Herc Holdings Inc (HRI) 2015 Q4 法說會逐字稿

Welcome to Hertz Global Holdings' fourth-quarter and full-year 2015 earnings call.

(Operator Instructions)

I'd like to remind you today's call is being recorded by the Company.

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

Good morning, everyone. By now, you should all have our press release and associated financial information. We have 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 earnings press release issued last night, and in the risk factors and forward-looking statement section of our 2015 form 10-K. Copies of these filings are available from the SEC, the Hertz website or the Company's Investor Relations department.

Today we will 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 measures.

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 the IR calendar, next week, on March 10, we'll be attending the JP Morgan leisure conference in Las Vegas, and we hope to see some 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, Chief Executive Officer of Hertz Equipment Rental and Jeff Foland, our Chief Revenue Officer will be on hand for Q&A.

Now I'll turn the call over to John Tague.

Good morning, everyone. Thanks for joining us.

We closed 2015 with over two points of margin improvement, a very strong cash position, and a dramatically improved leverage ratio. We also delivered $230 million in cost savings, the first year in a multi-year cost take out plan of the Company, while refreshing and right-sizing our US rental car fleet and delivering higher fleet efficiency and significantly improved customer satisfaction.

Our international operating performance was especially strong, and in equipment rental, we put in place new leadership and began to see real traction outside of the oil & gas segment. Overall, we're pleased that we've accomplished significant strengthening of our foundation and importantly, we've established a course for the rental car business towards our objective of 16% to 18% adjusted corporate EBITDA margins in the next three to five years.

Our employees' hard work and dedication ensured that we hit our profit targets for 2015. This was accomplished through an intense focus on cost and asset utilization while at the same time, stabilizing our legacy IT infrastructure and reducing the cost footprint associated with it, completing the Dollar Thrifty systems integration and building much stronger platforms for revenue performance and our customer experience.

In the equipment rental business, we completed the sale of our assets in France and Spain, enabling Hertz to better focus on its core and specialty market expansion strategy, and we filed the form 10 for the separation of the rental car and the equipment rental business, which is still on track for completion by midyear. I know there's been some concern about our ability to get the spin done due to the volatility of the credit markets and performance in the sector, but we have flexibility with respect to Hertz leverage and Tom will cover that, and we believe we remain on track for a spin midyear.

We also continue to work on opportunities in mobility. While the facts indicate the case for rental car versus ride sharing is quite different, we don't dispute the fact that our customers want more convenience and speed and product and service delivery, and we have work under way to significantly enhance our offerings in that area.

While the market is focused on risk associated with this emerging trend, we are focused on the opportunities it presents to Hertz.

With that I'll turn the call over to Tom who will walk you through the fourth-quarter results.

Thank you, John, and good morning, everyone.

This morning, I will begin by covering our fourth-quarter and full-year 2015 performance and then discuss our 2016 updated guidance. Let me start with a snapshot of our fourth-quarter financial performance.

Despite a challenging pricing environment, we continue to make progress against our plan to drive sustained earnings improvement as evidenced by the roughly 800 basis point expansion versus prior-year in Hertz Global Holdings' consolidated adjusted corporate EBITDA margin. In the last three months of the year, we eliminated nearly $75 million of excess costs from the business contributing to approximately $230 million cost savings in 2015, exceeding our $200 million target. As a result of improved labor productivity, reduced IT spending and greater process efficiency, fourth-quarter GAAP direct operating SG&A expenses declined to 68% of revenue, a 290 basis point improvement versus prior-year.

For the full year, DOE and SG&A expenses, as a percentage of revenue, are 66%, a 110 basis point improvement over 2014. Lower rental car depreciation expense due to smaller fleet size, better than expected residual values and greater use of higher return alternative sales channels also contributed to the 220 basis point increase in consolidated adjusted corporate EBITDA margin for the full year 2015.

Moving on to the business segment review. Since you have all seen the press release and financial tables, let me give you some additional color on the division operating results starting with worldwide rental car.

As I mentioned last quarter, given our intent to separate the car rental and equipment rental businesses in mid-2016, we believe it is helpful to begin discussing rental car performance on a worldwide basis. Of the total $9 billion of worldwide rental car revenue generated in 2015, 70% was from US RAC and 24% came from international RAC, and the balance was primarily related to the Donlen leasing business.

If one excludes Donlen, the split was 75/25 weighted to the US. Worldwide rental car adjusted corporate EBITDA margin, which we define as Hertz Global Holdings less the Hertz segment, was 10% for the full year compared with 7% in 2014 as a result of lower direct operating and fleet depreciation expenses. For the fourth quarter, worldwide rental car adjusted corporate EBITDA margin was 5%, reversing the prior year's quarter's negative trend.

Turning now to US RAC. Fourth-quarter total revenue declined 5% versus the prior year, of which the decline was roughly split between our on and off airport businesses. Published pricing for the industry was highly competitive across all tiers putting significant pressure on RPD, revenue per day, especially late in the quarter. We remain sharply focused on improving how profitably and efficiently we are utilizing our fleet assets, as measured by revenue per available car day and fleet efficiency.

Revenue per available car day, or unit revenue, was flat in the fourth quarter, overcoming a 5% decline in RPD, as we increase fleet efficiency by more than 400 basis points year-over-year. We reduced our average fleet size by 5%, compared with the same period last year, while simultaneously increasing the availability of the existing rental fleet through process improvement. Both revenue and fleet efficiency metrics continued their improvement relative to the first half of 2015 achieving one of our midyear 2015 stated goals.

Looking at our airport business, total revenue decreased 4% as transaction dates increased 2% and RPD declined 6%. RPD pressure had a more pronounced impact in the markets such as Florida and Southern California, where industry capacity appeared to be in abundant supply and a large number of regional competitors exist. Despite the overall decline, we improved customer segment mix as a result of targeted sales and revenue management initiatives.

Higher yielding inbound volume improved 5% continuing a turnaround from earlier in the year. Leisure traffic increased 4%, which was partially offset by 2% lower business traffic. Weakness in the business volume was driven primarily by industry travel softness particularly in the energy sector accounts and by continued execution of our sales effectiveness strategy aimed at improving the Company's portfolio of profitability as opposed to just volume. While our goal is to stop seeding share in the corporate sector our primary focus is on margin improvement.

In the off airport business, total revenue declined 9% as volume decreased 4% and RPD decreased 5%. All of the volume decline was driven by closure of the unprofitable stores earlier in 2015 and a tightening of debit card usages policies. While these actions accounted for a significant portion of the total US RAC revenue decline in the fourth quarter, they are a margin positive over the long term.

On the same-store basis, off airport transaction days were flat in the fourth quarter year-over-year. The decline in total RPD off airport was primarily driven by a higher mix of lower yielding insurance replacement business.

We saw continued strong growth in US RAC ancillary sales, an important component of our full potential plan we laid out during Investor Day last November. Ancillary revenue per transaction day, excluding fuel related products, increased 6% during the quarter.

Looking ahead, we continue to make steady progress on improving our revenue execution and systems capabilities as we drive towards our full potential of revenue excellence outlined last November. Among the initiatives in our multi-year plan, we are developing new pricing strategies and surveillance capabilities, taking targeted pricing actions when and where market conditions support them. We are testing and launching new products in the marketplace such as our recent rollout of cat mileage products with firefly.

We are continuing the technology work necessary to collect credit card information up front in the booking process and expect to be functional by midyear for some of our brands. We are continuing to execute on our sales effectiveness program to improve margins in our corporate portfolio. We are upgrading our eCommerce capabilities, driving ancillary revenue growth through better pricing, technology, product presentation, and importantly, we are taking actions to enhance the rental experience for our most valuable customers.

On the cost side, US RAC fourth-quarter net fleet depreciation per month was $269 per unit reflecting a 26% decrease versus prior-year. For the full year 2015, our multi-depreciation cost was $267 per unit, a decrease of 9% versus prior-year.

The fleet management re-marketing initiatives we implemented in late 2014 and through 2015, along with continued strong residuals, drove the improvement. As it relates to re-marketing initiatives, the number of non-program vehicles sold through dealer direct and retail channels increased 54% for all of 2015. Of the total non-program vehicles sold, approximately 67% re-marketed through these higher yielding channels in the fourth quarter as compared to 58% for 2015.

As I mentioned at our Investor Day in November, we are planning for a 2.5 percentage point decline in used car residuals for 2016. The assumed 2.5% residual decline, when combined with an increase in new model year 2016 program cars, results in expected increase in our 2016 US RAC monthly depreciation rates to be between $290 and $300 per unit. As a result of the higher cost and lower availability of inventory per program cars in 2016, our 2016 model year fleet buy is more heavily weighted towards non-program vehicles this year.

Fourth-quarter 2015 adjusted corporate EBITDA margin for US RAC was 5%, reversing 2014's negative performance that resulted from significantly higher vehicle depreciation expense and maintenance expense related to the then higher mileage older fleet. The successful fleet refresh in 2015 helped reduce the maintenance expense, resulting in a hundred basis point improvement in US RAC direct operating SG& cost as a percentage of revenue last quarter.

Looking now at the international rental car segment, we generated over a 400 basis point improvement in total international RAC adjusted corporate EBITDA margin in 2015 versus 2014. The margin improvement, which beat our internal projection, was a culmination of a three year, comprehensive restructuring program, which included the transformation of our network, accounts, fleet mix and resale distribution channels. During the time, we also developed tools to improve the performance of ancillary sales, fleet utilization and revenue management. Other initiatives include centralizing functions, renegotiating labor agreements and broadly rolling out our value brands.

International segment performed well all year, and the fourth quarter is no exception. Total revenue increased 3%, excluding currency, supported by improved mix of higher yielding inbound and insurance replacement referral business. Transaction days were flat due to macroeconomic pressure in Brazil and Canada; however, European volume increased 2% year-over-year despite the geopolitical unrest and airline strikes in certain countries during the quarter.

Revenue per available car day, or unit revenue, increased 2% in the fourth quarter due to higher RPD and stable fleet efficiency. The international segment's fourth-quarter adjusted corporate EBITDA margin of 5% increased 500 basis points versus the prior year, driven by a 12% reduction in fleet depreciation cost per unit and a 250 basis point improvement in the segment direct operating SG&A cost as a percentage of revenue.

Now that I've given you an update on rental car business, I'd like to turn the call over to Larry Silber, our CEO of HERC to provide an update on equipment rental business. Larry?

Thank you, Tom. Good morning, everyone.

I'll start on Slide 17. In the fourth quarter, we made significant progress on our previously announced initiatives and are continuing to focus on both short and long-term growth. We have assembled an experienced and savvy Senior Management Team with strong equipment and rental industry experience and are in the process of implementing four major initiatives to enhance revenues and improve utilization.

Those include organizational redesign, fleet optimization, operational efficiency, and salesforce effectiveness. We are pleased to report that we are already seeing progress throughout the organization. However, our performance continues to be masked by the impact of the upstream oil & gas markets and by the sale of our operations in France and Spain in October 2015. Despite the declines in upstream oil & gas markets, on a constant currency rate basis, and excluding France and Spain, total worldwide revenue declined just 1% in the fourth quarter and increased 1% for the full year.

On Slide 18, in North America, prices declined just under 1% in the fourth quarter and increased about 1% for the full year as a result of significant downward pressure in pricing in upstream oil & gas markets. Volume in North America increased about 1% in the fourth quarter and rose nearly 3% for the full year.

As you may recall, last quarter, to provide greater transparency regarding the impact of oil, upstream oil & gas markets, we broke out our North American rental and rental related revenue with and without major upstream oil & gas markets. As we go forward, we believe it makes more sense to share the data by market on a worldwide basis as shown in Slide 19 for the fourth-quarter and full-year performance, using constant currency rates. The data on the slide also excludes our operations of France and Spain.

During the quarter, total revenue, excluding upstream oil & gas and France and Spain, increased 13% and accounted for 80% of total revenue; however, revenue from upstream oil & gas markets, which accounted for 20% of the total, declined 33%.

For the full year, total revenue, excluding upstream oil & gas markets, increased 12% representing 77% of the total revenue. Revenues in the upstream oil & gas ranch markets declined 24% for the year and represented 23% of the total.

As you can see on Slide 20, we continue to remain focused on controlling costs and optimizing fleet in our upstream oil & gas markets and are carefully monitoring each local branch. We disposed of, or redeployed, approximately $150 million in assets from upstream oil & gas markets in 2015. More importantly, we made great headway in signing up new accounts as our energized organization focused on local, higher dollar utilization opportunities.

New account revenue in North America increased in the fourth quarter by 42%, offsetting the decline in revenue from major upstream oil & gas markets. For the full year, new account revenue in North America increased 52%.

Local revenue, as a percent of the total business, increased 330 basis points in the fourth quarter driven by increased penetration and stronger growth in the local markets. We are making good progress in our strategy to diversify our account mix and to reduce our risk and drive better pricing.

To better review our operating progress versus prior-year, our dollar utilization rates are presented on a constant currency rate basis and exclude results from the operations of France and Spain. As you can see on Slide 21, the fourth-quarter dollar utilization rate remained relatively unchanged from the third quarter but was lower than previous year due to the impact of our upstream oil & gas markets. To adjust to the upstream oil & gas headwinds, we reduced 2015 gross fleet spending and introduced new initiatives to improve ROI by increasing the availability of our fleet through better maintenance and by investing in specialty gear and higher margin equipment rentals overall.

On Slide 22, you can see the rate of improvement in worldwide adjusted corporate EBITDA, excluding upstream oil & gas markets, increased in each quarter in 2015 compared to the prior year and accelerated in the fourth quarter. Adjusted corporate EBITDA is reported on a constant currency basis, excluding France and Spain. On that basis, fourth-quarter adjusted corporate EBITDA, excluding upstream oil & gas markets, increased 21% and was over 300 basis points higher than the fourth quarter in 2014. As reported adjusted corporate EBITDA for HERC was $166 million for the fourth quarter and $610 million for the full year which was in line with our guidance for 2015.

Moving to Slide 23, in light of the continuing headwinds in our upstream oil & gas markets, we consider it prudent to lower our guidance range for 2016 adjusted corporate EBITDA for HERC to $600 million to $650 million, excluding standalone costs of being a public company. We are transforming the company into the new HERC rentals. We are implementing significant change through new initiatives, adjusting to the headwinds in upstream oil & gas markets to minimize the impact and continuing to invest in growth markets where we are seeing good results.

Our overall long-term prospects remain positive as industry fundamentals support growth opportunities and continued expansion through 2019. Upstream oil & gas industry spending will likely continue to remain under pressure until we see some stabilization in oil prices. So, we will carefully manage our fleet and control our costs in those markets. We are investing for future growth and currently expect net capital expenditures to be between $400 million and $425 million for the year 2016.

As John mentioned, we are on track to spin HERC midyear. As part of our preparation, last week, we introduced our new brand and logo at the American rental association rental show in Atlanta as seen on Slide 24.

We're excited about the opportunity to drive higher returns to shareholders with initiatives to grow revenue and profitability. I look forward to updating you on our progress and to meet with investors and analysts in the very near future.

Now I'll turn it back to Tom.

Thank you, Larry. Before I shift to the balance sheet and cash flow update, this is probably a good time to address the concern some investors have raised about our ability to get the HERC separation done in the current market environment. Although capital markets have experienced a high degree of volatility, we believe our goal of spinning of our equipment rental business, even in today's market, is very much achievable, albeit at perhaps a lower leverage target of 3 to 3.5 times versus our original target of 3.5 to 4 times.

To the extent the high-yield markets improve, the low end of the original range may still be achievable. The leverage level also may be a function of the market environment at the time of the spin.

Now, let me give you an update on the balance sheet and cash flow performance. The Company generated free cash flow of $755 million in 2015, representing a $434 million improvement over 2014. This increase, primarily, was driven by higher earnings, disciplined US fleet capacity growth, improved fleet utilization, and a higher overall advance rate on the fleet debt.

We also continue to be disciplined in our non-fleet capital spending, having invested $31 million in fourth-quarter, of which $16 million was related to a non-recurring investment in our new corporate headquarters. For the full year 2015, non-fleet capital spending was 25% lower year-over-year at $212 million and included $72 million for the new headquarters which is now complete.

Corporate liquidity of roughly $2.2 billion at year-end 2015 reflected the highest level since 2011. Our strong liquidity position and the fact that outside of the corporate ABL, which is supported by the HERC assets, we have essentially no corporate debt maturing until 2018.

When it comes to capital allocation, our strategy has been to balance share repurchases while reducing our leverage position and maintaining ample liquidity. During the quarter, we bought back 22.2 million shares of Hertz holding stock for $343 million, and at the same time, further reduced our net corporate leverage ratio by more than a half turn.

In total, for the year, we repurchased 37 million shares for $605 million. Proceeds of the $236 million from the reduction of our CAR Inc investment, along with proceeds from the Hertz France and Spain sale, helped fund more than half the share repurchase last year. Again, our priority for capital allocation is to remain balanced. At the current stock price, we believe share repurchase is a very compelling use of capital, however as always, we will need to be balanced in our approach by ensuring we maintain sufficient liquidity, continuing our path to reach our target leverage level in US RAC by year-end 2016 and then determining the appropriate balance of reinvesting the business in share repurchase activity.

Moving to the capital structure. In the first quarter of 2016, we issued $1 billion of medium term ABS notes despite the volatile capital markets. The issuance was upsized from the original $500 million due to the investor demand. As a reminder, this issuance follows the fourth quarter closing of a $600 million ABS note offering for the US RAC business, and we also extend the maturity by one year of the $3.3 billion of US revolving securitization facilities and our EUR400 million securitization.

Our primary focus is now on the spin financing activity. For HERC, we will need to refinance the existing ABL and support that with a high yield notes. For RAC, we are planning to put in place a cash flow revolver, front end the bank market and possibly a new term loan.

It is anticipated that the distribution from HERC, along with the new RAC financings, will use to pay off the existing term loan. What our focus remains on the ultimate RAC leverage target of 3.45 times or below by year-end 2016. In addition, this year, we expect to execute normal course fleet debt extensions and will continue to prudently access the ABS term funding market to better balance our US RAC mix of fix and floating debt.

Now, before I turn the call back to John, let me walk you through the adjustments we made to our 2016 preliminary guidance that was introduced during our Investor Day back in November. As you saw, we reduced our consolidated adjusted corporate EBITDA forecast by $100 million, primarily driven by more conservatism on the top line given the weaker trends in US RAC revenue, driven primarily by pricing since the end of November, as well as incremental headwinds for HERC revenue as pressure in the upstream oil & gas sector continues.

In the US rental car, we set our preliminary 2016 guidance estimates based, in part, on how we expected 2015 to finish. As the top line weakness accelerated in the late half of the fourth quarter, we had to reset the base for the 2016 guidance. That weakness has continued into the first quarter. As such, we have now brought our US RAC revenue guidance growth down 1 point to 1.5% to 2.5% growth from 2.5% to 3.5% growth.

We have also adjusted fleet capacity. While we still expect airport transaction days to grow in line with GDP forecast, overall growth will be affected by the reduction in volumes of off airport as a result of store closures and changing credit acceptance policies. We are now planning for a decrease in total fleet capacity of 2% to 3%, but with volume growth funded by improved fleet efficiency or utilization.

As committed to investors at our Investor Day meeting in November, we expect free cash flow to be $400 million to $500 million. That assumes $330 million to $340 million of corporate interest expense, $120 million to $150 million of cash taxes and $200 million to $225 million of consolidated net non-fleet CapEx.

The free cash flow is lower than last year's, primarily due, in part, to some improvements we achieved in advance rates in 2015 that are expected to be flat in 2016 and higher cash taxes due to expected increase in the profitability of certain foreign operations and the recognition of deferred gains in certain US states. Non-fleet CapEx is lower than originally forecast as we tighten our business plan since last November's preliminary estimates.

In terms of US rental car monthly depreciation per unit, we still expect it to be between $290 and $300 per unit based on the new program car costs and a 2.5% assumed decline in residual values and is projected, in part, by Black Book, a third party automotive forecasting service. We expect to continue to leverage the higher returns from our strong alternative disposition channel to optimally manage fleet sales.

As John said, we remain confident in our ability to achieve our long-term, full potential plan, and we are already making significant progress on this year's $350 million of cost savings target. Work is being done to re-energize our premium brand and relaunch our value brands, and new products and services are in development.

With that, I will turn it back to John.

Thanks, Tom.

We recognize that there are concerns in the market around where we might be in the cycle, access to capital and residual value in the US rental car fleet. We're running our business consistent with those potential risks, as I think Tom outlined, specifically for you.

I want to point out that our pursuit of a very tangible 16% to 18% margin for the rental car business has never presumed a tailwind. So, we are not surprised by some of the headwinds we face in the market, and we remain committed to that margin improvement goal with $350 million in additional cost take-out this year.

I will point out there's a flip side to the residual values that we've experienced in the market over the last several years. The industry has gone through an environment that provided an unprecedented incentive to up fleet. That has its own consequences, so while Tom pointed out that we are expecting a decline in residual values, over time, we do expect to a corresponding decline in capacity plans and in improved pricing environment, which we are still optimistic about over the longer term.

So, we continue to be focused on managing the business in a conservative fashion with strong liquidity, improving leverage ratios, assuring our continued access to capital as we demonstrated in the fourth and the first quarter, and staying the course and pursuing our plan of a very achievable 16% to 18% margin within the rental car business. That's the right decision and the right path in a strong market or a weak market, and we are committed to maintaining that course throughout the next three to five years for Hertz.

We truly believe that the sharing economy, as it grows, presents equal opportunity as well as risk. We will manage both of those, and we are very, very ambitious about what our role may be, not only in support of the industry, but in response to the trend of declining car ownership within the US. We were, after all, 100 years ago, almost, the first car sharing company.

So, with that I'll turn the call over to questions.

(Operator Instructions)

Afua Ahwoi, Goldman Sachs.

Can you hear me?

Yes, Afua.

Hi. Good morning. Just a few questions from my end -- first of all, as you think about your capacity guidance for 2016, is there any concern that, as you look to shrink your fleet, and your peers are not doing the same, is there any concerns about share loss on that front?

And then, given that shrinking fleet, maybe given pricing year to date is weak, what are your expectations for the back half? So, basically embedded in your 1.5% to 2.5% revenue guidance, what's the volume pricing split, if you can share that, please?

Well, we are experiencing significant improvements in fleet utilization, so I'd keep that in mind when you look at our plans. Look, we think it only makes sense to the extent we're experiencing a potential decline in residual values, a possible softening in the economy, to improve our asset utilization and reduce our fleet footprint. We have to run the Business in a responsible manner, and presume that others will do the same. So, I think that's really what's underpinning our fleet guidance.

Tom?

Yes, Afua, as you note, we don't give separate guidance for rate and volume. I think it implied -- with the weakness that we saw in the last part of the fourth quarter continuing into the first quarter and rising fleet costs, our expectation is there will be some improvement in pricing in the latter part of the year. But we don't break out separate rate and volume guidance.

Got it. And just a follow-up from me: Can you help us with basically a 1% decline in residual value? What does that mean or what does that do to your depreciation per month cost?

Yes, our assumption is 2.5%, and that, roughly, as you can see between that and non-program cars, the impact gross before our other initiatives to help improve fleet costs would have resulted in about $150 million, $160 million increase in fleet depreciation overall on a total basis.

So, I think the sensitivity about 1 percentage point is roughly $70 million, $80 million on an annualized base across the fleet. So, that gives you the sensitivity, but it gives you those two data points you can work with.

Okay. Thank you.

Christopher Agnew, MKM Partners.

Thanks, very much. Good morning. Wonder if you could share a little more color on what you saw in Florida and California in the quarter? And is it possible to quantify the impact to overall pricing and volume?

And maybe, was this more of a demand, ie, weaker international inbound? Or was there any change in competitive positioning of regional competitors, their ability to access markets, or maybe new entrants having a greater impact? Thank you.

Good morning, Chris. This is Jeff Foland. Thanks for the question.

As Tom had mentioned in the prepared comments earlier, and as you point out, there was a more pointed impact in some of the heavy leisure markets such as South Pacific and Florida. It's difficult to pinpoint exactly the reason for that. We will say there are a very large number of competitors in those markets. Inbound volume actually held up reasonably well, but the pricing environment tended to be more severely impacted in those markets.

And separately, can you -- Tom, I don't know -- can you break out what free cash flow guidance would be, excluding HERC for 2016?

Yes, Chris, we didn't break that out specifically. I think we gave you some information that would help from a triangulate around the answer about net fleet CapEx. We also, I think, on the slide presentation provided of the non-fleet CapEx how much is assumed to be HERC. Then you have the HERC earnings.

Clearly, the free cash flow is going to change relative to the capital structure of both Companies. So, we will obviously be providing an update post-spin for both Companies. I'm sure Larry will be providing his team, his own view at that point in time, as a separate independent public company. And we'll update ours as a result, if there is any change.

But this provides an overall view. And you can kind of get some of the data points to try to come up with a estimate, at least as of current Hertz configuration as to what the free cash flow for HERC is.

Okay, thank you.

Michael Millman, Millman Research.

Thank you. I guess more car price -- we, the investment community, hear about announcements of price increases. So, the question is: What seems to happen? Why [don't they seem to] be implemented?

Sort of related to that, we hear that a partner program, such as your AAA, have been a detriment to raising prices, and maybe you can talk about that as well. And then, in the first quarter, we have a very early Easter, and it doesn't seem that you're suggesting that that's going to have much impact, and maybe you can speak about that as well. Thank you.

I think, as you know, all the industry participants have taken actions to improve price over the last several months. Clearly, seasonally, this is the most difficult time of year to realize a price increase, given the fleet circumstances.

We remain optimistic that, as fleets tighten over the spring and summer, that we'll see an improvement in price. As you point out, there are a lot of non-published channels available in the industry that have an equal import on price. But I think, generally, the trend is positive but struggling to realize it, given the seasonality.

With respect to the second part of your question on insurance replacement business in the off-airport channel, look, we're very focused on margin improvement in that part of our Business. In fact, on 16 of 16 insurance replacement accounts that came up for renewal in 2015, we had improved terms, in terms of pricing for that business. When we refer to a mix issue in the off-airport business, it has more to do with self-pay replacement business versus insurance replacement business.

With respect to the third component of your question, and the Easter holiday, and peaks and combinations with spring break this year, we're working very hard to ensure that we position our pricing structures and our products in a way that we can yield up to the maximum point possible. And we feel reasonably good about how we are positioned at doing that as we go forward.

An Singh, Credit Suisse.

Hi, good morning. Thanks for taking my questions.

First off, I just wanted to get a sense of what your fleet levels may look like on-airport versus off-airport. I'm trying to understand the drivers of your fleet capacity cuts since November.

It seems most of the change in your EBITDA guidance for RAC is pricing driven, but then you're also cutting fleet growth. So, if you could just help us understand what's changed to drive that outlook for fleet capacity? Thanks.

Yes, I would say, we don't break out separate capacity information and utilization information, per se, by off- and on-airport, because, as you know, the fleet is very fluid and dynamic, and can be moved. So, it's a little bit of a point in time versus an average that you could get confused about if I gave you a specific number because of the fluidity of the fleet being shared.

But nonetheless, I think, when we guided to our capacity back in November, it was arguably a little bit -- we were probably a little bit at the lower end in our initial planning stages. We've obviously continued to get visibility on demand trends, as well as our own ability to execute and continue to drive utilization, and get greater confidence in that. As John mentioned, we do believe there is a significant opportunity for improvement of fleet efficiency utilization, and I've said that previously, particularly in the first half of the year. So, we're really very balanced and cautious as related to our fleet growth.

We believe that oversupply is not healthy for the industry, and not healthy for creating a good pricing dynamic and environment. And as a result, we've been very cautious in our fleet planning process and with the residual assumptions, that we have in our plan at least, and our expectations around demand, and our expectations on fleet utilization, we appropriately brought down our fleet growth as a result.

Okay, that's helpful. And one for you, John, on your closing remarks just before Q&A. With some of the volatility that the rental cars have been seeing with regards to corporate travel and pricing, and you guys having to cut your guidance given just three or four months ago, do you have any better sense of whether your longer-term targets are at increasing risk? Or do you think that the plan has been sufficiently discounted for some of the changes that you're seeing today? Thanks.

I think, as we outlined, we significantly discounted our full potential plan, and risk adjusted it, and we believe it's very achievable. I think that we've seen some choppiness, obviously, in pricing in the fourth and the first quarter. And that could be, frankly, in part, due to the strength of the residual market and the incentive to continue to hold on to fleet, particularly at this time of year. But we are not backing up at all, relative to our ambition, and our very clearly, we think, laid out plans to get to 16% to 18%, which, I think as you pointed out, were very much risk adjusted at the time.

Appreciate it. Thanks.

Chris Woronka, Deutsche Bank.

Good morning, everyone. It sounds like maybe one of the issues that might be there is some of the opaque channels, or in terms of pricing. Can you guys give us maybe a little bit of a sense of whether your mix has shifted? What the online breakdown of pricing looks like in proprietary and third-party channels? Thanks.

Chris, thanks for the question. This is Jeff. There has not been a significant shift in channel mix in fourth quarter on a year-over-year basis. We leverage our Business across all of the channels, be it through the corporate channel business, through retail agencies -- a lot of business through our direct channels, of course, and a degree of opaque channel business.

Where we utilize that channel and tool is market-specific and market demand-specific. When we need to generate more demand in a certain point in time in a market, we would tend to use the opaque channel more. So, we tried to take a balanced approach.

We're taking, clearly, a margin-centric approach as we drive this Business. It's not just about volume. It's not just about market share, but it's about trying to drive profitable business at the end of the day. So, we're balanced, and we expect to continue to be balanced across those channels as we go forward.

Maybe behind that question, when you look at all brands in the comp, we think the difference is about 3 points. And the majority of that difference is a function of the change in methodology of the [de-tag] days, as well as a somewhat declining RPD as it relates to our fleet mix year over year. So, while it may appear otherwise, the comp is actually pretty much on top of each other.

Okay. Thanks. And then, late last year, you guys had announced a few partnerships with a few of the ride sharing companies. Can you give us a sense as to how that's going early days, and whether you plan to expand that or change it in any way?

Well, it is very early days, as you say, but we do think there is a fleet management opportunity within the ride sharing business that we're going to continue to pursue. And we also think there are a lot of use cases between ride sharing and car ownership that we intend to build products and services to respond to.

So, we really have not seen an impact. I don't think that our numbers would be very different from our public comp in terms of what impact we may or may not have seen from ride sharing. But we do see an opportunity in these trends within the market.

Okay. Very good. Thanks, guys.

Brian Johnson, Barclays.

Hi. This is Dan Levy on for Brian. Thanks for taking the questions.

First, a question on your revised 2016 guidance: I understand the headwinds related to HERC and on US RAC pricing on the impact to your guide. But in the fourth quarter, you did see better cost saves. I think that was like a $30 million benefit over what you were previously looking at, plus the fleet costs were better than expected for the year. So, if we're just thinking of the year-on-year bridge from 2015 to 2016, why is it that these factors don't provide an offset to the HERC and pricing headwinds?

Yes, Dan. I can give you the very high-level bridge. I think it would be helpful for folks to hear that. We, obviously -- just specific to a couple of your specific questions, and then I'll give you a high-level bridge.

The better-than cost performance is timing. We're still maintaining our commitment, as of laid out at Investor Day, that the cost savings in calendar 2016 are $350 million. We did not change our net fleet [deep] guidance either, as you probably noted, from [$290 to $300]. That's remained the same.

So, the benefits and the cost increases are essentially in line with what we had laid out back in November. And as you walk through that, the pricing was not something we expected, at least in the latter half of the quarter into the first quarter. So, we started the year with a lower 2015 base to build our plan from than we originally had built our preliminary estimates. And then we had to accommodate more understanding that you can't just assume you're going to step off into 2016 with improved pricing versus what we were seeing in late November and early December.

The big picture -- you've got your cost savings that we laid out. You have your investments, as we laid out at Investor Day. So, that's an offset to improvement next year with the roughly $100 million in investments we had previously announced in IT, sales and marketing, and other areas of the Company as we continue to invest in the Business. We are not just cutting costs.

You do have fleet depreciation and interest headwinds that we laid out at Investor Day, and those are consistent, as I said. Earlier in the call, the $150 million, $160 million in US RAC fleet depreciation, and then fleet interest expense between the US and international based on what our plans are to refinance debt [and] term it out adds about $50 million of cost on top of that. And then you have other inflationary costs and things like that as an offset. So, the cost savings and the revenue improvement essentially offset and fund the fleet depreciation and interest, and in investments and in other inflationary costs.

What we have not, obviously, assumed, and we said out at Investor Day, our plans do not rely on significant industry pricing, albeit, as John said, we expect to see continued opportunity there with all industry participants having impacts of that major input factor increasing in cost with residual declines assumptions going forward. So, our view is that there is opportunity for pricing, but we aren't relying on it, and we are not making commitments based on industry conduct. As we've said before, we don't necessarily dictate industry conduct, but we obviously believe, at some point, and basically industry behaviors been such that everyone I think believes industry pricing is, given where input costs are today, and where they are headed, is something that we're going to continue to push for.

And, look, it's early in the year. We are where we are, in terms of the current pricing environment, so we felt it was appropriate to adjust guidance on that basis. But obviously, we're working hard on the cost and the pricing side.

Rich Kwas, Wells Fargo.

Good morning. So, John, I wanted to get your thoughts with what happened later in the fourth quarter, and what's transpired so far in the first quarter in terms of pricing. What do you make of what's going on in the industry?

If you take a step back, Hertz had the fleet issues in 2014 and the early stages of 2015, and that got unwound. And one would have thought that with the comparables with your Business more in line from a fleet standpoint, that pricing would have behaved better, generally speaking.

So, what do you make of what's going on in the industry? And I know you reiterated confidence in pricing longer term, but one could also counter that the industry is just not set up to drive consistent price.

So, I'm just interested in your perspective, given that you haven't been in the industry a long time. You've been in the travel business awhile, but just curious on what your big-picture thoughts are right now.

Well, I think it's relatively straightforward. When we were giving up share and shrinking, on an absolute basis, it provided the foundation for above market growth from some in the sector. And while we are not focused on necessarily growing share, we are not prepared to continue to shrink. And that, unless it causes a corresponding change, is going to create over-fleeting temporarily in the industry. It's that simple.

Okay. So, from a competitive standpoint, it seems like from a capacity standpoint you're taking the most rational approach. But you wouldn't say that -- it just seems like the industry is not necessarily there yet, and I don't know what would drive that, other than --

Well, look, I think we should take some solace. This is an industry that is focused on profitability. I think there are generally rational behaviors across the industry.

I think if you look at the earnings results across the sector, you are seeing some very strong earnings relative to previous periods. So, I have confidence in the industry being a responsible industry over the long term.

But we've got a changing balance here, both due to our self-inflicted issues, as well as other dynamics in the marketplace. We were basically ceding share; and ceding that share provided profitable, above-market growth for the rest of the sector. We can't continue to do that.

As I said, we're not going to irrationally compete for share, but we certainly are going to maintain a modest growth rate somewhat at or below industry levels. And we'll see how that transitions in terms of corresponding behavior in the industry. But I think this had to occur at some point in time, and that's where we are.

Kevin Milota, JPMorgan.

Good morning, everyone. Couple questions here -- one on the commercial demand side of the Business. You had cited weak to lower commercial demand, excluding the energy segment. Hopefully, you could give us a sense for what's happening with the other side or I guess the bigger side of the commercial business, excluding energy?

And then secondly, on commercial and leisure pricing, could you give us a sense for what's happening with your -- both segments? And then lastly, given both of you are from the hotel and airline businesses in a prior life, maybe you could give us some thoughts on what's happening with rental car pricing on the commercial side, and if and when you think we could possibly see some price increases for your corporate customers. Thank you very much.

Sure. Thanks for the question. This is Jeff. I'll start with the last part first.

In 2015, in our corporate portfolio, the 71% of the accounts that came up for renewal were renewed at equal or better terms from a pricing standpoint throughout the year. So, we feel reasonably good about that.

With respect to the first part of your question, we saw a degree of softening in business travel in the marketplace in the fourth quarter. But outside of the energy sector, it was a more muted softening in that demand. So, that described a portion of the volume decline that we saw.

But the other portion of the volume decline is, as we're going through our sales effectiveness transformation, we're trying to be very rigorous about the accounts in the portfolio, the profit levels we need to achieve with that portfolio, and that certainly contributed to the volume decline during that time period. Once again, we're trying to look at margin for the portfolio, and grow margin over time in a very responsible way.

So, some industry softness outside of the energy sector, but it was certainly more muted softness than we saw in the energy sector, which had a precipitous decline.

Okay. Thank you very much.

John Healy, Northcoast Research.

Thank you. John, I wanted to ask a question about the US rental car guidance again. I know you don't want to disaggregate the volume- and the pricing-specific metrics, but is there a way to think about the -- what I hear is that maybe a disconnect between investors are thinking about those metrics and how you are talking about the Business?

When I look at the guidance, it implies a 4% improvement in revenue per car per month. If you look at that number, how much of that improvement is driven by the conventional volume and price that we've all grown accustomed to looking for from you? And then how much of that is due to some of the initiatives you outlined at the Analyst day? And is there a way to think about a couple of those initiatives that might be more -- contributing to that growth in 2016?

No, I think, look, incumbent in the guidance, we believe we have a strong opportunity to improve utilization, and that's certainly the biggest driver. And we also believe we have a strong opportunity to improve ancillary. But I would not say that there's a lot of, per se, risk in that.

We are not presuming a lot of new initiatives. So, it's fundamentally presumed that we will have the environment you would expect, along with an improved utilization in ancillary revenue production.

Great. And when you think about utilization, with some of the changes you've made to the off-airport business, is there a way to maybe think about what the high and low point of the business can look like longer term now, maybe on a seasonal basis, in terms of how do you think about utilization for the US fleet?

No, we set out targets in the low 80%s, and I think, frankly, those may be a bit conservative over time. I think we can push that up a little bit more towards the mid.

But we continue to have very good experience at improving utilization by improvements in rentable fleet, reductions in supply chains, support maintenance, et cetera. So, we are very focused on that and the RACD metric, or more commonly within the industry the revenue per unit per month is what we're focused on to drive profitability on the revenue side.

Great. And then just lastly, I might have missed it, but did you guys disclose what the risk versus program target is for the US rental car business in 2016?

From an operating fleet standpoint, the rough numbers, I think we go from an operating standpoint of something like 77% was risk in 2015 calendar year, and it goes to the mid-80%s as an operating fleet from a risk standpoint. The buy in model-year 2015 was more a 45% to 50% program. And it's significantly less program in model-year 2016, because the availability of program supply and the economics that was offered in model-year 2016, frankly, you would have to assume a multiple increase of our assumption, our residual value declines, or you would be indifferent between taking a risk and a program car.

So, if we were profit maximizing, to be clear, in 2016 model year buy, we would have bought zero program cars. So, we tried to be somewhat balanced, and continue to use program as an operational flex, as well as a risk hedge, but not be too irresponsible and go to all risk and not kill the earnings and go to too much program.

But the program availability, frankly, was somewhat limited. You may have heard that from one of our public competitors, so we had to balance our fleet buy relative to what was available and the economics.

Neel Mehta, Morgan Stanley.

Good morning. This is Neel on for Adam Jonas.

So, you cited highly competitive market pricing in top tier markets due to more regional competition. Just want to understand the nature of the competition. Are these new players or just the existing ones stepping up their operations and capacity?

And lastly, if you could just provide an update on the Lyft pilot program in Las Vegas and your updated thoughts on what the opportunity for that could be moving forward? Thank you.

Yes, I think this is traditional competition from what the industry characterizes third tier players; so, nothing unusual there. We really don't see an overflow of ride sharing pricing impacting those markets particularly.

Our pilots with Lyft are going well. I would still characterize them in scale as pilots. But we think that there are potentially opportunities for us to extend the life, and in effect, have a secondary disposition channel by possibly providing pooled cars. And we have the technology and the business model to do that, I think. So, that represents an opportunity to extend the core Business to this developing trend.

We have no further questions in queue at this time.

Thanks, everybody. We look forward to talking to you after the first quarter.

Thank you. Ladies and gentlemen, that does conclude your conference. We do thank you for joining while using AT&T Executive Teleconference. You may now disconnect. Have a good day.