Herc Holdings Inc (HRI) 2013 Q2 法說會逐字稿

Welcome to the Hertz Global Holdings' second-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 speaks only as of this date and the Company undertakes no obligations to update the information to reflect changed circumstances.

Additional information concerning these statements is contained in the Company's press release regarding its second-quarter results issued this morning, and in the risk factors of the forward-looking statements section of the Company's 2012 Form 10-K and the 2013 Form 10-Q 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 it is also being made available for replay starting today at 12.30 PM Eastern time, and running through August 12, 2013.

I would now like to turn the call over to our host Leslie Hunziker. Please go ahead.

Good morning.

You should all have our press release and associated financial information. We've also provided slides to accompany our conference call that can be accessed on our website at www.Hertz.com on the Investor Relations page. Today we will 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 the Hertz Global Holding Inc, the publicly traded company. Results for the Hertz Corporation differ only slightly as explained in our press release.

With regard to our IR calendar, we will be presenting to the Citigroup Industrials Conference on September 18 in Boston, the MKM Leisure Conference on September 26, in New York City, and the Deutsche Bank Leverage Finance Conference on October 1, in Scottsdale, Arizona.

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; and Michael Taride, Group President of Rent a Car International; and Lois Boyd, Group President of Hertz Equipment Rental Corporation. They will be on hand for the Q&A session.

Now I will turn the call over to Mark.

Good morning, everyone, and thanks for joining us.

Hertz once again delivered record quarterly results across the board. As you can see on slide 5, consolidated adjusted pre-tax income and margin were the highest of any second quarter in our history, increasing 35% and 110 basis points year-over-year respectively, on a 22% revenue gain.

On slide 6, key top line drivers include the addition of Dollar Thrifty revenue, 12% revenue growth in US off airport rental car, 16% growth in Donlen revenue to $134 million, and 17% more equipment rental revenue in North America, excluding FX, year-over-year.

Supporting the earnings flow-through on slide 7 was consolidated cost savings of $50 million from continuous improvement programs, 6% and 8% increases in employee productivity for global car and equipment rental respectively; installation of 70 video kiosks bringing the total to 438 worldwide; a 230 basis points improvement in North American equipment rental time ute (utilization); and integration actions that are tracking ahead of plan.

Now, let me run through the highlights by business unit starting with US rental car on slide 8.

Total revenues grew 34% year-over-year driven by 30% higher volume, and a 3% increase in total revenue per day. Total revenue per day which includes all ancillary items increased both on and off-airport, as you can see son slide 9. For the Hertz brand, commercial pricing was up 1.8% in the second quarter while airport leisure total RPD was up 4.4%. In the off-airport segment, total RPD was up 1.3%, driving total revenue 11.6% higher. Within the off-airport replacement revenue represented 33% of the total with 17% more revenue year-over-year, due to the expansion of existing accounts, and 44 net new locations. Off-airport is a key growth opportunity for us with currently only a 13% market share.

On slide 10, fleet efficiency was 79% in the second quarter, which is down from last year. Because we no longer have Advantage, we've lost the efficiency that came from sharing the fleet. Remember that Advantage was fully streamlined with the Hertz fleet, counter systems and facilities, enabling us to optimize utilization. With Dollar Thrifty, that part of the integration won't be completed until the end of the first quarter next year. As a result of that acquisition, we have roughly 41% more vehicles, which temporarily impacts utilization as we work to integrate that incremental fleet. However, we are already capturing synergies as evidenced by the fact that Dollar Thrifty's utilization has increased every single month since it was acquired by Hertz. For all brands in total we expect to begin seeing utilization improvement by year end.

On slide 11, US monthly depreciation per unit was $218 compared with $213 a year ago primarily due to a tough car sales comp. In the 2012 second quarter, we reported a gain on fleet sales of $44 million, due to record high residual values. This year, residuals are coming off their historic peak as the number of off-lease vehicles is increasing faster than expected as the automakers offer their customers buyback incentives. Also, the industry has more risk cars to sell. For Hertz, our risk mix was 95% in the second quarter compared with 75% last year. The Mannheim Index declined 4.4% on average year-over-year versus Moody's forecast of a 2.2% decline. On slide 12, the good news is that while auction values were the hardest hit in the second quarter, retail values held flat. So we shifted as much supply into the Rent2buy and our car sales lots as possible. In the end we sold 44% more units through retail this year compared with the similar quarter last year. Another good sign is that residual values have improved sequentially since May. And this month, we saw auction inventories tighten again.

Overall, direct operating and SG&A expenses as a percent of revenue were down 60 basis points in US rental car in the latest second quarter. Adjusted pre-tax income was up 35% versus last year.

In total, it was a strong quarter across all segments of US rental car.

Moving to slide 13, for Hertz, things are improving in Europe. If you exclude our 2012 second-quarter Switzerland revenue, as if it were already franchised, total European rental car revenue was up almost 4% year-over-year, excluding the impact of currency. This represents a stabilization after almost two years of decline. Volume was up 3% and pricing increased nearly 1%. If you also exclude the discounted Firefly rentals, total pricing was an improvement of 3.3% year-over-year.

In the second quarter, we opened 137 co-branded Thrifty locations in France, Spain and Benelux. Our goal is to open an additional 20 Thrifty locations by year end. We will also be opening another 5 Firefly locations to address the higher demand in the deep value segment bringing that network to 38 corporate and 7 franchised locations by year end. And we recently acquired CCL Vehicle Rentals in the UK, which provides us with an entry point into the $1.5 billion insurance replacement market.

Now let's talk about the equipment rental business on slide 14. Its string of year-over-year double-digit growth continued with rental revenue up 17.4% in North America, excluding FX and 16.7% in the US in the second quarter. North America represented 93% of total equipment rental revenue. Based on the equipment rental market's projected 7% growth rate this year, according to the American Rental Association, we continue to significantly outperform the North American market's growth rate. The top line increase is being driven by continued strength in oil and gas, industrial, and specialty markets, and in the early beginnings of the construction recovery.

Our North American construction revenue was up 21% in the second quarter. The Architectural Billings Index continues to trend well, a positive sign for our business. And the construction loan pipeline continues to show positive momentum. In fact, construction loan commitments at March 31, which is the latest data available, were up about 30% year-over-year. We're well positioned to take advantage of the construction upturn and the fleet investments we made last year, and in the 2013 first half.

In the second quarter, total pricing in North America increased 4%, with non-contracted pricing up 4.5%. National accounts represented 53% of second quarter rental revenue. The 18% higher volume in North America benefited from greater overall rental penetration as more companies turn to renting versus buying equipment. Having the newest fleet in the industry and entry into new markets and geographies through small, strategic acquisitions is also driving the revenue growth and better fleet utilization.

In the quarter, time ute improved by 230 basis points in North America while dollar ute increased by 120 basis points. Overall, for the Company in total, our second-quarter results were in line with our expectations keeping us on track to deliver on our 2013 financial goals. In a minute, I will give you some thoughts on operating trends for the back half of the year.

But first, let me turn it over to Elyse to provide more detail on our financial performance.

Thanks, Mark. And good morning, everyone.

Let's start on slide 16. For the second quarter of 2013, we achieved record second-quarter earnings per share on both a GAAP and adjusted basis. GAAP earnings were $0.27 per share, an improvement of $0.06 versus the 2012 second quarter. Strong revenue growth was a major contributor. Worldwide rental car revenue was up 23%, driven by the addition of Dollar Thrifty, strong volume growth and overall better pricing. And revenue for the equipment rental business grew 14.7% worldwide, driven by a strong North America performance.

For the consolidated Company, total expenses as a percent of revenue decreased 60 basis points. Driving this improvement was an 80 basis points decline in operating expenses as a percent of revenues, reflecting the continued improvements in pricing, employee productivity, and synergy realization. Lower depreciation expense also contributed to the lower cost base. Worldwide, rental car depreciation per unit was down 1.8%, excluding FX. And depreciation as a percent of worldwide equipment rental revenue was down 70 basis points on 12% more fleet. As a result, worldwide corporate EBITDA improved 33% to a second-quarter record of $540 million. Equally driven by rental car and equipment rentals. Margin improved 160 basis points over the prior year period.

Turning to slide 17, corporate EBITDA margin for worldwide equipment rental increased 470 basis points to 43.1%. Corporate EBITDA flow-flew for equipment rental was 80% in the latest quarter, primarily due to one-time items that were a disadvantage last year. You may remember in the second quarter of 2012, we were impacted by legal settlement costs. Not having those costs this year added about 12 percentage points to flow-through.

In addition, year-to-date earnings benefited from a greater amount of new fleet, about two-thirds of this year's equipment order was received in the first half, as well as our decision to push some first-half spending into the second half. For the full year, we now expect flow-through to be 60% to 65%, as we continue to add sales force, open new greenfield locations to support our clients and markets, improve technology to drive customer satisfaction and invest in development programs for employees. For the Company in total, adjusted pre-tax income improved 34.5% in the quarter, and adjusted earnings per share marked a second-quarter record of $0.45, up $0.10, or 30%, over last year's results.

Moving to slide 18, the second-quarter consolidated net interest expense was flat as a percent of revenue, but up $30 million year-over-year. This increase is due to the incremental debt related to the Dollar Thrifty acquisition, which also drives the cash interest expense increase of $32 million year-over-year. For the full year, we expect cash interest to increase by approximately $100 million over 2012, slightly below our earlier estimates.

Now I want to take a minute on slide 19 to address the potential impact to Hertz from rising interest rates. We've been getting a lot of questions on this topic recently. The bottom line is that we don't anticipate a negative impact for at least the next couple of years, and here is why. Of the $1.2 billion of fixed rate US fleet debt that matures between now and the end of 2014, the interest rates range from 2.8% to 5.4%. This is significantly higher than the 1.8% current indicative rate for three-year term ABS notes. At the indicative rate, annual refinancing savings would be approximately $18 million on a pre-tax basis.

Additionally, we have the opportunity to call and refinance our 8.5% secured Euro notes, at an indicative rate around 5.25%. This lower rate translates into $17 million per year in interest savings. We're currently evaluating whether it makes sense to pay the call premium today or wait until the bonds are callable at par next summer. And finally, with respect to our maturing floating rate debt, short-term rates have not increased. The current market consensus is that the fed and ECB will not increase them until late 2014 at the earliest.

Now, let me talk about cash flow on slide 21. For those of you that are new to our story, we implemented a new cash flow format in the first quarter. Basically, this format highlights our key operating and investment items that drive free cash flow, which we define as cash available for us to pay down debt, make acquisitions, or return to shareholders. Starting in the middle of the slide, year-to-date operating cash flow was $264 million, this represents a year-over-year improvement of $84 million, driven by strong earnings growth, partially offset by higher working capital requirements. Net investments of $669 million were $303 million higher than the same six-month period last year. This increase was due to seasonal fleet growth for Dollar Thrifty, which we did not have last year.

Additionally, we increased equipment rental fleet growth in the first six months this year over last year. And we made incremental non fleet investments to fund technology initiatives and rental car facility upgrades. As is typical, cash flow will begin to build with the third-quarter rental car defleeting. And by year end, we expect to have generated free cash flow of $500 million to $600 million for 2013.

Moving to slide 22, we purchased $425 million of fleet for our equipment rental business in the first half of 2013. For the full year, we expect our gross spend on equipment rental fleet to be between $650 million to $700 million, and our net spend to be between $450 million to $500 million. On slide 23, our net corporate debt to corporate EBITDA leverage ratio was 3.7 times. However, if you include a full-year of EBITDA for Dollar Thrifty, the pro forma ratio would be 3.4 times. And the leverage ratio drops to 3.1 times using the full run rate cost synergies. Finally, our liquidity position remains strong at $840 million at the end of the quarter.

With that, I will turn it back to Mark.

Thanks, Elyse.

Let's move to slide 25. In US rental car, demand signals are mixed. Our off-airport volume is up 14% month to date while airport demand continues to track at a low single digit rate. The airport demand is being impacted by the sequester, and we believe airline capacity constraints and the associated higher fares. More over, on the residual front, Moody's is projecting the Mannheim Index will decline 1.9% in the third quarter and 2.9% in the last six months of 2013, compared with the similar period last year. Fortunately, Dollar Thrifty revenue synergies from partners like AAA, Jet Blue, and Marriott are already making a contribution and we're leveraging the flexibility of our model and capitalizing on the diverse issues to drive incremental revenue and profit stability. For example our key top line drivers continue to generate double digit growth. In rental car rising fleet costs are manageable as we capitalize on a favorable mixed shift and consumer direct resale channels to capture the highest returns. We now have 43 retail car sales lots, up from 14 at this time last year and we're planning to add 57 more by year end.

In addition, the Dollar Thrifty integration is tracking ahead of plan. Our initial technology rollout in the US is generating favorable reviews. The equipment rental recovery continues at a steady pace. And we believe that there is some nonresidential construction momentum building. And our cost savings should exceed our target of $300 million at the current run rate. As a result, our full-year guidance as outlined on slide 26 stands. However we remain caution about the economy. We recognize the leverage on this business is large as you can see, on slide 27. But you have to remember that the sensitivities work both ways. So we will continue to be prudent in our assumptions.

Finally, I want to give you an update on the rollout of our 24/7 technology. As of June 30, we have installed now 35,000 vehicles in our US fleet, with our patented telematics system. That puts us on track to meet our goal of having 70,000 cars available for self service rentals off-airport by year end.

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

(Operator Instructions)

Brian Johnson from Barclay's.

Yes, good morning. Just want to drill down with two questions on fleet costs. If we look at the difference between your prior guide of minus 4% to 5%, and your new guide of down 2% to 3%, what portion of that head wind is relative to where you were earlier, is GTG related, auction related, perhaps lower ramp of retail lots?

And then the second question is housekeeping. Can you remind us of the gains on sale in 3Q and 4Q of 2012 of last year, so we can get a finer sharper pencil in modeling year-over-year fleet costs in those quarters.

Okay, well on the fleet cost issue, going to from 4% to 5% to 2% to 3%, I think the only issue is that the residuals that we saw, the drop if you will, that we saw in April, May, time period, was more than we thought it would be. However, the good news is the residuals on the what we call retail side have pretty much stayed flat so we have been accelerating our plans at retail to, obviously, take advantage of that strong market.

The year-over-year hurdle for us in the second quarter was fairly large. I think that we made -- someone tell me here in the room, what did we make last year in the -- we made $44 million in car sale gains last year in the second quarter, and this year, we generated how many in losses total? About $11 million? Roughly about $10 million. So it is about a $54 million year-over-year hurdle to overcome.

Obviously we overcame it and still had significant, what I call significant earnings improvement year-over-year. That is the toughest comp for the whole year, Brian. We're not going to have anything like that in the third or fourth quarter. So we just thought it was prudent for us to take the net depreciation per unit to 2% to 3% versus 4% to 5% that we had based on what we saw was the drop. It was a little bit more than we anticipated in the second quarter. So that's why we took it down, just to be prudent.

Okay. And you don't benefit from the better pricing in rental residual --

Can you speak up a little bit Brian. I'm having trouble hearing you.

Do you benefit at all -- it looked like the Mannheim numbers continue to diverge between rental consignments and overall market. Isn't that providing somewhat of an offset to the headline Mannheim?

No. Not for us, no. Again we're not -- again, I don't think everyone is worried about this 4% to 5% to 2% to 3%. It is all in the rounding error. We could come in at 4% to 5%, I'm just, we took it down just because we saw them being a little weaker, but they have actually stabilized since then.

I'm not -- again, it is something that we're not concerned about. But we thought it was prudent to bring it down, given that it was a little weaker. We've seen signs that it has stabilized for the cars that we sell. And in order to offset anything, we decided to sell more cars at retail in the second half of the year. So we did accelerate some plans. But again, we feel, overall, we feel pretty good about the residual market.

Okay, thanks.

Yes.

Michael Millman from MIllman Research.

Thank you. You mentioned that you expect volume to be softer than expected and gave some reasons. Related to that, are you expecting to reduce your fleet? Do you see the industry reducing the fleet in line with that? And my other question relates to, to what extent is there any prohibition against you buying a discount brand or making a capital expenditure of some other brand in the US?

So in terms of the first question, around the fleet, we certainly are tightening our fleet. And always do so if we see any kind of a volume softening in the environment. So yes, we are definitely tightening our fleet. And always try to do so if we feel there is any softness in volume. In terms of the other question, I can't comment on any kind of acquisitions. It is just pretty much against our Company policy to do so.

My question was whether or not you're making it. Is there any prohibition, FTC type prohibition, for example?

I think the FTC prohibition on making any other buys, there is none. In other words we don't have any prohibition on making other acquisitions. But if we were to make an acquisition over $50 million, I think that's the threshold that the FTC has and roughly, roughly that doesn't require FTC review. So, acquisitions over $50 million do require FTC review for the most part. But we have no prohibition after making the Dollar Thrifty acquisition at all.

How much are you tightening the fleet?

I'm not going to talk about operating statistics you with, Michael. I mean, we tighten the fleet based on where we see, by market, demand. So the issue is that the overall retail environment right now, and leisure environment for consumers has softened. That is pretty consistent with everything you will see and hear in the retail environment. So I think there is a lot of retail statistics to support the notion that consumers are a little tighter right now, and the sequester impact has been fairly significant in the commercial sector.

Anything that is related to the government, as well as the Government business itself has been weaker. Those accounts that are tied to the government are traveling a lot less and so overall, those are the primary drivers. It is more of an economy. It has nothing to do with Hertz. We're not losing share or anything. So it is an overall economic environment that we're seeing right now.

Thank you.

Yes.

Chris Agnew from MKM Partners.

Thanks very much. Good morning. I wanted to ask with guidance maintained, but fleet costs worse, a little bit worse, what is the offset in your assumptions? And also, why are you still not baking much pricing into guidance, given that worldwide pricing was up 1.2% in the second quarter, and 2.6% in the first quarter? Are you seeing a deceleration into the second half of the year? Thank you.

I think that when I talked about the softness versus where we thought it would be in the first half, we talked about two things. One was volume-related. And the other one was fleet costs. And our costs are down year-over-year. Just to make sure I repeat that to everyone. They are down year-over-year. So but they're not down quite as much, maybe, as what we thought. But we don't flow that for sure. These are all estimates.

The point that I'm making is that the offsets to that are everything that we kind of talked about, pricing is one of those offsets. Obviously, pricing helps us offset a little bit of an increase in fleet costs, and then the same thing, it helps us to offset any volume softness. So that is kind of the primary offsetting factor. And then the other things are around the synergies that we have from Dollar Thrifty. Those are coming in ahead of plan. I mentioned that earlier. And so, pricing certainly in the equipment rental sector is better than we anticipated, as well. So, that helps us offset some of the softness we're seeing on that side, as well.

And maybe just one little follow-up, I'm not sure if this is just a pro forma calculation but if I look at your 6-month year-over-year pricing metrics, they seem to be hard to calculate, given the first two quarters. So for example, you're up 1.2% and 2.6% worldwide pricing. But your 6-month metrics are 0.3%. Is that just some sort of pro forma adjustment?

I don't know. I guess we're checking, there may be an error in the math, and we will correct it if there is. We're investigating that right now. We just got the question a half hour ago.

Perfect.

We are checking into it and we will make sure that we get communication out on that.

Great. Thank you.

Yes.

Adam Jonas from Morgan Stanley.

Thanks, everyone. Just to follow up on that pricing math, let's just assume, if you assume that the -- that we are up around 2%, year-to-date, which would be the individual, taking the individually, first quarter and second quarter, RPD numbers for US, it does suggest that leaving your pricing flat assumption on page 27 of the presentation, is this conservatism in the second half or otherwise mathematically we would have to have some, at least clearly negative pricing? Is that part -- is it difficult comps, or is there any kind of message there?

No, not at all. We don't have any I guess assumptions that pricing is going to be down the second half.

Okay.

Although that would suggest that. Again, we're just being consistent with our guidance and didn't change it, if you will. Although there could be upside, obviously. I think there is conservatism built in that. And it was just a plug and it was conservative. So I guess that's the way to explain it.

Okay. That's a very good explanation, thank you. And then as a follow-up, could you comment on the average age of your US car rental fleet in month terms roughly and maybe where we were a year ago, kind of where that is versus normal or -- I know you gave the data for the equipment side, but for car rental, it would be helpful.

I don't know if we have it. For US, they're getting it to me right now.

Thank you.

Right now the average is about 9.3, we think. And last year, in 2012, overall, it was 8.8. These are months, right?

9.3 months average. And last year again was what?

8.8.

8.8. And any way to contextualize that Scott?

Yes, the Dollar Thrifty fleet was a lot older than ours. That's one thing. So when you look at Dollar Thrifty fleet, when we got that, inherited that fleet, it was an older fleet than our fleet was. That was part of it.

Our risk cars year-over-year are actually younger. They're 9.4 months old versus 9.5 last year. We don't have the non risk cars which are much younger in life, but our risk fleet is actually a little bit younger than last year.

You got that, Adam? So the risk cars are now 95% of the total mix.

Yes.

And so when you life those versus the program cars, it will give you a longer life.

Got it. That's helpful. Thank you.

Okay.

Afua Ahwoi from Goldman Sachs.

Hi, thanks. Two questions from me. First, on the US rental car side, I noticed that the airport rental length was negative this quarter. We haven't seen that for a while. And so, I was wondering if maybe you could speak to what is driving the negative rental, and I know for a while that had been a positive tail wind.

And separately, in Europe can you describe which markets you are seeing the strength out of, is it commercial or leisure? Is it Northern Europe versus the Med? Any color on maybe the pockets of strength, or is it more broad-based, thank you.

I will answer the second question first and we will research the first one for you. But on the second question, in Europe overall, we're seeing very strong leisure growth. In Spain, very dramatic growth there. Italy, very dramatic growth. The only area that is probably still very tepid in terms of its recovery is France. Germany is fairly I guess stable, is the way I'd put it, but France is the only country where we're seeing some tepid growth.

Everywhere else is growing and in the leisure markets we're growing very, very nicely in those markets. Double digit type growth. Everywhere else kind of low single digits. And with France, kind of neutral right now, I think. I think we're pretty flat. And then on the first part of the question, I'm asking my team here, I'm looking at them. Guys where do you think the length, it could have been something that -- this is just the length on the airport or off-airport and airport combined?

It is on the airport side. So on your slide, the slide where you have the airport, Dollar Thrifty, and the off-airport, those bars.

Mark, when you look at the airport, it is not even 1%. I mean it is a rounding error.

It is a rounding error. So it is really essentially almost flat.

Yes. And then Easter are moving to the first quarter. Easter being earlier hurt the life a little bit in April, so it's roughly flat year-over-year, the life at the airport.

So, did you hear that on the seasonality piece.

Yes, I did. Thank you. I had one follow-up on your answer to your double digit increases you're talking about, is that on a same sort of -- is that on a like for like, or is it because you're also expanding the Thrifty locations?

The double digit increase in what?

In leisure in Europe that you talked about. Is that a like for like? Or is that benefiting positively from the Thrifty?

I think that it is primarily -- Dollar Thrifty has not kicked in yet really.

Okay.

It started to a little bit in June but not much. Primarily, it is driven by some of our Firefly -- we opened up new -- we had Advantage last year, and we switched it to Firefly. Those Firefly locations year-over-year are actually up a lot. On a same store basis even, they're up double digits. So that is probably driving most of the growth in the leisure segments in countries like Italy and Spain. It is driven by this increase in that segment that was Advantage and now it is Firefly. Okay?

Thank you.

Yes.

Rich Kwas from Wells Fargo.

Hi, good morning, everyone. Thank you. So Mark, I know there are some moving parts within the guidance here. But it seems to me that will is not much material change in terms of the businesses here. So is that true what you're seeing here, not much of a material negative change, I should say, versus what you had been expecting, and I realize you called out a couple different things here, but is that a fair comment to make?

Yes, I think the only thing that gives us any pause for caution is the volume side. The softness. And obviously, that is what I have called out here in the script. And what we've been talking about. That is the only thing, and we think we've got offsets to all of that, but volume was up significantly in the first quarter. In the Hertz classic brand, it was up like 7%-plus. In the second quarter, it dropped down to 4%-plus. And third quarter it is less than that. So it is low single digits.

So the point is, this volume level, we think will improve, there has been some issues around it, but it is still an area that gives us a little bit of caution, be prudent with our guidance, and be prudent with how we forecast our earnings. Now that was all airport that I was giving you. Airport and Hertz classic brand numbers. So we feel like that caution is something we should have in our guidance going forward. Yes, no surprises. Pretty much everything was in line. That's the only thing that we're a little cautious about right now is the volume levels right now, the demand levels.

And that excludes all the Dollar synergies or revenue synergies, right?

That's correct. That's exactly right. It excludes all of that.

Okay. And then just a follow-up on the utilization, I know you've got this head wind with Advantage still comping against Advantage from last year and still integrating Dollar, and you said this would be fully completed by the first quarter of next year. But progressively, as we move through the back half of the year, is there improvement on that front? How much improvement do you expect on utilization from the -- being further along with the Dollar integration? Or is that just not -- could that be room for upside or is that -- how should we think about that?

I don't -- for me, we're pretty well confident that in the fourth quarter we will experience year-over-year improvement on utilization. We continue to work on that hard. But don't want to predict in the third quarter improvement. We really want to wait until the fourth quarter to say that we will have solid improvement on utilization. And whether or not that is upside or not has yet to be determined.

Okay. Thank you.

Yes.

Fred Lowrance from Avondale Partners.

Thank you. Just on the first half pricing data that is in the release in table 4. The biggest issue I see is suddenly 1.3 million domestic rental days have materialized in the first quarter that weren't reported. So that would look very odd on a year-over-year volume basis, based on what has been going on with your business. So that's the big confusion on pricing. Which has everybody so confused with how your pricing guidance can remain flat for the year. I don't know if you will add any explanation of that since you've doing your research.

But the second question I had was just based on the Moody's data that you're looking at for forecasting the Mannheim, the down 1.9 in Q3, the down 2.9 in the second half, has that been recently revised? Or is that something they came out with at the end of the year? Just trying to figure out if they're baking in maybe the little bit softer than expected performance here in the first half.

It is the latest update that we have. It is the latest update that we have.

And then just on the volumes that would be implied by your first half numbers here, and in table 4 of your release, have you all been able to track down what that issue is, because obviously that takes your pricing from about 1.8 for the first half to 2.3.

No, we're researching it. As soon as we get to the bottom of it, we will send something out.

Today, we will send something out. So, after the call. The one thing that I will mention is that we really didn't talk about this on the call, but in terms of the fleet costs, the cap costs of the cars themselves, we expect the buy for next year will be down year-over-year. We're seeing signals of that. So we think that is a positive as it relates to net depreciation per vehicle. So I want to make sure that people know that, and that is happening.

And I feel like there is an opportunity here, because residuals have softened at the same time. There is a high correlation when that happens that fleet costs go down, the actual cap costs and that's exactly what we're seeing. That is the buffer if you will to when residuals do soften, fleet costs always go down and that is what we're experiencing right now.

John Healy from Northcoast Research.

Thanks for taking my call. Mark, I wanted to ask a little bit about the Insurance Replacement business. Continued to put up a really great quarter in terms of growth there. Can you give us some sources of where that volume growth continues to come from? And for how long it can keep going at this rate? And then a question on -- I don't know if you mentioned it, I might have missed it, but could you give some commentary about how leisure US pricing faired in July on a year-over-year basis?

Yes, well, I don't think we've been prepared to talk about July in leisure pricing, but in terms of -- I think it is overall going to be positive. I will say that. But in terms of our volume growth, we expect through 2015 to have double digit growth in off-airport. Our 24/7 technology we think will accelerate off-airport growth.

And in addition to the off-airport, Donlen is increasing significantly, double digit. We expect that to continue. HERC certainly will be double digit we think for the foreseeable future. We have not hit, if you will, the peak Nonres Construction business. That Nonres Construction business is big for us. So we think there is big upside there.

In terms of looking at the overall leisure space, with Dollar Thrifty getting turned on to all of our travel relationships, we think Dollar Thrifty has the potential also to be in a double digit kind of environment over the next couple of years. So, those are kind our big growth drivers. The big chunks of them. In terms of pricing, overall, for Discretionary or Leisure business at the airports, we can say month to date, it looks like that is up about 3%. So there is a little data on July, okay?

Great. And then just one question on the holding costs. And I know you mentioned the average age of the fleet, but when you think about the length of hold, can you give some color on where you're planning -- how long you're planning on holding these cars, and if that assumption has changed relative to the beginning of the year?

I don't think there has been any assumption changes. I think we're in pretty good shape on length, in terms of how long we're holding cars.

It is the Firefly we're extending the life --

The only thing is, as we launch Firefly in Europe, we are extending the length of the car there. So if we get into the Spartan segment, obviously if we did that in the US, we would extend the length. So other than that, that is pretty much it on the aging.

Great. Thank you.

Okay. All right. Okay, operator, no other questions, I take it?

There are no other questions. Please go ahead with your closing remarks.

All right. Well, listen, with that, thank you all for attending this morning's sessions. And we look forward to giving you progress reports in the future.

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