanding, inbound revenue is up, and net depreciation per unit is down 2% year-over-year. In the first quarter, we rebranded our 33 Advantage locations as Firefly, our new brand to address the deep value segments in Spain, Italy, and France. Our goal is to open up an incremental six new Firefly locations this year. We'll also be opening up about 140 new corporate locations across Europe and under the Thrifty marquee, and we recently launched a referral service to serve Dollar Thrifty US customers coming into France and Spain.

If you adjust our 2012 first quarter Switzerland revenue, as if it were already franchised then, total European rental car revenue was essentially flat year-over-year excluding the impact of currency. We believe the downward trend has bottomed in Europe as transaction days were up nearly 1%. Pricing was down 0.9%, although we did initiate price increases in certain markets. If you also exclude the discounted Firefly rentals, total pricing was actually an improvement of a 0.5 point in the first quarter.

Moving outside of Europe on slide 15, earlier this month, we invested a 20% stake in China's most recognized rental car brand. Our new partner, China Auto Rental is the domestic market leader in the $2.5 billion Chinese rental car market, generating more than $250 million in revenues in 2012. That's 2.5 times larger than any of the other domestic players. Its 50,000 unit fleet is more than 4 times the size of its nearest competitor and the company has strong financial partners in Legend Holdings and Warburg Pincus.

China Auto Rentals roughly 300 full service locations will be co-branded with Hertz. It gives Hertz exposure in the domestic self-drive market while Hertz offers China Auto Rental greater access to inbound foreign customers, corporate business and chauffeur drive services. The terms of the transaction also include a commission structure for any Hertz inbound referrals. Partnering with the largest, most recognized, and value car rental brand in China, provides us the best path to rapidly gaining share in an emerging market that is expected to grow more than 15% annually through 2016.

Now, let's talk about equipment rental on slides 16 and 17. Its string of year-over-year double-digit growth continued with rental revenue, excluding currency, up 17.6% worldwide and 20% in North America in the first quarter. Based on the equipment rental market's projected 6% to 7% growth rate this year, according to the American Rental Association, we believe we significantly outperform the North American market's growth rate. The top line increase is being driven by the beginning of the non-res recovery and continued strength in oil and gas, industrial and specialty markets. With our North American construction revenue up 24% in the first quarter and continued upward trend of the Architecture Billings Index and increases in commercial loan activity; we believe that non-residential construction recovery is starting to pick up. We are well positioned to take advantage of the upturn with the fleet investments that we made last year.

In the first quarter, total pricing in North America increased 3.9% with non-contracted pricing up 5.6%. National accounts represented 52% of first quarter rental revenue. Total US pricing was 4.1% higher than the year earlier period. The higher demand benefited from greater overall rental penetration as more companies turned to renting verses have buying equipment. Additionally, further penetration of the less cyclical industrial, specialty markets and entertainment services segments, is driving revenue growth and better fleet utilization.

In the quarter, time utilization improved by 240 basis points in North America, while dollar utilization increased by 170 basis points. Corporate EBITDA in North America increased 32.3%, resulting in a 420 basis points margin expansion, with strong growth and a [shorter quarter] and operating infrastructure already in place compared with last year and Corporate EBITDA flow-through was 65%. For the full year we still expect flow-through to be in the range of 55% to 60% as we continue to invest in development programs for employees, add sales force, new greenfield locations to support our clients and markets, and technology to drive customer satisfaction.

Overall for the Company in total, our first quarter results exceeded our expectations, keeping up on track to deliver our 2013 financial goals. Now let me turn it to Elyse for a more detailed financial review of the last three months, and then I'll come back and give you some color on the second quarter.

Thanks Mark, and good morning, everyone. For the first time since going public in 2006, we recorded a positive first-quarter GAAP earnings per share of $0.04, an improvement of $0.17 verses the first quarter of 2012. Major contributors to this achievement were strong revenue growth of 24.3%, driven by stronger volumes and better pricing in both rental car and equipment rental, and lowering net depreciation per vehicle in our car rental segment. The inclusion of the Dollar Thrifty fleet, lower depreciation rates, lower car cost in Europe, continued growth in retail car sales channels, and an increase in mix of risk cars in the US more than offset softening residuals.

And while direct operating expenses increased 21.3%, primarily due to the acquisition of Dollar Thrifty, they declined by 150 basis points as a percent of revenue as improved pricing and labor productivity more than offset higher damage costs due in part to increased winter storms this year compared to the first quarter of 2012. Also, the actions we have is taken to improve our debt structure are reflecting favorably in net interest expense, with the first quarter of 2013 was only 7.3% of revenue verses 8.3% in the same period of 2012.

Now, let me talk about the EPS calculations. First of all, as a reminder, when we report positive GAAP net income, we fully dilute the share count when calculating both GAAP earnings per share and adjusted earnings per share. The share count is diluted for incentive stock related items and the convertible MOE. In March, we purchased 23.2 million shares of common stock in connection with the private equity sponsor sale of 60 million shares, bringing their ownership down to 12.5%. The shares we purchased will be held as treasury stock. We announced our intent to settle the conversion of our 5.25 senior convertible notes in 100% stock. We bought the shares to prevent further share dilution from the convertible note.

This transaction results in changes to how we calculate earnings per share which are shown on slide 20. You will see there are four major changes to the share count in the fourth quarter. First is the movement in our stock price, which impacts the dilution related to stock-based incentive compensation as well as the converts but only prior to the share buy-back. Second is the share buy-back transaction, which results in the decrease in basic shares outstanding. Third is the change in policy for settling the convertible notes from a cash-stock blend to a 100% common stock share settlement, which sets the dilutive impact on the convertible notes at 57.3 million shares going forward.

Lastly, since the transaction occurred in March, the calculation is based on a weighted average number of shares for the first quarter. The other change to the EPS calculation is the interest expense on the convertible note will need to be added back to earnings as shown in the example on slide 21. The interest add-back is necessary while the convertible debt is outstanding. The debt is set to mature in June of 2014.

Moving to slide 22, the first-quarter consolidated interest expense was up year-over-year due to the Dollar Thrifty acquisition, but improved 100 basis points as a percent of revenue. Cash interest expense increased about $22 million reflecting higher fleet levels in the additional acquisition financing. For the full year, we continue to expect cash interest to increase approximately $100 million to $120 million over 2012, depending on fleet levels.

Moving to slide 23, the first quarter effective tax rate is 75.1% reflecting mainly taxes paid in the US. The high rate is due to the limitation of loss benefits in foreign jurisdictions, for we have is established reserves. We're going to benefit in the tax provision. We continue to expect our full year normal normalized tax rates to be 35%. This is due to the higher concentration of US profits as a result of the Dollar Thrifty acquisition, and is an increase from 34% in 2012.

Turning to cash flow on slide 24, we are utilizing the new format that we previewed at our Investor Day Meeting earlier this month. The goal of reporting free cash flow in this format is to highlight the key drivers of operating cash flow and the net investments made to support business growth. Free cash flow excludes acquisitions and share repurchases. Free cash flow is typically negative in the first half of the year as we begin fleeting up for the seasonal peak in Rent-a-Car. In the first quarter, it was negative $78.7 million, representing a $5.6 million improvement over last year.

Operating cash flow was quite robust, increasing $171.8 million on a year-over-year basis due primarily to higher earnings. Net investment increased by $166.2 million year-over-year. Contributing to that increase was the worldwide Rent-a-Car fleet growth increase of $98.2 million primarily due to the incremental fleet requirements associated with the Dollar Thrifty acquisition and timing of fleet payment.

Hertz fleet growth also increased $38 million over last year as we intentionally front load equipment purchases in the first half of the year to meet incremental demand. We continue to expect our growth spend on equipment rental fleet to be around $600 million to $700 million for the full year and the net spends between $400 million to $500 million. Finally, non-fleet capital expenditures increased $30 million versus last year as we step up our investment in IT facilities and service vehicles. We are still targeting full-year pre-cash flow of $500 million to $600 million.

Recent debt related activity is summarized on slide 26. You can see we continue to reduce our borrowing costs. So far this year, we have executed three financing transactions. In January, we issued $950 million of US ABS notes at a blended yield of 1.69% and a weighted average life of 4.7 years. The ABS market remains strong and this transaction continued the trend of lowering our all-in costs from previous term ABS issuances. We issued $255 million five-year senior unsecured notes in March at a yield of 4.25%. The proceeds were used to partially replenish the liquidity used in the share repurchase which I discussed earlier.

And early in April, we repriced the $1.37 billion tranche of our term loan facility, locking in a reduction of 50 basis is points on our borrowing spread and 25 basis points on the LIBOR floor. We estimate this will result in interest savings of around $7 million in 2013. Our liquidity cushion at March 31 was $1.4 billion. Our net corporate debt to corporate EBITDA leverage ratio was 3.6 times. However, if we include a full year of EBITDA for Dollar Thrifty, the pro former ratio would be 3.3 times. And the leverage ratio drops to 2.8 times with the full run rate cost synergies $300 million. With that, I'll turn it back to Mark.

Thanks Elyse. As I mentioned, I would like to pick this up on slide 29 again. As I mentioned before, the first quarter financial results came in better than expected. It was really a strong quarter across the board for us. The Dollar Thrifty integration synergies are tracking ahead of plan. We installed our car sharing technology in roughly 25,000 vehicles globally in the first quarter, and we're continue to roll out with a goal of having at least 80,000 telematic packages installed by year end. Our current install base gives us the largest car sharing fleet in the world now by a large margin. We also opened up both off-airport and equipment rental facilities over the past three months to address the higher volumes in those markets and we saw what we hope is the beginning of growth in Europe.

Looking ahead on slide 30 in terms of fleet costs, the first quarter improvement in the US was significant, but also had the easiest comp this year. As we mentioned in February, the second and third quarters will be more difficult. In response to recorded gains on car sales, we made adjustments to depreciation rates in each of those quarters last year. But for the full year, we're still expecting US monthly depreciation per vehicle to be down 4% to 5%. On the top line in April, we experienced some softness in both the car and equipment rental businesses in the US due to the holiday shift and the initial impact of the sequester. Volumes in our government businesses were down double-digits this month in our commercial accounts with exposure to government customers, also cut back on travel.

The volume softness has had an impact on US rental car pricing at a time when the industry is seasonally over-fleeted as we begin to fleet up for the summer peak. When April pricing was weaker than the first quarter overall, it was expected due to the holiday shift. Based on what we see today, conditions are still positive for pricing in 2013 due to lower used car residuals driving fleet costs higher, which as I said strongly correlates to higher rental rates. For the full year, keeping our original volume assumptions intact, we continue to be comfortable with a 2013 guidance we announced in February, which is reaffirmed on slides 31 and 32. Let's open it up to questions now. Operator?

(Operator Instructions)

One moment please for the first question. Our first question will go to the line of Adam Jonas with Morgan Stanley. Please go ahead.

Hi, thanks for taking my question. There was a slide that you put in the second quarter -- sorry, in the fourth quarter deck that we didn't see here on US monthly RAC depreciation per unit. Could you update us there, and also your utilization down year-on-year, you highlighted that's because of growth in the used business having more of that inventory available. Adjusting for that, would your utilization have been more -- would it have been exactly stable or perhaps improving year-on-year. Thank you.

Okay. On the depreciation question, do you have an answer, Elyse, on that? I don't know -- I don't have the data in front of me.

Yes, I mean we -- we've given in the past, US per unit cost, which are down 5.3% and in Europe the unit cost is down 2.4%.

Okay.

And then the second part of your question dealt with --

So if you -- without the retail car sales, the utilization would have been about flat year-over-year in Q1.

Right.

So it would have is been flat without the retail sales increase that we're actually experiencing in having those cars in queue; right?

Correct.

Right. The primary driver as I mentioned when we talked about the earnings script that we just read was the fact that we were operating with three fleets. Advantage, Dollar Thrifty, and Hertz. So we expect to actually get significant utilization improvement over the next couple years as we combine our systems and work out the efficiency due to demands, which are just the opposite in terms of when the peak and trough are with Dollar Thrifty verses Hertz.

Next question.

Thank you. Our next question will go to line of Brian Johnson with Barclays. Your line is open.

Yes, can you give us a sense of just -- can you quantify both the pace and time, the amount and the kind of timing of the DTG synergies. You are saying they are going ahead of schedule. Does that mean we could potentially see which previously guided to faster and if so, when? Or is there potential, especially as you bring these fleets together, to see even greater synergies?

Yes. I think in the past, we have is described them as $100 million a year, each year. And I'm not -- you know, roughly. I mean, it's radically over the three-year period. I really don't -- I'm not comfortable at this point, anyways, telling you what is going to be more or less at this point. We are just starting. But, you know, we had our own monthly goals, and we were able to exceed those monthly goals. So until we get more into the heavier lifting months where the goals start to go up, I'm not comfortable forecasting, you know, a higher number at this point. So pretty much status quo right now.

Thank you. Our next question will go to line of Michael Millman with Millman's Research. Please go ahead.

Thank you. Could you give us some idea of what you are seeing in the RedBook regarding pricing and which markets are weaker or stronger? And also by holding cars longer, can you decrease your depreciation and to what extent?

Okay. So, the first question which dealt prospectively of pricing, we don't talk perspectively about pricing for obvious reasons, but we can say as I mentioned to you in the script that we just talked through, we think industry continues -- industry conditions continue to be right for good prices and good price increases. In terms of the res build, you know, what we see going forward again, as I mentioned before, a little weak this month due to a variety of factors. We expected to see weakness this month.

The question on depreciation in terms of aging the fleet -- you can always age the fleet and actually help your depreciation curve. So that is always an option that rental car companies have. If they believe that there are certain types of fleet they want to age and that can help them if it makes sense that the maintenance costs don't outweigh, if you will, the aging. That is the way you think about it. Because you have to make sure that if you are going to age your fleet, the increased maintenance costs are offset by better depreciation and there's no customer service issues. So that is the methodology that companies use.

Thank you. Next we'll go to the line of Rich Kwas with Wells Fargo Securities. Please go ahead.

Hi. Good morning, everyone. Mark, on equipment rentals, so Q1 came in better than expected. Was mixed better than expected or was this all just volume coming through?

I actually -- it's just volume coming through. It wasn't a mix issue really. We planned for some mix shift going on this year and so it was on the plan. Executed well in the quarter. You know, pretty much had great execution in all of our businesses. You know, everyone came in where they were supposed to or better. So again, felt good about the execution and felt good about the mix. A little bit of goodness on the pricing front. We were expecting good pricing given what the holiday season was on the US Rent-a-Car side. But yes, pretty much good execution around the board and on the equipment rental side, things came in as expected. Maybe volume was a little bit stronger than we had anticipated. I think that was the only thing in the quarter that might have been good to what we had originally anticipated. A little bit stronger than we thought.

Next question comes from the line of Afua Ahwoi with Goldman Sachs. Your line is open.

Thank you. Just speaking a little bit on the pricing issue, for April, given that Easter was obviously in the first half of the month, did you see a difference as the weeks progressed throughout April? And then just, really quickly on the emerging market's exposure with China, is there any other markets that you are looking at to do similar acquisitions or joint ventures? Thank you.

Yes. So on the pricing front, you know, obviously March was stronger than it should have been because of the holidays, having Easter in March. And so it weakened, if you will, the first couple of weeks in April, and yes, we did see improvement as April continued in the back half of April. So that is very true, what you are suggesting.

In terms of other transactions or anything else we're considering, I mean we're always looking at emerging markets, but we consider emerging markets really to be ones we're investing in would be Brazil and India and China. And we're always looking for partners as well as things that we can do to improve our position in those emerging markets. But in terms of -- I'm not indicating we have any deal pending at all. I'm just saying that, that's something, an opportunity that we are always looking forward to and always looking at the marketplace to improve our position.

Thank you. Next, we'll go to the line of John Healy with Northcoast Research. Please go ahead.

Good morning. Mark, I wanted to ask about DTG again, you had the business now for about five or six months. I was hoping maybe you could give us some color about what maybe your biggest surprises have is been since is you have been in there and kind of looking at things, getting to know the folks, and kind of bringing the Hertz practices and mixing them with the DTG practices. Maybe your biggest surprise to the upside and maybe your biggest surprise to the downside would be helpful.

I think there really hasn't been a downside. I think the company was well-run when we bought it. They have a lot of best practices that they were using that we have actually adopted here at Hertz, in some cases. They have a -- had really good management team. Very entrepreneurial culture. They had stripped the business down to its most fundamental structure, after the recession that they went through, and you know, the tough times that they incurred. So we had a good lean model with good talent, good entrepreneurial spirit. And we're trying to adopt as much of that as we can into a much bigger company, and then taking anything that we thought was really well- done and adopting as our own and being very open-minded about that. And I have included several members of my senior team, now include Dollar Thrifty personnel so, again very positive. Nothing really negative to report. There have been no bad surprises here. Just positive ones.

Thank you. Next, we'll move to the line of Fred Lowrance with Avondale Partners. Please go ahead.

Thanks a lot. Mark, just wanted to dig in a little bit more on a question -- a couple of questions ago. If you look at -- with this Easter shift -- if you look at March and April together, how would you -- what would you say your pricing and volumes kind of look like in relation to the first two months of the year, which I think we knew were going to be strong. But again, take March and April together, how does that look?

I don't know if I have actually combined those two months in looks of overall pricing. But again in April, traditionally, people are over-fleeted. So the fleets are certainly aren't tight right now. They haven't -- they weren't tight last week. They're not tight this week. No one is off-selling right now. So when fleets are looser, pricing usually weakens. Having said is that, you know, volume as demand increases, we move into the summer season, the opportunity for pricing becomes better. Overall for those two months, I think it is clear to say that we have an overall positive pricing number.

But again, you know, don't want to get into perspective pricing discussions. But this -- the pricing is certainly weaker than it was in the first couple of months given that the first couple of months had some seasonality in the pricing due to the way Christmas and the holidays fell from 2012 to 2013.

Thank you. Next, we'll move to the line of Christopher Agnew with MKM Partners. Please go ahead.

Thanks very much. Good morning. I wonder if I could ask about what you are seeing for corporate pricing trends in the first quarter. And then can you also -- you discuss government and corporate accounts with government exposure? How much of that is -- or what percentage is that of your mix?

Well, government business in the Rent-a-Car side is probably only about 3% to 4% of our volume. But there are ancillary travel-related impact that we get overall. And government business right now is down 25% April month-to-date. But -- and it was up the first two months, just so you know. It is a small percent of our mix, but it does include a lot of customers that we do business with, who do business with the governor -- government segment. My guess is probably in the range of 10% to 15% of our revenues have is some kind of impact, or, you know, some kind of corollary to the government.

In the equipment rental side, same thing, probably 15% to 20% of our customers there are tied to the government. And it could be government projects that are funding local municipalities. It could be actually government customers that we have, so all-in-all, that impact when it is down significantly can have an impact on revenue base. So I think that is about the best way I can answer it. Anything else from anyone? No. Okay. Next question.

Yes, we'll move to the line of Phillip Bobacelli with Deutsche Bank. Please go ahead.

Good morning. Could you please prioritize the uses of the free cash flow that you plan to generate from 2013 between share repurchase's, debt reduction, acquisitions, and possible dividends.

Sure. I'll take that. You know, obviously we took on some debt to buy Dollar Thrifty so we'll be looking at paying down debt, but we'll also be looking at investments in the business. And so as we weigh the pros and cons, we'll make the best decision that we think will derive better shareholder values. So I guess in the short run, it will be debt repayment, but we're also looking at investments and then down the road we'll be looking at return to shareholders.

Once we become investment grade.

Right, once we become closer to investment grade.

Statistics, right.

Thank you. We do have is a follow-up question from the line of Fred Lowrance with Avondale Partners. Please go ahead.

Yes. Sorry, guys. I was trying to get a follow-up in there on that -- the March, April thing. I was just interested to see if you -- what I was trying to get to is if you strip out that Easter shift, you know, kind of like Afua was trying to get to. And you look at the second half of April, would you -- obviously you got the sequester going on. We know that's impacting other travel businesses as well. But would you have still sort of classified that period as soft on the year-over-year basis? And then unrelated, can you give us sort of related commentary on the FTC's digging into investigation of the whole Advantage investiture? Thanks.

Okay, so, again, going back to the pricing question that you just asked, I think the best way to answer is we're not surprised at the weaker volume and pricing that is going on right now. So there was no surprise here. We still believe the overall pricing environment is positive. So I don't want investors to read too much into this and think that, you know, we think that pricing has crashed and burned. We don't think that has happened. We expect pricing to be weaker in April because volumes soften in April. The Easter fall -- the holiday fall made it even worse than normal, and we were expecting that.

So just trying to explain it so people understand why it's a little weaker and why volume is a little weaker. It has to do with the holiday affect. Plus, we think the sequester had some issues. But that doesn't mean that the environment we think has changed or that there is some significant big risk on the pricing environment out there. We think that, you know, this year again will bode well, pricing environment given that there's tight -- given that there are fleet cost increases and some residuals weakening that usually bodes well for the industry. The industry usually moves pricing up with a fairly higher r-squared as you look at our business historically over the last 40 years.

Then on the FTC, as we said previously Hertz continued to work cooperatively with the FTC. We were in full requirement with all requirements of the consent decree, and all -- to date all the divestiture's required under the terms of the decree have totally gone smoothly. And based upon the communication that we have had directly with the FTC staff and through our council, we've got no reason to believe the commission will not execute the consent decree in due course. We've got no comments on the matter that goes between the buyers of Advantage and the FTC. That is their issue. It has nothing to do with us, so, you know, we see no issues with the decree being issued. It's just a formality at this point, making sure that they tie up their loose ends with the buyer of Advantage and we believe that is proceeding smoothly from what we've heard.

And next we'll go into the line Yilma Abebe with JPMorgan. Please go ahead.

Thank you. Good morning. On the equipment rental business, away from seasonality like you described and away from the government rate of business, the 15% to 20% of the business. How does a balance of the business look like in April?

I think just in general the balance of this is solid. It's just kind of where we expected it. So we have -- the one thing that I need to remind investors of is that we have growth drivers that are growing us way beyond the market on the equipment rental side. We're out-pacing the market in the Rent-a-Car side. We're out-pacing the market in off-airport, in Donlen, and in leisure. So we're definitely growing faster because we have got not only the revenue synergies on the leisure side but we have more outlets that have leisure product in than we had in the past. We weren't able to take advantage of that growth in the past so Hertz, unlike the other rental car companies, never had a leisure brand to speak of in all the airports. So this is helping us grow faster than the market because of it. So we feel pretty good about our resiliency given, you know, some of the issues that I talked about like the sequester. Volume is good in April.

Thank you. Our final question comes from the line of Christopher Agnew with MKM Partners. Please go ahead.

Thanks very much. Good morning. Wonder if you could discuss the opportunity in Europe given expansion of Thrifty stores and the rebranding of Advantage to Firefly. What you see is the sort is of market opportunity there given such a fragmented value leisure base. I think it's 25% of the markets relatively fragmented. Thanks.

Yes, for us in Europe, we view Europe positively and certainly in the second half of the year. Moving in the second quarter, we think there's going to be year-over-year improvement due to a couple different issues. One is volume growth. Obviously when you add 143 locations, and you launch Firefly which we think is even a better brand than Advantage, and you do that in a differentiated way, which we are doing, separation of uniforms, cars, and people, that, you know, we think that is going to be a big boost to revenue. We also believe that our fleet changes that we've made there to match what we do in the US. We're selling cars in more profitable channels. Our volume is up 42% on used cars. We're improving the amount of used cars that we sell and again selling in better channels. Our fleet depreciation will continue to be favorably disposed. It will be down year-over-year.

So in spite of, you know, some issues around the European economy, we think we have reached the low point and we're improving. So, you know, inbound, there's a big opportunity with these brands that we never had before. So the new Dollar Thrifty brands gives us a lot of inbound opportunities, well but we never -- that never existed. And I think Europe, you know, again -- I have invested a lot in the restructuring of Europe over the last 12 to 18 months. We'll start realizing the benefits of that, also in the second is half of the year. So we have is a lot of good things that will be happening, we believe in Europe both on the growth side as well as the efficiency side coming up over the next six months.

This is all the time we have for questions today.

All right, so, again, want to thank everyone for attending the call, look forward to talking to you and updating you at the next call.

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