Herc Holdings Inc (HRI) 2015 Q3 法說會逐字稿

Good morning, and welcome to the Hertz Global Holdings third-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. It is now my pleasure to turn the call over to your host, Leslie Hunziker. Please go ahead.

Good morning, everyone. By now 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.

I want to remind you that certain statements made on this 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 our third-quarter press release issued this morning, and in the Risk Factors and Forward-Looking Statements section of our 2014 Form 10-K and the September 30, 2015, 10-Q. Copies of these filings are available from the SEC, the Hertz website, or the Company's Investor Relations department.

Today, we'll use certain non-GAAP financial measures, all of which are reconciled with GAAP numbers in our press release, which is 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 Holding, Incorporated, the publicly traded Company. Results for the Hertz Corporation differ only slightly, as explained in our press release.

With regard to the IR calendar, as you know, we'll be hosting our Investor Day next week, in New York, on November 17. We're looking forward to meeting with all of you there. After that, we go right to the Barclays Global Auto Conference on the 18th, followed by the MKM Entertainment, Leisure and Internet Conference on November 19. Both are also being held in New York. And then, in December, we're scheduled to attend the Bank of America/Merrill Lynch Leverage Finance Conference back here in Florida. So we hope to see you at one of these events as well.

This morning, in addition to John Tague, Hertz's CEO; and Tom Kennedy, our Chief Financial Officer; on the call, we have Larry Silber, Chief Executive Officer of Hertz Equipment Rental. Now, I'll turn the call over to John.

Thanks, Leslie. Good morning, everyone, and thanks for joining us. We achieved improved profitability in the third quarter as we continued to see the results of our aggressive actions to manage cost, and improve utilization and revenue efficiency, while importantly, enhancing our customer satisfaction. For Worldwide Rental Car operations, that culminated in a 17% corporate EBITDA margin, or a 300-basis-point improvement year over year, which is likely even a bit understated as we're simply deducting the HERC EBITDA from the consolidated EBITDA, burdening the rental car operation with overhead that will ultimately be eliminated.

Additionally, in the quarter, we successfully integrated the Dollar and Thrifty systems and made good progress toward the imminent filing of the Form 10 for the HERC separation. Further, we introduced -- excuse me, we reduced our investment in CAR from 16.1% to 13.6%, generating $100 million in proceeds, which, in part, funded the repurchase of $262 million of stock. This was the initial installment in our commitment to fulfill the previously authorized $1 billion buyback.

We remain comfortable with our full-year consolidated adjusted corporate EBITDA guidance of $1.45 billion to $1.55 billion, which includes $575 million to $625 million of forecasted HERC EBITDA. HERC's revenue performance in the quarter remained challenged, due to its exposure to oil and gas. However, as Larry will discuss later, revenue growth outside of energy-affected stores was actually quite encouraging.

And while we are pleased to see a modest improvement in RAC revenue efficiency, as indicated by revenue per available car day, the US revenue performance overall, and at the RPD level, fell somewhat short of our expectations. That was primarily due to a significant deterioration in published pricing during the back half of the quarter, and a softening of commercial traffic, consistent with what you have heard about from other travel companies.

We're making progress -- never as fast as I might like, but nonetheless, we are gaining momentum and are at the very early stages of our performance improvement plan. We'll have more to talk about next week at our Investor Day regarding our plans to significantly improve the Company's margin performance.

While we acknowledge that pricing is clearly an important factor for profit growth, I think the real question we ask ourselves consistently is, how do we close the substantial margin gap versus the market leader who achieves that outcome in the same pricing environment we operate in? At Investor Day, we plan to take that question head-on and leave the debate about base-pricing momentum aside for a bit, while creating a plan for substantial earnings improvement trajectory that will only be further enhanced when industry pricing improves, as I believe it will. We also plan to introduce initial 2016 guidance as a first installment in a three- to five-year journey to sustainable market leaderships. The opportunities are significant.

But before I get ahead of next week's meeting, let me turn it over to Tom to walk you through the third-quarter results. Tom?

Thank you, John, and good morning, everyone. This morning, I will cover with you our third-quarter results, provide an update on the Company's capital and balance sheet management, and address the correction made to the previously issued second-quarter 2015 10-Q which was contained in this morning's 2015 second-quarter 10-Q/A filing.

First, turning to the quarter, let me start by pointing out that, consistent with prior comments we made on the second-quarter call, and despite 2015 being a transition year for the Company, we are starting to see better core performance in our business as we continue to make progress against our plan to drive sustained earnings improvement.

This progress is evidenced by the 247-basis-point improvement to consolidate corporate adjusted EBITDA margin and a 300-basis-point improvement in a -- worldwide rental car margins. A very tangible example of this progress can be seen in the US fleet management, where our fleet and operations team delivered a 300-basis-point improvement in fleet efficiency. Furthermore, we achieved better-than-expected net depreciation per unit in US RAC. While this result was supported by a strong residual market, it was also a result of our team's keen focus on fleet costs and the strategic re-marketing of our non-program fleet through more profitable alternative channels.

A second example of the progress we are making is in the managing the overall cost structure of the Company. Year to date, we have delivered more than $150 million of cost savings directly to the bottom line and are well on our way towards our commitment of achieving $200 million of end-year 2015 cost savings and annualized savings of at least $300 million on a go-forward basis in 2016. The improved focus on cost has contributed to a 290-basis-point improvement in our GAAP direct operating and SG&A expense as a percent of revenue.

Given our intent to separate the Rental Car business and Equipment Rental businesses in 2016, we believe it is also helpful to begin discussing Rental Car margins on a worldwide basis. As John mentioned earlier, our worldwide Car Rental adjusted corporate EBITDA margin, which we define as consolidated Hertz, less the Hertz segment results, was nearly 17%.

What gives us optimism is that we are able to achieve this margin growth while still clearly being in the very early stages of our full potential profit improvement plan. Additionally, as we previously indicated, we will continue to review our non-core asset portfolio for opportunities to create additional liquidity that, when combined with improved operating cash flow, create the capacity to support our previously commitment of $1 billion share buyback plan.

This was evidenced in the third quarter, as we monetized a portion of our China Auto Rental ownership position, and with the improvement in cash flow from our core operations, we were able to purchase nearly 15 million shares -- or approximately 3% of our equity float during the quarter -- while also improving the net leverage ratio from 4.8 times, as of June 30, to 4.4 times, as of September 30.

Let me now give you some additional color on the financial results issued in this morning's press release. Total consolidated revenue of $3 billion declined $145 million, or 5% versus prior year. However, on an FX-neutral basis, year-over-year consolidated revenue was flat. Despite the lack of absolute revenue dollar growth, we were able to report an adjusted EBITDA corporate margin growth of 9% versus prior year, to $601 million, and an adjusted corporate EBITDA margin of 20%, which was 240% -- 247 basis points higher versus the same period last year.

On a consolidated basis, GAAP net income totaled $237 million, or $0.52 per diluted share, while adjusted net income totaled $226 million, or $0.49, which was $0.05 favorable year over year. Excluding the unfavorable foreign exchange impact of probably -- approximately $0.03 per share, year-over-year adjusted diluted EPS would have increased by approximately $0.08.

Another item I'd like to point out is that, in our third-quarter reported results, they were inclusive of approximately $18 million of out-of-period items, of which $13 million relate to prior years, which we estimate negatively impacted adjusted EPS by another $0.03.

Turning now to the US Rental Car segment, while revenue results came in below expectations, we continued to advance the revenue agenda we established earlier this year, including improvements in our systems, talents, and performance visibility. For the third quarter, total revenue decreased 2% year over year as a result of flat volume and a 2% decline in RPD.

Unit revenue, as measured by revenue per available car day, increased by 1%, as fleet efficiency increased by 3 percentage points. During the third quarter, we took advantage of strong used car market, heading into the shoulder period, resulting in a 3% reduction in fleet size. Ancillary revenue per transaction day, excluding fuel-related products, continued its healthy growth trajectory, increasing 4% during the quarter. Looking at our Airport business, total revenue was flat, driven by a 3% increase in volume and a 3% decrease in RPD.

Volume increased on reduced capacity, reversing the negative trend we observed in the first half of the year. As it relates to the RPD challenges John mentioned, published rates for the industry declined as we entered the shoulder period at the end of August, and weakness in the corporate portfolio performance was a phenomenon observed consistently throughout the travel sector.

Given the Airport results, you can see all the revenue decline for the quarter was driven by our off-Airport business, where volume decreased 6 percentage points from the third quarter of 2014 as a result of store closures early in 2015 and a reduction in the fleet allocated to our off-Airport business. Third-quarter net fleet depreciation per month of $267 per unit reflected a 1% increase versus prior year.

As it relates to our re-marketing initiatives, the number of non-program vehicles sold through alternative channels increased 68% in the third quarter versus prior year. Of the total non-program vehicles sold, approximately 60% were re-marketed through these higher-yielding channels. Year to date, our multi-depreciation per unit was also $267, but improved 1% versus the prior year.

The fleet management re-marketing initiatives we implemented in late 2014 and through 2015, along with continued strong residuals, are driving the improvement. Based on the year-to-date run rate, we now expect US RAC multi-depreciation rates for the full-year 2015 to be between $270 and $280 per unit, a decrease from our previous guidance of $295 to $305 per unit.

For the quarter, adjusted corporate EBITDA margin improved 236 basis points to 16%, despite the revenue decline and a 1% increase in monthly per-unit depreciation expense. The improved segment margin was the result of a 330-basis-point improvement in US direct operating SG&A costs as a percentage of revenue.

Several key drivers to the our improved cost management included favorable maintenance costs, which were lower in the quarter, in part, as a result of a refreshed fleet. We also reduced personnel expense by 4% year over year to rightsize our operations and demand and began rolling out new resource management tools that allow us to meet customer demand peaks and reduce underutilization at off-peak times.

Another key driver was improved net damage collections. By streamlining and expediting documentation delivery to our Collections Group in Oklahoma City from the field locations, we have increased our percentage of damaged bill back to customers which, in turn, increase our total collections year over year.

Looking now at the International segment, this business continues to perform very well. While total revenue decreased $108 million year over year, to $687 million, excluding $130 million unfavorable FX impact, total International revenue increased $22 million, or 3%. Transaction days increased 1% and total RPD increased 2% on a currency-neutral basis. Our focus on profitable rental demand resulted in moderate transaction day growth and strong pricing discipline. Unit revenue, or revenue per available car day, increased 2% versus last year due to higher RPD and fleet efficiency of 81% that was equal to the prior year.

The International segment's adjusted corporate EBITDA margin of 24% increased 509 basis points versus the prior year, driven by an improved revenue mix, a 6% reduction in net fleet depreciation per unit on a constant-currency basis, and a 290-basis-point improvement in segment direct operating SG&A cost as a percentage of revenue.

Now that I've given you an update on the Worldwide Rental Car business, I would like to turn the call over to Larry Silber, who -- our CEO of Hertz, to provide an update on the Equipment Rental business. Larry?

Thanks, Tom. And good morning, everyone. In the third quarter, we continued to focus on diversifying our customer base, optimizing the sales and operations organizations, increasing the fleet available for rent, reinvesting in branch management and maintenance personnel, and assessing the efficiency of the network. While we're making good progress transforming the business, the performance improvement is being masked by the continued weakness in major upstream oil and gas regions, which is having a secondary effect on other types of businesses in those markets.

We previously broke out customer account revenue in the upstream markets to illustrate the impact that sector's downturn is having on our business. However, due to the broader effect we are seeing, we now believe that it is relevant to identify branch revenue in major upstream oil and gas markets rather than just specific upstream oil and gas customer account revenue.

In my commentary this morning, I'm going to highlight North America's performance, since it is being impacted by the major oil and gas markets. In the third quarter, North American rental and rental-related revenue increased 2%, excluding currency. Branch revenue in major upstream oil and gas markets, which made up about 21% of the total, decreased 26% in constant currency, while non-oil and gas rental and rental-related revenue increased 14%.

North America pricing was flat on a 3% increase in volume, driven by growth in new accounts. Average rate was heavily impacted by the loss of higher-priced oil and gas business and related price concessions in that sector. Excluding the impact in major upstream oil and gas markets, pricing increased by 1%. The non-oil and gas growth is derived from incremental new account revenue, which is up 67% compared with last year's third quarter.

The new accounts primarily represent small contractor, government, and infrastructure business. As a result of the more diversified customer base, our national account mix declined 200 basis points to 49% of our total revenue. While the strategy is to continue to grow the national accounts, expanding faster with local customers will reduce risk and drive better pricing.

In addition to diversifying the customer mix, we're also starting to shift our product mix to include higher dollar utilization, specialty and small equipment. You'll see us buying more in these categories of equipment for next year. Excluding major oil and gas markets, dollar utilization for North America improved 59 basis points, excluding currency, and time utilization decreased 26 basis points in the third quarter.

Our average fleet in oil and gas markets in the third quarter was down 16% year over year, which we believe positions us appropriately for the longer term. Fleet availability in non-oil and gas markets has increased as we continue to work on accelerating maintenance cycle times and improving operational processes. The investments we've made on that front have resulted in a 220-basis-point improvement in fleet available for rent year over year.

Taking a global view now, worldwide adjusted corporate EBITDA decreased $14 million in the quarter. Excluding the impact of foreign exchange, approximately $21 million of the decline came from North American major upstream oil and gas markets, while North American non-oil and gas branches reported an approximate $10 million increase, reflecting the early stages of operational improvements. The remaining impact was primarily related to the adverse impact of foreign currency.

As we continue to work on our own transformation, and prepare for the business separation, we're adding key leadership to support those efforts with appointments of a General Counsel and a Chief Financial Officer to be announced later this week.

Finally, we are reaffirming HERC's full-year adjusted corporate EBITDA outlook of $575 million to $625 million. We are on target to file our Form 10 with the SEC prior to year end, and continue to target a separation in the latter part of the second quarter of 2016. We look forward to providing the market with our own full potential plan as we get closer to the separation date.

Now, I'll turn it back to Tom Kennedy.

Thanks, Larry. Before we open the call up to questions, let me give you a quick update on the balance sheet and cash flow performance. I'm pleased to report that we ended the quarter with a sequential improvement in our net leverage ratio as we continue to make progress toward our target leverage level of 3.5 times by year-end 2016.

Our corporate liquidity remains strong, with a total $1.8 billion at quarter end, including $509 million of unrestricted cash and cash equivalents, and $1.3 billion availability under our ABL facility. We continue to be disciplined in our non-fleet capital spending, having invested $58 million in the quarter, of which $19 million was related to a nonrecurring investment in our new corporate headquarter facility.

Year-to-date non-fleet capital spending was $181 million and includes $56 million for the new headquarters. We now expect our full-year non-fleet capital spending to be between $220 million and $240 million, a decrease from our previous guidance of $275 million to $295 million.

Free cash flow for the first nine months of 2015 was $414 million, representing a $336 million improvement over the same period last year. This increase was primarily driven by a reduction in RAC fleet growth, resulting from higher fleet utilization, disciplined US capacity growth, and a higher overall advanced rate on fleet debt.

We also completed a number of fleet financings in the quarter. We replaced the existing Hertz and Dollar Thrifty Canadian securitization facilities with a new CAD350 million facility that matures in January 2018. We also extended until September 2017 the variable funding notes associated with the Donlen business and upsized that facility by $100 million, to $500 million.

In October, we closed on a $600 million term ABS note offering for the US RAC business. This represented the first 144a issuance out of our new HVF II funding platform. We also closed on an extension and re-pricing of our EUR400 million securitization, bringing the drawn spread lower by almost 30 basis points. For the balance of the year, we anticipate extending maturities for our two primary US RAC securitization revolvers.

Turning now to a few housekeeping items, I'd like to take a moment to point out a few changes in our disclosures that you'll likely notice in this quarter and that we intend to implement going forward. First, we have included information on Worldwide Global Rental Car. We believe it is an important in advance to the separation of Rental Car and Equipment Rental businesses that we begin providing additional detail on each entity separately, and feel that this disclosure will be a good proxy for how the two business units will perform on a pro-forma stand-alone basis.

Secondly, as you've seen, we started reporting unit revenue performance metric, revenue per available car day, for our Car Rental segments in this quarter. We believe this unit revenue performance metric captures the combined results of both revenue management and fleet management [in one] metric.

Further, moving to a unit revenue metric, we believe creates a path towards a common industry definition of revenue efficiency that today is challenging, given the different ways industry participants define unit rate and transaction days.

This change is, in fact, timely, given the results of our recent conversion of the Dollar Thrifty operating systems into the Hertz operating system has now aligned in DTG transaction days calculation to the Hertz convention, which will cause some transaction day comparability or issues over the next 12 months beginning in the fourth quarter of 2015, as the changes were immaterial to 3Q given the timing of the conversion.

The alignment and methodologies had the effect of recognizing a greater volume of transaction days on a Dollar Thrifty rental transaction, as compared to its previous practice. I would point out that, while different in terms of how partial days are recognized, both approaches were accurate. This difference is relatively small and accounts for an increase of approximately 1% to 2% on transaction days over the next 12 months.

Lastly, I'd like to take a moment to address the circumstances that led us to file an amended second-quarter 10-Q this morning. During our review procedures for the third quarter, Management identified an error in fleet depreciation expense in 2015 due to a process change we implemented at the beginning of the year.

This error is unique to the way vehicles are transferred between our legal entities when they are to be sold through our retail sales channels -- it is not related to our standard depreciation process. The cause of this error has been identified and additional control procedures have been implemented. As a result of this error, depreciation expense during the three and six months ended June 30, 2015, was previously overstated by $21 million and $18 million, respectively. In addition, the Company corrected an error that resulted in a $3 million overstatement of direct operating expense for the three months ended June 30, 2015.

As we move forward, we are committed to streamlining our processes and improving our controls to further mitigate the risk of these types of errors occurring in the future. The net effect of this correction was to increase GAAP net income for the second quarter of 2015 by $13 million, decrease US RAC monthly depreciation by $11 per unit, and increase GAAP earnings per share by $0.03.

There was no change to cash flow as a result of these corrections. While each of these corrections were immaterial to the individual line items in which they are recorded, the net effect was material to the previous reported second-quarter 2015 earnings and, thus, why we needed to correct and reissue the statements.

With that, we would like to open the call up to questions. Operator?

Thank you.

(Operator Instructions)

Your first question comes from the line of Chris Woronka from Deutsche Bank. Please go ahead.

Good morning, guys. I wanted to ask a little about the pricing environment you described in the back half of the quarter. Did that come about fairly suddenly and can you maybe give us a little bit of color on whether that lasted into October or whether you've seen some change there? Thanks.

Well, I don't know how much color we can give you that's accurately going to predict the outcome for the rest of the year. I think the biggest affirmation we can give you is we did reiterate our guidance of $145 million to $155 million, so I suppose that gives you some indication as to where we think we're headed from a margin perspective.

Between now and the end of the year, it's largely going to play out as to what occurs over the holidays. And I think that remains to be seen. So as I said, we're not concerned on a margin level but there was a deterioration in published pricing.

Okay. Got it. And then could you maybe talk a little about the partnership you announced with Lyft and how that came about and what some of the things you think that -- how that helps?

Well, I think it's way too early to ascertain what might evolve from this and what might not. We're committed to continuing to conduct pilots and experiments and evaluate the way in which we can participate in the theoretical reduction of car ownership within the US. This is one of those pilots.

I would expect there will be many more over the next few years. We do believe, as some have taken the perspective, that there are ways in which we can reposition and change the way we go to market that give us as much potential from the conceptual decrease of car ownership in the US as the risk that may be presented by it. So this is just one of those efforts.

Your next question comes from the line of Rich Kwas from Wells Fargo. Please go ahead.

Good morning, everyone.

Hi, Rich.

How you doing? John, on depreciation, so taking it down here, obviously, there's -- things have come in better than expected but as you're starting to plan for the 2016 fleet, you've taken the capacity growth down. How should we think about depreciation as we think about 2016? I realize you're going to give guidance next week. But is this the right level to think about it? There are there lots of puts and takes preliminarily as you start to think about the next 12 months.

Well, I think it's -- it can be dangerous at one item in isolation without looking at the whole context. So I'd go to your point, and say, look, the next week we're going to deliver a preliminary guidance for 2016 and incorporate what our view is for fleet deep there. We'll also provide you with discrete guidance around this line item next week as well.

I would point out, as Tom indicated, that the improved results we're seeing are certainly supported by a strong residual market but we are improving our execution and our analytics around this core capability each and every quarter. We've got a strong ambition ahead of us which we'll lay out next week as to what we can do from a managed outcome perspective around this particularly important line item.

So we don't feel like we're in a circumstance where simply we're going to float up or down with the market. Tom, do you want to add anything to that or --?

No, I think, Rich, as you've probably heard from others in the industry, the model year by 2016 is coming to a close. There was some supply challenges, I think for the industry and that has potential impacts on at least on the program side and availability and pricing, but nonetheless, as you know well, as others do as well, the industry has historically had when they've had issues related to fleet costs kind of universally which, I think we all would, has historically been able to get pricing to offset some of those, if not on a lag effect.

But again, As John mentioned, we have put a lot of initiatives in place already this year which helps -- helped us manage our fleet costs outside of just the marketing factors but Company-controlled factors. And we'll continue -- we think we'll continue to have opportunities going forward which we'll lay out next week and we'll provide you some preliminary view of what our -- we think our unit costs are for next year.

I'd be relative to this -- just to add a point to that. In terms of the guidance we issue next year -- next week for next year, we'll include our current outlook on fleet deep. We will not provide discrete revenue guidance. However, we are not assuming that there is a recovery in revenue related to our fleet deep as it affects the guidance we'll provide for next year.

Okay, and then just two quick follow-ups. On the reduction in non-fleet CapEx, what really drove that relative to your initial outlook? And then in terms of seasonality with cash flow, how do we square that with what you do on the buyback front? Do we take -- how much do we take that into account as we think about your willingness to repurchase shares? Thanks.

Let me start with the back end and then turn that over to Tom. Look, we're committed both to reducing our leverage ratio over time and hitting our targets as well as fulfilling the buyback as quickly as we responsibly can. And we believe through operating cash flow and asset sales that we can do both of those things for a very balanced outcome that satisfies where we want to end up from a credit perspective as well as where we want to end up in terms of returning cash to shareholders. But Tom?

Yes, and Rich, on the non-fleet CapEx side, we've seen more favorability on corporate, our corporate spend. I think we pretty -- we put in some pretty aggressive processes here that require very strong business cases on discretionary capital spending that, frankly, were not as robust one would like to see. I think that's helped us manage our capital spending on the corporate side.

In US RAC, we've cut CapEx a little bit but that's more of a timing issue as we get our plans in place on our full potential. We'll be doing some investments on some of our facilities and our service delivery in the US RAC going forward and we'll be able to give you some color on what non-fleet CapEx would be for 2016 next week as well.

Your next question comes from the line of Michael Millman from Millman Research. Please go ahead.

Thank you. Just two questions. Could you talk about some changes, improvements that you may be making in your pricing reservation systems and give us some timing on that and impact on that, both on price and fleet? And then secondly, regarding Airport share, could you talk about what that had been, say, a few years ago and what it is currently and what your goal may be and how you expect to achieve that goal? Thank you.

First, around the systems and the execution capabilities within revenue management, we're still on an improvement curve, I would say within the current context and we have a number of initiatives in that regard. Next week, we'll talk to you about significant revenue improvement that we believe is available but only that is within our reach and control.

I don't think it's appropriate for us to build the business around some presumption that there's going to be a general uplift on revenue in the future. I believe that's going to occur but I can't tell you when and how much and when it becomes sustainable.

So what we'll be talking to you about next week is a very substantial improvement in our margin objectives over the next three to five years which is based, in part, on the revenue that's within our reach and control which is the execution improvements we'll talk about within revenue management systems and also ability to increase penetration and effectiveness of how we go-to-market with ancillaries and products for our customers.

So I don't think we're a victim to the revenue environment. We have a lot we can do to improve it. We'll demonstrate that. And we'll certainly benefit if there's a general industry uplift going forward. As it relates to the Airport share, we've lost about 3 points over the last few years. That began quite some time ago, frankly, and then was exacerbated, particularly in the third and the fourth quarters of 2014.

Look, this reset we've gone through, both as a result of our own issues as well as a result of the aggressive capacity growth of a primary competitor is a necessary reset that we had to go through. The Company fully intends to grow and it is responsible to do so. And we believe that the leverage we'll get from that growth on the bottom line will be much higher, having gone through this process in terms of a capacity store footprint and cost reset.

We do intend to position the Company to profitably and responsibly maintain its share on Airport but we're not going to -- and generally within the industry but we're not going to force that as an outcome for next quarter. But clearly, over time, we're going to build a business model that can responsibly compete for share and we're not going to dividend that profitable market share to our competitors.

Your next question comes from the line of Kevin Milota from JPMorgan. Please go ahead.

Good morning, everyone. Had a question on the weakness in commercial demand that you called out in your prepared remarks. Wondering if you could dig into the customer type and industries that you saw, particularly, if you could give us some detail on that front. Secondly, if you believe that ride sharing has had an impact on some of the shorter duration commercial rentals that you've seen in the quarter. Thank you.

I think as you know, we've certainly seen some share loss in the corporate contracting business which, as I said, we're not going to dividend profitable share to anybody in the future. But we've seen some share loss there.

I think we saw some behavior that went beyond that during the quarter, as you probably heard about in certain hotel sector or airline sector, be it around volume or yield. There seemed to be a softening of commercial demand. I think it's too soon to tell whether that's something that sticks with us for a quarter or two or is a trend.

As you know, within our business model, we tend to be less impacted by softening corporate demand than other travel sectors, given the high leisure component. As it relates to ride sharing, and we'll talk a little about that next week, I think the -- if you look at the highest concentration of ride sharing markets, New York, San Francisco and LA. In New York, you'd see an impact or at least what appears to be an impact.

I think it would be hard in Los Angeles and San Francisco, given the overall industry trends, to draw a conclusion that there has been much of an impact, although obviously, growth would have been higher for the industry without it. So look, I think the impact continues to be less than the logical worriers might expect and as we go further and further in this, I think it's best to look at the data as opposed to our hypotheticals.

Okay. Thank you very much.

Your next question comes from the line of Raj Singh from Credit Suisse. Please go ahead.

Hi. Good morning. Thanks for taking my questions. First off, I was hoping you could help us parse out the fleet size reduction in US RAC year over year, both in magnitude and timing. How much of this is attributable to, say, pure rightsizing? How much is due to better efficiency from integrated and better functioning systems? And how much of this is perhaps just the weaker commercial demand that you're seeing?

Well, as we continue to reiterate, we're going to manage for margin and I think, if you look at -- we had our last call, I think in about mid-August and we saw a couple things occur, as we talked about, a weakening published environment as well as a weakening commercial environment. We also saw a stronger residual environment around sales than we expected.

So we could have obviously managed unit a bit lower and possibly gotten a higher RPD. We could have managed fleet a little bit higher and gotten a higher top line. We felt driving to this record level of utilization and taking advantage of fleet disposition was appropriate as a consequence, I would say we expected down in fleet year over year, but we probably about 1 point to 1.5 point further down than we might have anticipated earlier in the quarter.

I wouldn't read anything into that other than we're going to dynamically manage within certain guard rails, obviously, around our basic customer proposition, our cost structure. But we're going to manage around those on a dynamic basis. I wouldn't read anything into that. We have not adjusted our 2016 plans, for example, as a result of what we've seen over the last two or three months.

Okay. Got it. And then on the topic of margins, I'm hoping you can talk a bit about the EBITDA guidance for 2015. It seems versus your fleet cost guidance at Q2, you've got a significant tailwind towards your $1.45 billion to $1.55 billion corporate EBITDA yet the total corporate EBITDA guidance was unchanged. So could you just help us parse out the puts-and-takes that have led to the EBITDA guidance being unchanged despite much lower fleet costs?

Let me take -- ask Tom to take that directly. Look, we're committed to delivering on our guidance and I think that's why despite the fact of some softening revenue in the industry, we're reaffirming, but Tom?

Yes, I think you're right. As you look at the fleet cost change, it is a significant favorable adjustment and we're keeping our guidance the same and the revenue, internally revenue softness was offset by cost savings. Again as we've said during this transition year, our commitment is to deliver on the overall margin and the overall earnings guidance and how we get there might be different ways and different paths as we go through this year of transition.

From our perspective, we're very confident with the range; fleet cost is more favorable. We continue to make progress on the other components of the cost structure. Revenue's probably behind where we thought we'd be at this point in time but nonetheless, we're establishing a cost structure that, as John mentioned, that as we come and start to perform on the revenue side, it will have quite a bit of leverage as we get our cost structure, I think, aligned to, again, closing the gap on the industry leader in the market.

I think as we issue preliminary guidance for 2016 next week, we'll come back and refine that guidance outlook in February and certainly, how the year actually finished up will be a key component of refining that guidance further as we go through the next few months.

Your next question comes from the line of John Healy from Northcoast Research. Please go ahead.

John, Tom, I wanted to ask a bigger picture question. If you look at the progress you've made over the last 10, 11 months, if you think about fleet, if you think about revenue management and pricing, and if you think about just general Airport operations, of those three buckets, where do you think the most progress has been made? And where do you think that the most potentially lies head ahead for you guys in 2016 and 2017?

And then secondly, you made a comment, John, about looking at some of the non-core assets and evaluating those and trying to maybe accelerate your capital returns. Is that review complete and maybe any color you can give us regarding maybe what the list of non-core assets looks like.

I think we made progress across the agenda. I think, clearly, the revenue outcomes are less than we had hoped to achieve at this point in time. I think we probably underappreciated the level of deterioration in the fourth quarter last year and that, frankly, we probably anticipated a bottoming before that was likely to occur.

So it's uninspiring to tell you, I think we've made progress in our revenue execution because I think it could have been and was on a trajectory to continuing to be worse and that has been arrested and we've stabilized. But I do think the team has made good progress in that context and they'll lay out for you a very achievable aspiration around a number of factors for revenue next week.

I think the fleet has been extraordinarily well executed by both Tom's team and the operations team. This was a staggering fleet transformation for us in terms of number of touches on vehicles and it's gone off completely without a hitch.

Now, obviously, that's absorbed quite a bit of utilization, frankly, even through the -- certainly through the second, even through the third quarter. So there's costs. We're beginning to see that maintenance cost benefit but there's been a lot of cost associated with simply affecting that outcome and those should improve in the future.

But I think that was a big executional win for us and I think the way in which we've been financially managing fleet is becoming more and more nuanced and sophisticated but again, they're going to lay out a big aspiration next week for you in terms of what we think we can generate outside of market effects on the fleet side.

I'd have to give our employees in our operations team a lot of credit for having a significantly improved customer satisfaction experience over the summer. However, I think this is probably the area that we have the greatest trajectory of improvement opportunity in the next several months where, across the enterprise, we can demonstrably go after significant cost take-out while improving quality.

And I'm encouraged by the early progress Alex Marren has made in this area and we're very committed to driving cost out of our operating footprint and increasing quality at the same time and are confident we can do both. As it relates to asset dispositions, as you know, it's probably difficult or inappropriate for me to surmise what may or may not occur in the future.

Market conditions change and we want to leave ourselves open to being responsible in that regard. But we'll continue to affect those changes as it's appropriate to do so but also, we have significant cash flow improvement. And I think our trend is that our leverage ratios are coming in ahead of where we expected in terms of progress.

We're seeing that as we look out towards the year end. So I think we've got a lot of levers to support a return on capital to shareholders that hopefully will be as aggressive as some would like but certainly responsible from a credit perspective as well.

Great. Thank you so much.

Your next question comes from the line of Brian Johnson from Barclays. Please go ahead.

Good morning, John and team. You've included a slide on revenue per available car day, which I assume is more of a slide but a means by which you're going to run the organization. Three questions around that. One, can you give us just some of your thinking on strategically why you think this is a better metric than standalone pricing?

Secondly, I know we're going to get details next week but just given the big jump-up in utilization you've got and given that's the driver along with pricing of this, how much more is left? And then third, a single-minded focus on this would lead potentially to undercoverage of the fixed cost base so maybe comment on what percent of the DOE you think is actually fixed and then how you're going to manage that trade-off?

So look, I think on the revenue side, our ACD is really the equivalent of RPU which is a pretty common metric within the industry. And I think a very good metric within the industry. The incremental benefit we get by going to an RACD or an ACD level, available car day, is that we're able to manage the -- in effect, the utilization of that asset on a more discrete basis.

As an example, we can discretely manage what are we spending in transportation in terms of car days? What are we spending in licensing and into service? How many days are being invested in the disposition channels, those types of things. You'll see what that's created in the organization is we now have people who own each portion of that car day spend and they own an optimization of that particular investment in car days.

So I think it will contribute to significantly improved rentable utilization as we focus on each of the areas that consume car days. Look, I'll tell you, 25, 30 years ago in the airline business, we talked about yield. We ultimately converted to a RASM effect, which was a fleet -- an efficiency factor, which really combined load factor and yield.

Now, I will acknowledge that incremental volume in this industry carries a higher variable cost than incremental load factor within the airline industry but nevertheless, this is what we're after is, a tighter unit cost and unit revenue measurement within the industry. Comparability is horrific in this business.

I've never seen so few participants be less comparable. But nevertheless, that's where we are. I think that's still true in terms of how we calculate car days. We'd like to drive to an outcome that is less noise and more directly associated with margins. Tom?

Yes, I mean, The revenue per available car day is not inconsistent. The industry has reported RPU, revenue per unit per month; it's just on a daily basis and that allows us to better look at costs on a daily basis and get more granularity. So I can assure you there is just as equal focus on unit revenue performance as there is on unit cost performance, as you probably heard in our remarks. Quite a bit of commentary about our progress on cost management.

The actual variable versus fixed; it's the DOE line item, specific to your question, anywhere from 30% to 40% of that cost you might consider to be fixed on the DOE line item. But obviously, our objective is to look at every one of our line items and try to make those variable over the long term as much as possible and continue to move that cost structure down.

This is simply an acknowledgement that if you were to focus on RPD, you could -- we could most certainly increase it and in doing so, decrease margin and correspondingly, if we focused on you, we could do the same thing. The best view is to put them together, from our perspective.

Okay. Thanks.

Your next question comes from the line of Adam Jonas from Morgan Stanley. Please go ahead.

Thanks everybody. First I just wanted to kind of clarify an earlier comment, John. I think you said you will not guide on revenue next week or just not give the factors behind the revenue. I just wanted to clarify.

We will guide on the EBITDA outcome that we expect, the fleet deep that we expect, and our non-fleet CapEx. We will not guide on revenue next week.

Okay. So you'll guide on EBITDA but not revenue. Okay.

Correct.

All right. And then just as a follow-up, on deferred taxes and fleet growth, I understand car rental companies they pay -- excuse me, they pay virtually no US cash taxes due to accounting conventions like-kind exchange. My understanding is that's dependent on having a stable or growing fleet size, where the timing of the tax shield from the depreciation expense on the acquired fleet is more offsetting amount of vehicles circulating back out of the fleet.

I just want to -- I just want to -- is that understanding correct? And if not, what fleet conditions would need to be in place to see an atrophic development of the tax shield and that rise in your cash tax?

I ask this question only because seeing the fleet decline, that's great in terms of utilization and the way you define that and the discipline but I am a little concerned about the whole like-kind exchange tax shield timing. Kind of calm my nerves on that. Thanks.

I would start by saying that, look, this is a fleet reset. It's not a long-term strategy. So we expect growth in the future but I'll ask Tom to answer the technical.

Adam, your general description is correct. So having growth equal to -- or fleet growth and/or fleet replacing fleet, obviously, replace the basis in your fleet and allows you to continue to have that shelter deferral, I should say, above -- of cash taxes. Again, to John's point, this is not a long-term strategy for the Company to continue to shrink.

This is a reset, resetting a lot of the different parameters in this transition year and that is not an expectation that we have as a Company to shrink over the long period of time. You also would probably note from our disclosure that our current NOL is quite significant. There is no view that we're going to pay taxes the next couple years. So that's not a risk that we have.

Your next question comes from the line of Afua Ahwoi from Goldman Sachs. Please go ahead.

Thank you. Two questions from me. First, on the cost, I think it was asked earlier but I wanted to ask it a little differently. As you think about the guidance for 2015 that you maintained despite the revenue slowdown, do we think of it more as a cost pull-forward defined opportunities you might have done next year that you pulled forward? Or are you finding more opportunities versus what you had maybe publicly conveyed to us earlier?

And then the second question, just -- I know your outlook for revenue is pretty modest and I was curious, given you showed utilization improvement and that Avis actually showed utilization improvement, what do you think is driving the weakness in published pricing on the Airport, if everyone rightsized and tight? What's happening in the broader industry's a little weak on pricing? Thank you.

I think sometimes things need to get worse in order to get better. So we'll see whether that occurs or not. Look, on the pricing side, I tend to take a longer-term perspective here. I think the industry has been a little bit inordinately focused and those that follow the industry at times have as well. If we had good pricing for a quarter then the conversation would turn to well, it's only one quarter, is that it's sustainable. I think we're focused on what we can do in terms of the revenue improvement that's within our control.

We do believe that over time, it's only logical that you're going to see structural pricing improvement and general pricing improvement across the industry but we, obviously, can't say when and we can't say the order of magnitude. And I think it's actually for us a dangerous conversation to be having internally because we want to go after how can we significantly improve margin without relying on this, say, from the field, so to speak. Relative to the cost, I'll turn that over to Tom.

I mean, I think as we have articulated in the past, the first $200 million this year and $300 million annualized basis were through, I think, initially what we would consider work-stopping activities that we thought was no longer value-added or were destroying shareholder value. I would characterize them as the proverbial low hanging fruit of cost take-out and they weren't structural kind of harder to process reengineering and/or automation through technology initiatives.

As we lay out next week at our Investor Day, I think you'll see a book of work in many different areas that we would say we believe drives a significant and additional cost take-out going forward. But more critically, it's not a cost take out, the expense of the quality of the service or what we do as a Company.

So we're going very thoughtful as to how we approach this. We're not just taking costs out for the sake of costs taking out. We're taking costs out to position ourselves to be more a competitive, from the industry leader, from a margin standpoint and we're going to be taking costs out in a responsible way that improves the quality and service delivery to our customers.

Your next question comes from the line of Yilma Abebe from JPMorgan. Please go ahead.

Thank you. Good morning. My first question is, can you remind us what the leverage target is for the corporation pro forma for the HERC spend? I remember it being at 1.5 to 3.5 times. Can you confirm that, please?

Yes, that's correct, as we've previously articulated that the target leverage ratio for the RAC business is 2.5 to 3.5 times. We've also said that our objective through the course of 2015 and our transition year and by year end 2016 to be equal to or better than the high end of that range by year-end 2016 at 3.5 times. We've also previously articulated for the HERC business that the target leverage ratio was 3.5 to 4 times depending on market conditions at the time of the spend.

Okay, great. Thank you. And then my second question is, you have some high coupon callable bonds on your balance sheet. What's the thought process there, please?

We are going to look at -- obviously, there is the economics, the market, depending on market conditions and timing of having our pro forma financials available because that is a requirement to refinance those -- that debt. We need have to have the pro forma for the spin available for any offerings. Obviously, as we move closer towards our filing of our Form 10, those financials will be available and depending on market conditions, obviously, in the economics, if they dictate, we will look at potentially refinancing some of those high coupon debt instruments.

Thank you. That's all I had.

At this time, there are no further questions.

Thanks, everybody. And we look forward to seeing many, if not all of you, next week.

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