Herc Holdings Inc (HRI) 2015 Q2 法說會逐字稿

Ladies and gentlemen, welcome to Hertz Global Holdings second-quarter 2015 earnings call.

(Operator Instructions)

I'd like to remind you today's call is being recorded by the Company. I'd now like to turn the call over to our host, Leslie Hunziker.

Thank you. Good morning, everyone. Before we begin let me remind you that certain statements made on today's call contain forward-looking information 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 second-quarter results issued last night and in the risk factors and forward-looking statements section of the Company's 2014 Form 10-K and in its second-quarter Form 10-Q quarterly report. Copies of these filings are available from the SEC and on the Hertz website.

You should all have our press release and associated financial information. We've also provided slides to accompany this conference call that can be accessed on the IR page of our website.

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

Our call today focuses on Hertz Global Holdings, 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'll be hosting our Investor Day on November 17 in New York and look forward to seeing all of you there. This morning, in addition to John Tague, Hertz's CEO, and Tom Kennedy, our Chief Financial Officer, on the call we have Larry Silber, CEO of Hertz Equipment Rental Corporation. Larry will be on hand for the Q&A session. Now I'll turn the call over to John.

Thanks, Leslie. Good morning everyone and thanks for joining us. Performance in the quarter continued to reflect some of the execution challenges we faced over the last few years. However, it also represented progress. The performance plan we've set in motion is beginning to take hold and early results give us the confidence that we are clearly moving in the right direction. In fact, I believe we are seeing evidence of an inflection point.

In US rental car, fleet management is certainly one of the areas of greatest focus as we drive to improve operations. The quarter demonstrated the progress we're making and that we are well positioned for the back half of the year. Importantly, we've largely completed our fleet transition, successfully bringing on over 125,000 cars in the quarter while disposing of nearly an equal amount. This was accomplished with a high level of operational efficiency and with strong financial performance overall, in particular, in our alternative distribution channels. These factors allowed the Company to maintain flat monthly depreciation per unit while appreciably improving fleet condition and reducing risk through a higher mix of program cars. The result of these efforts position us well as we enter the back half of the year with the fleet condition meeting our objectives and capacity size properly.

As we bring the fleet transition to a close and right-size our capacity, we are beginning to see expected improvements in utilization. We are also beginning to see the early results of improved revenue execution with more reliable data and reporting capabilities. This, combined with a more consistent performance management process, as well as a strengthened team which provides a good mix of new and existing talent, are part of a broad-based effort to support our revenue execution.

The Company's improvement initiatives are beginning to reverse the negative performance trends in the US rental car operations. In fact, we saw the momentum shift to flat margins year over year and RPD flat, as well. And we are seeing early indications in the third quarter of significantly improved fleet utilization, modest growth in revenue -- importantly, driven principally by on-airport strength. So things are moving in the right direction.

Across the Company, leaders are embracing the broad performance improvement agenda centered around the basic proposition that if we are to achieve our full potential, we must first simply rent cars better than anybody else. The path to truly realizing that objective will create significant improvement in our financial and operating performance.

Our ambition around this core belief is not limited our US operations. On the international front while quarterly operating results were skewed by a one-time legal accrual, our rental car operations overseas are making substantial improvements when you look at core revenue, transaction days and fleet efficiency.

Total RPD was unchanged year over year due to a shift in the mix of volume to our value brands. We are encouraged by the international results year to date and have equally ambitious plans to drive performance improvement in the coming quarters.

HERC -- in equipment rental, HERC, like other participants in the sector, has been negatively impacted by continued weakness in upstream oil and gas markets and the transitory effects of the Company and the industry redeploying equipment away from this sector. Despite the challenging energy markets, we are encouraged by the Company's performance in other sectors. In fact, excluding energy, worldwide HERC is gaining traction in its efforts to participate in the industry growth levels, as you saw in the second quarter's 6% revenue growth and 1% price improvement, both on a constant currency basis, again in the ex energy or ex upstream markets more specifically. While it will take time to offset the higher margin contribution of our energy business, we have other levers to close that gap and we're in the early stages of driving those initiatives.

As you know, the Consolidated Company has an annualized cost efficiency target of $300 million of which we expect to deliver $200 million this year. While most of the first six months were spent identifying initial opportunities, we've already realized $80 million in savings through June 30 as a result of a variety of early actions. The balance will be achieved between now and the end of the year as we capitalize on the momentum we've built. As we previously indicated, it's our aspiration and expectation to move beyond the $300 million. And as we firm affirm that objective we'll be communicating that with you in the future.

Now let me turn the call over to Tom who will talk about some of the specific cost actions we're taking and walk through some high level drivers of our second-quarter results. Tom?

Thanks, John. And good morning, everybody. This morning I'd like to provide you an overview of our second-quarter financial results and give some additional color on the key drivers to the performance we reported. While the second-quarter result do not compare favorably versus the first quarter of 2014, they are in line with our internal expectations and are consistent with our position that this was a transition quarter for what is a transition year for the Company.

We believe we have made significant strides to address some of our key issues as we exited the quarter, including renewing the US RAC fleet, stabilizing the revenue management execution capabilities, aligning vehicle supply more closely with demand, and gaining traction on our cost transformation agenda. While we are not at all satisfied with our results, the quarter reflects the fact these efforts are starting to show sequential improvement and we believe will position us well for a continued improvement in the second half of 2015.

So turning to the results, for the second quarter the Company reported consolidated GAAP net income of $23 million or $0.05 per diluted share and adjusted net income of $88 million or $0.19 per diluted share. Corporate EBITDA declined 15% to $379 million which resulted in a corporate EBITDA margin of 14%.

Total revenue for the Company declined 5% versus prior year to $2.7 billion. Excluding negative currency effects total revenue declined 1% versus prior year and was driven primarily by lower transaction days in US RAC segment, lower ancillary fuel pricing in both the US and international RAC segments, and the impact of the weakness in the upstream oil and gas markets in our HERC business segment. These areas of decline were partially offset by a 4% growth in international RAC transaction days.

On the cost side total direct operating and SG&A expense as a percentage of revenue increased 120 basis points to 67%. This resulted from a $31 million increase in SG&A expense which was partially due to an increase in costs associated with accounting restatement, investigation remediation activities, HERC separation costs, a legal reserve and associated costs as a result of a termination of a contract and other consulting spending in support of the Company's transformation initiatives, partially offset by favorable foreign currency translation on expenses.

The higher SG&A was partially offset by a 6% lower direct operating cost due to the decline in fuel expense, reductions in personnel resulting from the US off-airport location closures and the ongoing cost benefit from freezing our US RAC and HERC-defined benefit pension plans, and the termination of our supplemental executive retirement program. Worldwide rental car fleet costs improved year over year from stronger than expected residual values and lower interest expense.

With that context on the Company's overall performance for the quarter I'd like to now provide you some additional commentary regarding each of our reportable segments. Turning to US RAC, total rental car revenue declined 3% versus last year to $1.6 billion. The decline in revenue is the result of a 240 basis point decline in transaction days and an 80 basis point decline in total RPD. If one excludes the impact of lower fuel prices on ancillary revenue per day, total RPD was flat year over year for the quarter. Approximately half the decline in US RAC transaction days was the result of off-airport location closures and other intended business rationalization.

In our on-airport business, we saw total RPD decline approximately 50 basis points over the prior year with the decline in the Hertz brand RPD partially offset by an increase in the Dollar-Thrifty pricing. Excluding the impact of lower fuel prices on ancillary products, US RAC airport RPD was up 50 basis points for the quarter. Airport transaction days were down 240 basis points year over year.

In our off-airport business, excluding ancillary fuel, total RPD declined approximately 150 basis points during the quarter due to a shift in customer mix towards discount insurance replacement business. Volume was also down 250 basis points driven by our previously announced closure of 200 off-airport rental locations.

Looking then at the bottom line, US rental car adjusted pre-tax income of $174 million was down 5% versus prior year and corporate EBITDA of $203 million was down 8%. Improved direct operating expense as a percentage of sales was more than offset by lower revenue and higher absolute vehicle depreciation expense due to a larger fleet. From an operational perspective we experienced a 400 basis point decline in fleet efficiency to 75% as we continued our fleet renewal program throughout the quarter and worked to align supply and demand.

A bright spot during the quarter was the excellent execution by our team on our fleet renewal initiative and the corresponding fleet disposition process. During the second quarter we deleted roughly 120,000 total vehicles, which is more than two times the number of cars we deleted in the same period last year and a record quarter for the Company. This effort was further aided by the fact that the residual values remained strong for the rental industry during this period. Additionally, we doubled the number of vehicles sold or deleted through our alternative marketing channels versus the second quarter of last year, which on average result in higher net returns that had a favorable impact on net depreciation expense.

As you can see, the evidence of the great work of the team accomplished during quarter translated to monthly depreciation unit rates of $259 for the second quarter and $273 for the first six months of the year, which coincidentally both were flat versus prior year. With that in mind let me take a second and give you the context of our full-year 2015 guidance of $295 to $305 per unit per month and the math I anticipate many of you will do. Given the fact that we still have six months left in the year we feel it makes sense to take a conservative approach as you look at our full-year net depreciation estimate given the couple of big variables that still remain.

First, the 2016 fleet buy has not yet been completed and therefore the purchase price of new vehicles, some which we'll bring in in the third and fourth quarters, is only an estimate at this point. And, secondly, and perhaps more importantly, third-party residual value forecasts are pointing to continued moderation in the back half and into next year. As a result of the uncertainty around both fleet acquisition costs and residual values our depreciation guidance may reflect some conservatism.

Turning to international our international rental car operation was another highlight for the quarter with total revenue up 4% excluding currency. Transaction days rose 4%. RPD was flat on a constant currency basis as mix of volume in Europe, our largest market, shifted towards the Thrifty and Firefly value brands. On the operational front fleet efficiency of 79% improved 270 basis points versus prior year. Looking at the net result, international car rental adjusted pretax income and corporate EBITDA were both down 21% year over year. However, if you exclude the impact of legal reserve and other related one-time write-offs taken during the quarter, year-over-year results were flat on a constant currency basis driven primarily by lower net depreciation expense.

Turning to HERC, HERC total revenues worldwide declined 2% to $375 million or increased 1% on a constant currency basis. In our North American business, second-quarter equipment rental total revenue declined 1% year over year to $352 million. Excluding unfavorable currency impact, revenue was up 1%. This top-line revenue growth resulted from incremental new accounts predominantly driven by small contractors in the construction sectors and recent expansion efforts into specialty and niche markets to help diversify our customer base. These gains were partially offset by the headwinds from upstream oil and gas.

For some additional context on how the HERC business was impacted by lower energy prices, upstream oil and gas revenue represented roughly 11% of North America equipment rental and rental related revenue in the second quarter of 2015 on a constant currency basis. Upstream rental and rental related revenue was down roughly 30% year over year, excluding currency effects, as major oil producers reduced spending. This was predominantly reflected in the volume weakness although upstream pricing was down 3% in the quarter. In contrast, all our North American rental and rental related revenue increased 6% with pricing up 2% excluding currency effects.

A key priority for improving revenue has been to expand and diversify with the local customer base. Our progress is evident in a 300 basis point improvement in the local business as a percentage of revenue, bringing our national account exposure in North America down to 51% of total revenue from 54% in the second quarter of last year.

Moving on, another way we are addressing revenue growth is by reorganizing the sales force to decentralize the reporting structure for better field accountability, more focused asset management and improved customer service. The reorganization was undertaken last quarter.

In the second quarter, corporate EBITDA was $147 million for the worldwide equipment rental, a decrease of $19 million over the prior year period. Of the total decline, we estimate weakness in upstream oil and gas markets alone represent in excess of $20 million with the rest of the business recording a slight improvement.

North American time utilization was 63% and dollar utilization was 35%. Improving utilization is another priority for us. We've increased our investment in fleet maintenance to reduce out-of-service assets and have cut our original net fleet CapEx plan by approximately 10% in face of the upstream oil and gas weakness. We now expect full-year 2015 net fleet CapEx for HERC to be between $410 million and $430 million compared with $433 million in 2014.

On a positive note residual values remain strong related to our disposals. We're also addressing our store footprint for more efficient equipment sharing. And we are working to increase our specialty mix of equipment which will drive higher dollar utilization and provide entry into new markets.

We recently added Chief Operating Officer Bruce Dressel, who has extensive experience in specialty businesses and branch expansion, which will greatly impact diversification into new markets. For the full year we still expect corporate EBITDA to be in the range of $575 million to $625 million, having already incorporated the second-quarter weakness in our guidance. Under Larry Silber's leadership, the equipment rental business is focused on improving fleet maintenance and product mix and quality, while focusing on top-line revenue growth through new accounts, customer diversification and strategic specialty market opportunities.

Moving on to interest expense, consolidated GAAP interest expense for the second quarter was $156 million, reflecting an $8 million decrease compared to the same period in 2014. Adjusted interest expense declined $11 million versus prior year primarily due to favorable foreign currency translation and lower US fleet debt rates which more than offset higher US fleet debt levels. We expect this favorability will reverse as we execute capital market transactions to term out a significant portion of our US ABS fleet debt.

In terms of taxes, the Company expects its full-year effective rate to be 37%. Adjustments to GAAP net income to yield the adjusted net income results for 2014 and 2015 are tax-affected at 37%, the company's forecasted effective tax rate.

Turning to cash flow, free cash flow for the first six months of 2015 was negative $30 million. Cash flow from operations excluding the fleet depreciation add back was an $84 million source of cash, and the net investment in our fleet growth and non-fleet CapEx was a $114 million use of cash.

The components of our net investment were as follows. Net non-fleet capital expenditures totaled $123 million, including $37 million spent in our new corporate headquarters building which is scheduled to be completed in late November. The investment in the net HERC fleet growth of $101 million in the first six months reflects timing of capital spending in the year.

RAC fleet growth of $110 million source of cash was an improvement in the US fleet [debt] advance rates, more than offset by the increase in net fleet CapEx associated with our fleet refresh strategy. On a year-over-year basis free cash flow increased by $659 million driven by improvements in RAC fleet growth associated with higher overall advance rates and the avoidance of certain inefficiencies that existed last year because of our late filing status.

Turning to debt, we had nearly $1.6 billion of corporate liquidity available, as outlined in slide 17 in the presentation. Our net corporate debt leverage ratio was 4.9 times, up from last year's 3.6 times. Although by year end we expect 2015 ratio to be the lower than 2014's year-end level of 4.4 times.

For the balance of the year we anticipate executing one or more term ABS transactions in the US, refinancing our Canadian-Australian securitization platforms, and issuing additional European fleet notes. Depending on market conditions and the timing of the completion of the pro forma financial statements that would reflect the HERC spin transaction, we also may consider refinancing some of our callable bonds.

With that I will turn it back to John.

Thanks, Tom. As the release indicated we are reaffirming our corporate EBITDA guidance of $1.45 billion to $1.55 billion. Clearly given the under performance of the Company, particularly in the first half of the year, the opportunity we see in front of us, this result by no means represents our full potential.

In fact, we are in the early innings of our transformation and expect to see significant improvement in 2016 followed by a multi-year agenda of continued performance improvement. We'll have a more comprehensive review of the third quarter in early November and we're looking forward to an even deeper dive during the Company's Investor Day later that month.

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

(Operator Instructions)

We have a question from Chris Agnew from MKM Partners.

Hi, good morning, thanks very much. The first question, just with the fleet transition this year, do fewer risk cars sell through the end of the year? Essentially how far through risk disposals for 2015 are you? Thanks.

Chris, thank you. Yes, we've disposed of a significant amount of risk cars. We still have more to come. I would say a disproportionate share clearly was done in the first half of the year. I think our guidance reflects the assumption we'll have some additional risks with some potential exposure to residuals in the second half of the year conservatively. But we've completed a substantial number of our risk deletes during the first half of the year.

Got you. And then if I can ask on volume headwinds that you saw in the quarter, should we expect those to continue through to the second half? And maybe if you could break those down into different headwinds and maybe touch on what your approach to the opaque channel is this year and how maybe that impacted in the second quarter. Thanks.

I think as we've indicated, in the third quarter we expect US rack revenue to be up year over year. That's likely to be, though not certain, likely to be a balance of rate and volume. It's particularly supported by on-airport growth. We could see a flat to modest decline in off airport. So, I think it's a very different picture than we had in the second quarter so I don't really think the second quarter is necessarily terribly instructive.

I would say that some of the volume issues were self-inflicted as we reached for a level of rate in Dollar-Thrifty that, frankly, turned out not to be supportable and continued to deal with some execution issues that we have resolved.

Our issue on opaque is really based on the rate in opaque. We'll sell opaque when we think the rate is an attractive option versus the alternative. I think in the second quarter I'm not sure what that was year over year. I think it was somewhat down. And I'm not really currently in a position to communicate an expectation on the third. But, again, if we like the rate relative to alternatives, we'll sell an opaque.

Excellent.

Our next question comes from the line of Rich Kwas from Wells Fargo Securities.

Hi, good morning. Just a question on what you're seeing pricing-wise here in the third quarter. Given the move that you made back in June with the rate increase, both weekly and daily, the acceptance rate around that seems to have been mixed. Just wanted to get a sense for how you're seeing rate play out in the third quarter. And then I have a follow-up on HERC. Thanks.

Yes, I think obviously the acceptance rate was -- or, in effect, the competitive match -- was weak. I continue to draw folks' attention to, our objective is to drive realized rate improvement over time, really ultimately as reflected in our revenue per available car day, so we get both the rate and the volume equation in how we talk about revenue efficiency. And when you look at that, the published pricing is really a small component of what is going to drive that outcome and, frankly, probably the least likely component to yield to simplistic increases. I've always felt that base price was the most difficult.

So, one of the significant opportunities we have is to work against this declining yield curve that exists in the industry. I don't expect it to be an airline or a hotel curve. And I think particularly in the last year and a half, the curve hasn't even really looked like it previously looked like in this industry with the degradation as you come towards pick up day being significant. So, that's an opportunity that we have internally around how we execute going forward.

Ancillary sales and new products, I think, are going to be a big opportunity against realized revenue. We're going to be frustrated with our progress in that regard because our systems are inflexible and it's going to take longer than we would like to move that needle. Sales effectiveness and value-based selling to the corporate market, I would say particularly around features and consequences as opposed to necessarily base rate or other areas of opportunity.

So, I think that we would all be well served -- I appreciate the validity and the insights of the pricing surveys but we would all be sell served to compartmentalize those as really a small part of the story and probably telling a story around the data that's least likely to yield to improvement over the next few years. I don't want to suggest to you that we're well on our way to realizing our realized revenue improvement objectives but the story is much bigger than the pricing surveys and it will continue to be so.

Okay. And just shorter term are you seeing a little bit of lift on price here on a year-over-year basis on the leisure side of things?

I think we're seeing what we would expect to see given the seasonality between the second and the third quarter, and obviously tightening up our fleet. But as we've said, we expect US rack revenue to be up year over year through a mix of rate and volume.

Okay. And then just a follow-up, more targeted at Larry. So, you made progress on the oil and gas piece. It's a lower percentage of the HERC revenue base. But with oil continuing to decline here into the low $40s is the cost structure right-sized for a $40 to $45 barrel level or is there more work to be done there?

We believe at the moment we're right-sized for the market conditions that exist today. We're focused on really operational efficiency and operational improvements around the fleet, making sure the fleet is available for rent, making sure we have the right fleet available for our customer base. And we believe at this time we've moved the product appropriately in our fleet appropriately around so that we're prepared for the current levels that exist in the market.

Okay, thank you.

We have a question from Anj Singh from Credit Suisse.

Good morning. Thanks for taking my questions. I was hoping you could talk a bit more about your systems integrations. Last call you mentioned you had ran an integration pilot in Dallas. Have you ran any other pilots since that location? And if you could talk a bit about what you're seeing in the locations that you have integrated. Are you seeing benefits in volume, pricing, costs or customer service? And do you still expect to be done by the year end?

First of all, those pilots aren't complete cutovers. Only a portion of the location volume flows through that system as we work through, in effect, testing all of the potential transaction parameters. They continue to go well. With these things you expect some bumps along the road but I don't see any of those being unmanageable. And we do expect to conclude by year end beginning to phase in real cutovers later in the summer or early fall.

Relative to the rest of the systems we did cut over a substantial amount of the accounting from Dollar-Thrifty in July and that went quite well. So, we're encouraged by that. Right now all systems go, we expect to conclude the systems integration by the end of the year. I think it will be a few months into next year before we're able to decommission the systems because we'll likely run with the side by side capability for a period of time but it's on track.

Okay got it, thank you. And as a follow-up, I realize your fleet buy negotiations aren't complete yet but we've heard a competitor discuss how program cars are becoming slightly less attractive in their negotiations. Wondering if you have a sense of what your program and risk mix may look like for next year at this stage. And also if you could give us a sense of how your discussions with OEMs may be faring. Thanks.

I think, obviously, as OEM negotiations are continuing we're not prepared to discuss the details. Tom and I just sat down a few months ago. I'd just like to set the context for what we're seeking and have Tom talk about the specifics.

We're not necessarily seeking the lowest fleet deep in any calendar year period because if we were to do that we would succumb to a higher-risk position than we believe is responsible. So, consequently, even if the numbers suggest we should go high on the risk curve based upon the program car offering, we're going to be balanced in that outcome. Tom can talk more specifically.

Last year our fleet buy was split from all the year 2015 approximately 50/50 risk and program. And as I think I've articulated to folks previously the economics were, I think, more closely aligned in the offerings.

This year we are seeing, as you probably heard from another competitor, is some pressure on program pricing related to domestics. And we're evaluating how that overall program mix might change by keeping a balance between having good economics but also, as John alluded to, not being irresponsible on moving too much to risk or too much to program.

We can't yet tell you what our program risk mix will be or the economics but it's likely to be more risk than the 50/50 split last year but not to where the Company was a few years ago where they were at 95% risk. So, we're going to continue to be balanced and iterate our fleet plan as a multi-variable solution set we solve for. We solve for not only the economics of program and mix but what we think from a program standpoint that provides us the flexibility for adds and deletes during the course of the seasonal nature of the business.

It also is reflective of, as you have more program mix it allows you to turn your cars more frequently and keeps the renewal of your fleet there. So, there's a lot of factors that go into our ultimate decision-making. The economics of the overall buy is one of multi-variable that we are concluding on. So, it's a process we're in, we're deep into it right now, and I think we'll probably have some more color when we come out with the third quarter.

Okay, got it. Appreciate the thoughts. Thank you.

Our next question comes from Michael Millman from Millman Research.

Thank you. Could you talk about how much the State Farm deal and other IR contracts are losing if, in fact, they're losing and what can you do about it?

Could I just say no, Michael? (laughter) Look, I think there's no secret that the IR business tends to come in at lower RPD, but it has certain beneficial characteristics, as well. All I can tell you about some of the controversial IR contracts the Company entered over the last few years is we can clearly improve them. But we are committed to the IR market and if we were to, quote-unquote, exit these, I wouldn't exactly be redoing my guidance. So, I think their impact has been overplayed.

I don't underplay the tumultuous sequence of events it caused at the Company. That was very significant in 2014. But I can't get all that back and make the decision differently than what was made. I have to evaluate that as sunk cost and where are we today. And where are we today? -- we're not in a place I would like to be but we're not in a place that causes us to question our participation in the sector and we'll move to improve those economics over time.

Okay, thank you. A second question is actually about DTG. Can you compare how the DTG business is doing today versus what it was as an independent company?

We haven't disclosed that. I think intuitively it's fair to reflect that we've had some issues in capturing and improving value with DTG. I think to a certain extent we fell into the trap that you can fall into in some of these acquisitions and reforming the acquired entity in the vision you had for it as opposed to how it went to market.

And I think from one perspective you can say how difficult can this be, we're just merging two rental car companies. I think we know it can be a lot more difficult than that. It was the Company's first entry into a multi-brand strategy.

I think the way in which DTG went to market was appreciably different from the way Hertz went to market. I think DTG was clearly a value brand that participated across all of the segments, including business travelers, particularly those that were not operating under corporate contracts. And to a certain extent I think we would be self-critical and repurposing them more as a weekend leisure brand than was appropriate.

So, now we have to restore real value brand proposition there and I think enhance the deliverable product there not through necessarily significant investment but through cleaning up our stores, improving our execution. Again, they were negatively impacted by our decision to age fleet over 2013-2014 which even within their competitive set presented challenges. So, I think we're in a less desirable place than we would like to be but I think we know how to fix that and we're undertaking that work aggressively now.

And I'd add I think when you look back at the history of the Company as an independent, Dollar, in my last (inaudible) industry was the leader in international inbound tour, and we kind of lost our way. And that's an important segment of the business. When I was at Vanguard, Alamo was a distant second, and I think Alamo's done and Enterprise has done a good job of expanding their presence in international inbound tour. And Dollar de-seated some of that market.

So, there's an area, as John said, whereas the brands could stand, and need to stand, for things for certain segments. And Dollar itself was one leaders in international inbound tour, and that is a segment that we obviously are going to be very focused on recapturing some of that lost business.

Our next question comes from Chris Woronka from Deutsche Bank.

Good morning, guys. I know the fleet plans are not done yet but maybe some directional thoughts on what you think in terms of fleet size growth for next year.

As you said, they're not done. I think as I've indicated before, we have a significant opportunity to grow transactions even if we were not to grow fleet because of the utilization improvement opportunity we have, which is in part enabled by simply getting the fleet transition, which was a massive operational project for us, behind us. And also we're doing a lot of improvement work, particularly on the supply chain and the support maintenance spend in car days, working our way through trying to compress supply chain spend and its effect on capacity.

We expect quite a big opportunity in utilization improvement. And I think we have to lock down where we're really going to be there before we're in a position to determine overall fleet levels.

Okay. And then just on the stock buybacks, I think you mentioned last quarter you could start going to market when this 10-Q has been filed. Is that still relevant and do you expect to be active buying back stock in the second half?

Our window is closed until this Thursday. I think, as we've said, we will continue to be opportunistic in our pursuit of that. I think you saw the liquidity that Tom moved forward to. Some have suggested -- where's the capacity? I think you see the capacity right there and we'll move forward in a prudent manner.

Okay. Very good, thanks.

We have a question from John Healy from Northcoast Research.

Thank you. John or Tom I wanted to ask a little bit more about fleet cost. As you look to 2016, is there at least a way you can help us think about the movements in the purchase price and the movements in the residual values that at least that you're thinking about from a like to like basis, maybe what a 2016 model year vehicle looks like on a risk car purchase versus a 2015, and maybe what you're initially thinking for the movements to be in the changes in the residual value outlook.

Yes, there is a way we can help you think about it and that will be on November 17 when we give you our 2016 guidance. Between now and then while we're in negotiations, we're just not comfortable putting together data points until we conclude that.

Fair enough. And I also wanted to ask, on the update you provided a few weeks ago there was a lot of talk about improvements in the service offerings and not going to battle with cars but going to battle with service. I was hoping maybe you could provide a little bit more color on what you're doing there, maybe some changes in the field, some milestones we can expect. Anything you can provide there.

Yes, I hate to keep deferring until November but most of that is still in work. We are piling a few things that we'll see how those go. But we'll be more descriptive about that.

Look, Hertz has long been recognized as the premium brand within the industry. And we tested that brand proposition by diminishing the deliverable around what is more important than anything else, the condition of the car. So, we've cleaned that up but obviously we're not going to see that, while we're getting very strong customer satisfaction year over year, and frankly at two-year highs, all of our customers don't have a ubiquitous understanding of the fleet having been transformed.

I think you'll see continued traction month to month with the way customers are feeling about the brand as we evidence that in the cars that they are driving. And that's certainly the biggest thing we can do. We're continuing to work condition down, in some cases below -- I.E, better -- than we've operated traditionally in the past. So, that continues to be a lever we're going to look at.

I think people are predisposed towards a willingness to place this brand there. We called that willingness into question. We're going to have to, frankly, over-correct in how we deliver service against that premium brand to bring their perspective back into balance. And we'll discuss that in more detail in November.

Great. And just with that, are you able to do that without a meaningful change in the cost structure of those Hertz airport locations, do you think?

It's the interesting thing in this business. As you know, the concentration and customer density on-airport, number one, and then in a relatively small number of locations on-airport, is pretty significant. That's been one of the encouraging things I've seen in the model is I think we can make a difference on service with a responsible level of investment.

Thank you.

We have a question from Kevin Milota from JPMorgan.

Hi, good morning, everyone. I was hoping you could give us an update on the cost reduction program. Obviously you had the $200 million this year, $300 million next year. Would it be possible to give us a more granular view of what buckets you're looking for in those aggregate numbers? And also, on the net fleet CapEx side of things, Tom, I missed the number. Was it $410 million to $430 million? And was that only for HERC? Or could you give us a break down for what it looks like on the rack side, as well? Thank you.

Let me start with the latter part of your question. The net fleet CapEx was for HERC, the $410 million to $430 range. The non-fleet CapEx range is consistent with our prior guidance that we provided, which is in the $275 million to $295 million. And of that $275 million to $295 million, you might recall, I said about $70 million of that number is for the new corporate headquarters this year. So, that's the non-fleet CapEx and HERC fleet CapEx.

As it relates to your first part of your question was on the cost savings, a lot of the, Kevin, initiatives I have spoken to folks are what we would consider the no regrets kind of binary decisions. So, we closed the defined benefit pension plans in the supplemental executive retirement plan. That drove $18 million of annualized savings.

We eliminated a significant portion of our aviation and special events. That's $11 million. We reduced some, I think, non-value-added sponsorships and things, and that was in the $10 million range.

We had the navigation solutions business which was the parent company that managed the Never Lost system. That was never integrated in the business and they had 300 people in three separate headquarter locations and a whole executive management team that was never integrated in the business. That was $16 million.

I can go on and on and give you the areas. We had a renegotiated of an IT contract and that was $20 million. So, there's big buckets of quick hit binary decisions that were part of the first $300 million. Some of them obviously got agreed to or executed during the course of the first quarter and second quarter, and that's why you see $80 million of the $200 million, and it's lower in the second half of the year. And that's why we've said we'll have $300 million annualized.

We aren't finished, to be clear, on our cost initiative work. I think I've spoken to folks before, we still think there's a significant amount of opportunity in the business to take out costs, some which will take longer to get at through technology enablement and labor capital tradeoffs. But we have a significant amount of labor in the workforce that we think we can improve the quality and service delivery and reduce the delivery cost of that service.

We have 1,500 people in the back office which is probably double what it should be. Our call centers are probably double what they should be. Our IT spend is over $400 million a year. And despite getting a quick hit of $20 million, we think that could be half. None of those numbers are included in our $300 million target.

Plus there will be additional savings for which we'll validate as part of the integration of DTG and Hertz, which alone you can just think of one easy one which is the decommissioning of duplicate IT systems, which is a run rate of about $1 million a month. So, once we decommission, as John mentioned, we'll have some overlap time, but once we decommission that, that will be $12 million a year.

So, we view that there's enormous amount of cost agenda that's directly in our control that is an ability for us to go execute against, which, to be clear, does not impair our customer service delivery or quality of product we deliver. And, in fact, as John Healy asked, we believe we can invest in that product quality and still sell from that, and do it at a very nominal basis to make a significant difference in the customer experience we have with our Hertz and DTG customers.

The structural cost reduction opportunity here is very significant. And it actually, in many cases, will improve quality as we take out costs. And, importantly, it's virtually unrepresented in the $300 million.

Okay, great. And just the rack fleet CapEx is what for the year?

We said capacity was going to be down.

We just said capacity, we only gave capacity guidance. We didn't give full-year CapEx guidance on the rack fleet. But we said capacity would be about 0.5% to 1.5% for the year.

(inaudible) in the back half.

Okay.

Our last question comes from Brian Johnson from Barclays.

Hi, this is Dan Levy on for Brian. Thanks for taking the questions. A question on understanding your back half pricing comp. I understand that the third quarter of last year you were negatively impacted. I think you didn't have enough fleet to service this high-rate leisure close-in business. You also had mixed dilution in the back half from more off-airport business. So, can one make the assessment that now that your fleet is normalized and you're not going to have that excess off-airport business, should your second-half comps be on the easier side? Just trying to understand how easy those comps are and if there's is some offset which we should consider.

I think if you look at the sequence of results last year they're absolutely easier. Having said that, the first path to health is passing over and improving against the easy comps. I think it's clearly progress but I wouldn't indicate to you that the results are indicative of what we think we can do in next year's third quarter, for example. So, it's a directional improvement, it's not fully fixed.

Okay. But there's no big offset against those, correct?

I don't think so.

Okay. And then just a follow-up -- I know you guided to your fleet growth of up 0.5 point to 1.5 points this year. And I think your fleet growth in the first half is only up 70 bps, so is there opportunity to grow fleet even below that back half? That 70 bps I assume is actually with increased fleet purchases. So, just trying to understand how we should frame that and whether there's opportunity to come in below that up 0.5 point level.

We expect that the back half will be a modest decline year over year. Tom's calculating your number here, hold on.

Yes, we're up 70 bps for the first six months, is correct. We expect the 0.5 to 1.5 probably in the lower end. It depends upon, again, the big driver potentially of some of that fleet growth in the first part of the year and lower in the second half of the year, as some of the higher fleet was a result of the fleet rotation.

We're not going to have the high fleet rotation friction going on in the business driving fleet growth. So, that's why there is a possibility it could be lower than that but we still think the full-year 0.5 point to 1.5 points is an appropriate amount. There could be opportunity to be higher end of that range depending on demand and it could be at the lower end of the range. That's why we set the range and reconfirmed that range for this guidance again.

And if appropriate we'll update that in the third-quarter call.

Your fleet growth is going to be just largely driven on where the volume comes in -- that's correct?

Yes, and I think where the utilization comes in, obviously. We've got improvements to stick a much higher utilization assumption in the out months but we want to earn that in every step of the way.

Okay, thank you very much.

Thank you. I appreciate everyone joining us on the call today. Not a satisfying quarter but we feel very strongly it is evidence that we are impacting the critical areas of non-performance of the Company. It won't be fixed, it won't be done in the third quarter but it will be a much better story. And we think that we have several quarters in front of us where we can go at improving the basic non-performance at the Company. So with that, we appreciate your support and we'll talk to you next quarter. Thank you.

Ladies and gentlemen, that does conclude our conference. We would like to thank you for your participation and using AT&T teleconference. You may now disconnect.