Herc Holdings Inc (HRI) 2016 Q1 法說會逐字稿

Welcome to the Hertz Global Holdings first-quarter 2016 earnings call.

(Operator Instructions)

I would like to remind you that today's call is being recorded by the Company. I would like to now 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 the 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 statements section of our first quarter 2016 Form 10-Q. 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 metrics.

Our call today focuses on Hertz Global Holdings, Inc., the publicly traded Company. Results for the Hertz Corporation differ only slightly as explained in our press release. With regard to the IR calendar on June 7, we will be attending the Goldman Sachs Lodging, Gaming, Restaurant & Leisure Conference in New York and we hope to see some of you there. Of course, that presentation will be webcast.

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.

Good morning. Thanks for joining us. There's been a lot of discussion about pricing in the rental car industry, particularly in the recent quarters. Obviously, pricing is a function of supply decisions. In order to increase RPD fleets have to come down and utilization has to go up. At Hertz last year, we reduced our average US fleet by 2% with our 2015 ending fleet down 7%.

At Investor Day last November and again in March, we guided to subsequent reductions. Our current plan for 2016 is for US RAC average fleet to be down 2% to 3%. We base this outcome on our knowledge at the time in the Fall as we were seeing more conservative GDP projections and also seeing a somewhat softer business travel environment across all travel sectors.

Throughout the first quarter, we maintained a tight fleet in line with the strategy that we outlined during our Investor Day in November. The resulting average US fleet levels were down 6% year over year, driving fleet efficiency up in the US by more than 500 basis points. And even though our fleet level was on plan, RPD remained under pressure as industry pricing struggled with what we believe was a base level of excess capacity that was then further exacerbated by the mild winter, affecting insurance replacement demand and somewhat weaker business travel trends.

We believe the pricing pressure we've experienced is temporary, as evidenced by recently improving trends as we move towards the peak season. Unfortunately, the weak industry revenue environment in the quarter masked the significant improvements we are making in other areas. In particular, we are making great progress on our agenda to drive costs take-outs and quality improvements.

In the quarter, we reduced worldwide rental car unit cost per transaction day by 5% compared with the prior period. This outcome was benefited from more than $70 million of incremental net cost savings. The progress we're making against unit cost will drive earnings leverage in the future as pricing recovers. Since the beginning of the year, in addition to improving operating efficiency, we've enhanced global customer satisfaction across all service metrics in all brands.

We outsourced our legacy IT systems and began building a flexible leading-edge platform. In support of that objective, we recently selected Salesforce as our CRM service provider. Ultimately, this will provide a platform for enhanced customer experience and loyalty programs, all leading us to drive revenue through increased brand preference. Installation of that and the new system is well ahead of schedule and we expect to be fully rolled out by year end.

At the same time, we are moving to a next-generation revenue management system by the end of the summer and importantly, upgrading our fleet system with completion targeted in the first half of next year. Our work in redefining the brand is also well underway and we expect to launch the new positioning in the fourth quarter.

Looking forward, we're in a position to reiterate our guidance of adjusted corporate EBITDA between $1.6 billion and $1.7 billion. Also importantly, the Hertz Spin is on track.

We've made significant progress, including review of capital structures and expect our offering to be well received by the financial markets. As we previously indicated, the transaction was targeted to be complete by midyear. So we expect sometime either in June or July.

Turning to the balance sheet, our liquidity is strong and we're moving toward our year-end leverage target at or below 3.5 times per RAC. Despite raising $240 million in proceeds in part from another sale of the CAR shares, our Chinese partner, we elected not to repurchase additional shares of Hertz Global Holdings during the quarter.

While we clearly believe our stock is significantly undervalued, we concluded that given the challenging revenue environment in the US industry in the first quarter, it would be prudent to take a cautious stance for now. Should recently improved pricing trends continue as we expect they will, we will next assess the cadence of our buybacks following the Hertz separation. Then we will be in a better position, being more informed about our available liquidity as result of the actual spin transaction proceeds.

Before I turn the call over to Tom to walk you through the details of the quarter I want to emphasize that our primary objective is to improve business performance as measured by EBITDA and importantly, free cash flow. Supporting those objectives and given the strong returns we generate on-Airport, we plan to manage our capacity in line with expected market growth.

Off airport, our go-forward strategy is not to chase shared with cars or storefronts, but rather to optimize our existing network and customer portfolio. While that could mean lower revenues in time our focus is on increased profitability and absolute free cash flow.

With that, I'll turn it over to Tom who is going to walk you through the details surrounding the rental car performance in the first quarter and then to Larry, who will talk to you about the progress he and his team are making and driving the performance agenda at Hertz and preparing to separate their company, and move forward as an independent public entity. Tom?

Thank you, John, and good morning, everyone. Before we get into the quarter detail, while we are clearly not pleased with our reported declines in revenue and profitability, which are not unsurprising given a challenging industry pricing environment during the quarter, we are nonetheless encouraged by the recent industry trends and progress on our full potential plan. The recent pricing trends, when combined with our progress on worldwide car rental transaction day growth, a mature improvement in the worldwide car rental fleet efficiency, significantly higher customer satisfaction scores, a meaningful improvement on unit cost performance metrics, and a strong quarter and a liquidity position provide us with the confidence to achieve our earnings and balance sheet objectives in 2016.

Now let's move onto our quarterly results. For the quarter reported, consolidated adjusted net loss was $52 million, or $0.12 per share, and adjusted corporate EBITDA was $155 million, a decline of $71 million on a total revenue decline of 6% to $2.3 billion. Excluding a $30 million FX impact in the quarter, total revenue declined by approximately 5% and excluding a one-time payroll accounting adjustment in 2015, adjusted corporate EBITDA declined by $55 million. On a worldwide car rental basis, which we define as the combination of the US and International car rental segments, total revenue for the quarter declined 6% to $1.8 million.

Excluding the impact of foreign currency, revenues declined 5%. While total RPD declined 7%, unit revenue, or revenue per available car day, declined only 2%, benefiting from a 400 basis point improvement in fleet efficiency to 77%. During the quarter, our strong discipline allowed us to decrease worldwide car rental average fleet by approximately 25,000 vehicles, or 4% while also growing transaction date by 2.5%.

On the cost front, we continued to make sustainable progress on our full potential cost savings commitment. For the quarter, we delivered approximately $70 million in new cost savings initiatives.

Given a significant unusual decline in entry pricing and negative impact to top-line revenue in the first quarter versus prior year, our traditional metric of monitoring cost management, direct operating, and sales, general, & administration expenses as a percentage of revenue, is masking our cost management progress. As such when the first-quarter cost performance is measured on a non-revenue cost efficiency metric, our results stack up very favorably year over year. For example, our GAAP DOE and SG&A per transaction day and per transaction improved 5% and 3%, respectfully -- respectively versus prior year.

These cost efficiency metrics are strong indicators that we are making meaningful progress in optimizing our overall cost structure and bode well where when pricing recovers, we should achieve improved earnings leverage. Further, as a result of our continued progress in cost management, we are confident that we are on pace to fully achieve our 2016 target of $350 million in incremental cost savings. As a reminder, we do not anticipate the case of a $350 million should be linear across the quarters. Rather, we expect a realization rate of the new program initiatives will be more heavily weighted to the back half of the year.

Moving on to the business segment review. In the US car rental segment, first quarter car rental car revenue declined 8% versus prior year, predominantly driven by the industry pricing pressures and closure of unprofitable airport locations in the second quarter of 2015. Looking at the on Airport business, total revenues decreased 8% driven by lower RPD, slightly offset by higher transaction day growth. Most of the RPD decline in the on-Airport business, driven by the decline of industry published pricing; an increase in the proportion of smaller cars rented; an unfavorable shift in customer mix; and the impact of the change in the calculation of Dollar Thrifty transaction days in conjunction with the counter system conversion at the end of the third quarter 2015.

In the off-Airport business, total revenue declined 9%, predominantly driven by lower RPD. Transaction volume was negatively impacted by the closure of the 200 unprofitable stores in the second quarter last year and therefore, on a same-store basis off-Airport transaction days increased 4% for the quarter versus prior year. The declines in RPD was driven by competitive industry pricing and lower yielding customer mix.

In the face of these industry challenges, we remain sharply focused on improving how profitably and efficiently we utilize our fleet assets. Through these efforts, we increased US RAC fleet efficiency by 500 basis points, a 2% volume growth and 6% lower capacity. In light with our April 11 business update report, US RAC unit revenues, or revenue per available car day, with decreased 3.3%.

Overall the published pricing environment is obviously quite challenging during the quarter. And while still not yet considerably healthy, early signs of improvement are evident in the second quarter, especially as we heads toward the peak summer season. We are taking actions to improve the mix of cars we rent, enhance our customer segment mix, drive greater customers' preference and steadily increase volumes to achieve industry growth levels.

Our recent improvements in product and service quality are being recognized, as evidenced by our significantly improved customer satisfaction scores across-the-board. We are also pleased to report we successfully renewed ours exclusive partnership with AAA, a highly valuable and long-term strategic partner for the Company.

On the cost side, US RAC net fleet depreciation per month was 6% higher year-over-year in the first quarter, driven primarily by the anticipated impact of both the decline in used car residual values, and higher program car costs as well as a reduction of hold period for certain vehicle types. To all mitigate the rate increase, we continue to focus on the effective management of our total fleet costs.

For example, as a result of our improved processes around supply chain optimization, we were able to reduce over20,000 cars from unavailable-for-rent status, which is a 34% improvement versus prior year, and an impact of 4.5% of the total fleet in the US RAC. Additionally, we continue to deliver strong results in our re-marketing efforts.

During the quarter, our total non-programmed vehicles sold was approximately 66% remarketed through higher-yield channels, as compared with 62% a year ago. As a result, our full-year 2016 depreciation guidance is unchanged at $290 to $300 per unit per month. So bringing it all together, US RAC business first quarter adjusted corporate EBITDA was $26 million, or a margin of 2%.

Looking now at the International car rental segment, total revenue decreased 1% year over year on $433 million. Excluding the $26 million unfavorable FX impact, International RAC revenue declined -- increased, excuse me, 6%. Transaction day grew 3% year over year. International RPD increased 2% year over year, driven primarily by strength in long-haul inbound business.

In International revenue per availability car day increased 1% versus last year, driven largely by RPD increase and stable fleet efficiency. The International segment's net depreciation per unit decreased 7% from the prior year on improved fleet management processes, including strategic procurement and greater use of alternative disposition channels.

So in total, the International segment reported adjusted corporate EBITDA of $11 million, or a margin of 3% for the first quarter. This reflects a $5 million reduction year over year on a reported basis. However, adjusting for the impact of a favorable nonrecurring item last year, adjusted corporate EBITDA improved by $11 million year over year.

Now I'd like to turn the call over to Larry Silber, our CEO of HERC, to provide an update on the Equipment Rental business. Larry?

Thank you, Tom and good morning, everyone. Before I begin our business discussion, I'd like to update you on our people and operations in Fort McMurray, Alberta, Canada.

We are receiving frequent updates on the status of our colleagues and customers who have been affected by the wildfires. All of our people are safe and accounted for. We're doing all that we can to assist them during this challenging time and are committed to providing support and assistance to our employees and constituents in the local area.

Now let me turn to our first-quarter results, beginning with Slide 17. We delivered a strong operating performance in core markets in the first quarter. We continue to make headway in new sales initiatives that expand and diversify our revenue base and improved key operating metrics relating to increasing fleet available-for-rent and reducing maintenance costs. We also focused our capital expenditures on investments to support our Specialty Solutions and ProContractor tool initiatives, which I'm pleased to say, are being enthusiastically received by our customers.

First quarter 2016 Worldwide Equipment Rental segment revenues totaled $328 million, a decrease of $27 million from the first quarter of 2015. The sale of the operations in France and Spain accounted for $19 million of the decline. The improvement in non-oil & gas revenue substantially offset the decline in upstream oil & gas markets while the remainder of the impact was primarily currency related.

Excluding upstream oil & gas branch markets, revenue increased 12% and a pricing increased just over 1%. Revenue from upstream oil & gas markets represented approximately 18% of total revenues in the first quarter of 2016. Revenues from new customers increased approximately 20%, and the volume of new accounts improved approximately 41% over the first quarter of 2015.

New customer-focused programs, such as rental protection and other ancillary offerings, also began to take hold and contributed positively to the quarter. Worldwide volumes, excluding France and Spain, increased approximately 1% due to new account growth.

With approximately 280 locations worldwide and about 270 in North America, we have a strong footprint, from which we intend to build, which you can see on Slide 18. During the quarter, we opened three new branches to improve our density by providing additional coverage in strong growth urban markets. In April, we closed five branches in Canada and reduced our workforce there by about 13% to rightsize the fleet and workforce given the slowdown related to oil exploration. We are also evaluating additional branch closings in the United States for similar reasons.

The average fleet in our upstream oil & gas markets declined nearly 20% in the quarter. And while we increased fleet in our non-oil & gas markets by approximately 12% compared to the same period last year, we have also been able to achieve a price list -- lift of just over 1% in the same period.

We have approximately $3.5 billion in fleet at original equipment cost, primarily in core equipment such as aerial, earth moving, material handling as shown on Slide 19. Our fleet has an average age of 47 months, similar to some of our major competitors. We refurbish and remanufacture equipment when it makes sense and have done so with 45% of the fleet over seven years of age, which makes our fleet younger than it appears because we don't reset the fleet age.

We are also supplementing our fleet by adding new specialty and ProContractor gear, which has a higher value utilization than our core equipment and which should drive higher flow-through and higher margins over time as we increase fleet in these categories.

We were very disciplined with our fleet CapEx this quarter. We purchased $88 million of fleet in the first quarter of 2016 compared to $199 million in the first quarter of 2015. Due to the impact of changes in fleet working capital and equipment proceeds, our net fleet CapEx number in the first quarter is a positive $6 million. Substantially, all of our purchases were for equipment and Specialty Solutions categories, such as climate control, HVAC, building maintenance, and remediation and restoration, as well as for ProContractor tools.

We incurred a loss on the sale of revenue earning equipment of $8 million, primarily related to sales in upstream oil & gas markets and the sale of equipment manufactured by non-premium brand suppliers, as we reduced the number of brands we carry. Reducing the number of suppliers and vendors is a delivered strategy to enhance operational efficiencies.

On Slide 20, you can see that of the last year, we reduced the number of vendors by about 40%. Our strategy is simple. A lower vendor count means better leverage for buying fleet and simplifying our fleet also reduces future maintenance and operating costs. We also significantly reduced fleet unavailable for rent, or as we call it, FUR, our metric for measuring the availability of our fleet. This chart shows the progress we are making.

From nearly 20% a year ago, we are now currently running at a 12% rate. Since we have $3.5 billion in fleet, for every 1% improvement in FUR, we have $35 million more fleet available-for-rent. You can be assured that our branch managers are focused on this important metric every day.

Turning to Slide 21, adjusted corporate EBITDA for the worldwide equipment rental segment and for the first quarter of 2016 was $122 million, a $10 million, or 8% decline versus the first quarter of 2015. Half of the adjusted corporate EBITDA decline is attributable to foreign exchange and the impact of the sale of the operations in France and Spain. The remainder reflects declines in major upstream oil & gas markets.

As you can see, if we exclude upstream oil & gas branch markets as well as the results of operations in France and Spain, on a constant currency basis, we increased EBITDA in each quarter over the previous comparable years quarter for the last five quarters, and in the first quarter of 2016, we recorded a 14% improvement.

On Slide 22, our guidance for 2016 is summarized. We remain committed with our full-year adjusted corporate EBITDA guidance of $600 million to $650 million. Excluding the cost of being a stand-alone public company, which we state in our recent Form 10 amendment would be an incremental $35 million to $40 million annually. We also expect our net CapEx spending to be in the range of $375 million to $425 million for the full year.

And now let me update you on our separation as a standalone public company on Slide 23. As you may recall we filed our initial Form 10 in late December of last year and updated it with our Second Amendment in mid-April. We intend to provide a third update shortly, which will include the first-quarter results. Our senior leadership team is in place and I'm pleased with the level of talent the public company experienced of the executives that have joined the company.

As we move closer to becoming an independent public company, we are also pleased with the progress we are making building a strong Board, having recently named Herb Henkel, the Retired Chairman and CEO of Ingersoll-Rand as the non-Executive Chair Designee. We have levered the rating agencies, launched the syndication process for our ABL credit facility, and plan to start meeting with the capital markets in the next few weeks.

As our seasoned leadership team focused on above-average growth, we have significant opportunity for operational and financial improvement while being committed to disciplined capital management. We're excited about the future and look forward to becoming an independent public company. And now back to you, Tom.

Thanks, Larry. Now let me provide an update on the balance sheet and our finance activities before I turn the call back over to John for some closing remarks.

During the first quarter, the Company generated free cash flow of $130 million, which when combined with the $240 million of proceeds from the CAR Inc. transaction, increased corporate liquidity t to over $2.3 billion. Our corporate leverage ratio declined 3.6 times at quarter end, progress consistent with achieving our objective to be at or below 3.5 times by year end for the RAC business. We believe there is a significant dislocation in our intrinsic value relative to our share price during the first quarter and has continued in the second quarter; however, as John indicated, given the industry pricing pressure experienced in the first quarter, combined with the imminent separation of RAC and HERC we do not see share repurchases in the quarter and we will reassess the cadence of any share repurchase activities post-separation.

The financial market continues to be supportive of our access to capital at attractive rates and terms. To that end, in February, we issued $1 billion of term ABS notes for our RAC business at an attractive blended rate at 3.02%. In April, we completed a $385 million term ABS transaction for Donlen; during this quarter, we also expect to execute several normal-course fleet debt extensions and seasonal facilities. In addition, over the course of the year, we will continue to prudently access the ABS term funding market to better balance our US RAC mix of fixed and floating rate debt.

As we move to the completion of separation of RAC and HERC, we are making significant progress in lining up the requisite bank credit facilities and related capital market transactions to improve the debt maturity and leverage profile at RAC and establish a long-term capital structure of appropriate liquidity at HERC. Given the improving market conditions, we now expect the leverage ratio for HERC to be between 3.25 times to 3.75 times at the time of spin and RAC to be at or below 3.5 times by year-end 2016. Finally, we expect to complete the separation of RAC and HERC by midyear, which is targeted for as early as June 30 or as late as July 31 closing if we desire to close the transaction on a month end.

With that, I'd like to now turn the call back over to John.

Thanks, Tom. Thanks Larry. As you can see from Tom and Larry's remarks, we are now at the long-awaited eve of separating the HERC business and moving these two companies forward. I think the progress Larry and his leadership team are making outside of the transitory noise of oil & gas is evident.

The capital structure that will support the company going forward is strong. And I believe that the shareholders of our Company today as well as the independent shareholders of both companies going forward are going to be well-served by the work Larry and his team are doing in the HERC business and the progress we're making in the remaining RAC business.

We are making tangible progress on our full potential plan. That progress is certainly temporarily masked by the pricing environment in the US, which is currently moderated. Lower cost, higher quality is what we're focused on and what we are delivering.

While residuals are under some pressure, we believe that our guidance accommodates the effect and we continue to be encouraged by the strong progress we are making in alternative distribution channels, decreasing our reliance on options. Access to capital and costs are favorable and as a result, we are migrating to a higher mix of fixed rate debt and moving maturities out as well.

So whether you believe the impact of ride sharing, it may or may not be, I believe what we must do is clear; lower our unit costs, improve quality, particularly speed and convenience of our services while reducing friction in the path to rent, most importantly, in urban markets and finally, partner in the tremendous growth these companies are experiencing. We are doing all of these things. That and more that we will discuss in the coming months will ultimately be recognized, we believe, in our stock price.

With that, we're going to turn the call over for questions. Linda?

Thank you.

(Operator Instructions)

Chris Woronka, Deutsche Bank.

Good morning, guys. You mentioned some brand repositioning coming up in the fourth quarter and I can understand you might not want to give us all the details yet but can you give us a sense directionally what the goal is going to be there?

While I think foundationally, what we've been focused on, first and foremost, is including the customer experience off of each of these brands. So clearly when we reposition and invest in these brands going forward, we want to do it on a foundation of strength and quality of service and I think we're getting to that point where we can have that level of confidence.

Look, differentiation amongst brands is, historically, a struggle in this business. But there are clearly reasons to have multiple brands. So I think going forward, both in terms of customer experience and brand positioning, we're going to continue to push Hertz up as a premium rental car brand in the market while creating appropriate value positions for the other brands that address their own segmentation.

We're also going to try and drive cost out of customer experience delivery across all of the brands and do it to the greatest extent possible to create differentiated cost position in the value brands.

Okay. Very good. And then you mentioned a shifting the free mix a little bit. I just wondered if you could give us an idea of what's going on there? Are you -- is this within a segment or size of a car? Is it more about risk versus program?

Well, I think what we experienced during 2015 was really an outcome where we took more compacts than probably an ideal world we would have wanted to in order to access the total fleet plan we wanted. As a result of that, our rented fleet mix quality declined year over year and had an impact on our RPD results. We believe we can effect a strategy to return to a more normalized fleet mix over the next three to 12 months. And we're undertaking that now and we expect this effect to be temporary.

Okay. Great. Thanks, John.

Adam Jonas, Morgan Stanley.

First, you mentioned a few times in your prepared remarks the -- a suggestion that pricing is moderating into the second quarter. Without being too specific, could you tell us categorically, if I gave you three options? Does that mean down by a more modest amount, stable or possibly improving? What category would you say that real-time is moderating (multiple speakers) --

Category 4, observing trends and watching them develop ; two, which are currently moving in the right direction. I wouldn't say that our concern about pricing is over; we're merely encouraged by the directional improvement. But it needs to continue and it needs to be in more steep as we move forward.

Again, if we get back to supply decisions, are impacted by that. Obviously, the peak season tends to mitigate an overhang and it will be important that as we assess our fleeting coming off the peak in the Labor Day timeframe, that we consider defleeting possibly more than would be normally seasonally required, depending upon how the market develops.

This is a follow-up. On the cost guidance, so you're saying $350 million for 2016 year-on-year cost savings, most of that back-end -- heavily back-end loaded towards the end of the year. Could you give us an idea then of the year on year, looking into 2017, how much would be left in terms of year-on-year cost savings bridge from 2016 to 2017?

This is Tom. We haven't disclosed yet all of our initiatives that will impact 2017 but obviously, there's going to be in annualization of the $350 million which would probably add another $50 million to $100 million on an annualized basis of these new initiatives because it is back-end loaded, as you indicated. And then obviously, we're continuing to make progress on longer-term initiatives that we outlined in our three to five-year plan.

As we indicated previously, I think our cost initiatives will continue to make steady progress. The early wins are less technology reliant and the later wins will be more technology reliant so I think you'll see the 2017, 2018 to really accelerate as we get our new system in place.

And we're able to leverage that from a back-office as well as from a front operational side of the house to really leverage the technology we're investing in to take out the costs in those areas. So, it will be an annualization of $50 million to $100 million in 2017. Obviously, we'll have additional initiatives on top of that which we will talk about later this year as we get better visibility on the timing and some of the delivery of those technology initiatives and the impact they will have on our back office and our front office operations.

We're not remotely, Adam, running the business on all cylinders in terms of cost performance. And it really is connected by -- it's quality. That's not simply a recreational connection. The same thing that underlies our quality opportunities is the same thing that underlies our cost opportunities, best-in-class execution.

And when we look at the technology in annual cost savings in the future, they are going to be very, very significant. When we look at what we're able to do in terms of manpower planning and staffing models, all of these things are simply running the business very tight. Look at what's going on in terms of supply chain.

We didn't get that simply from selling more rentable days. We obviously had an impact there, too, but we drove out 20,000 cars, quarter over quarter, due to supply chain and out-of-service improvement initiatives. That's an enormous amount of invested capital.

And that's what we after. We can drive capital down, drive cost down, drive service up and get more of the model in terms of the return on capital and free cash flow and in many respects, we're still in the early innings.

Thanks, John. Thanks, Tom

Anj Singh, Credit Suisse.

Good morning. Thanks for taking my questions. John, you talked about Q3 of FY15 being an inflection point in your results and you definitely made considerable progress on multiple fronts since then. But given the encouraging trends in pricing that you're seeing, if you had to think about when a similar inflection point could happen for US RAC, RPD or your preferred metric of RAPD, when do you think it would be?

Well, I think we expect things to improve in the second quarter but I think it's too soon to call it an inflection point. I would expect to see -- be more satisfied in the third but I'm not prepared to say that as a hockey stick inflection point. It's simply things improving.

I do truly believe this is transitory. I think all the industry participants are suffering from the consequences of this pricing environment and I believe this is largely an industry that's responsible to the capital returns to investors.

So when you think about what we've experienced over the last several months, you've really got the moderating of a very long both cycle and residual values. It's not -- it's moderating; it's not truly not a collapse. It's a moderation.

When you combine that moderation and the cessation of rewarding the behavior of incredibly low fleet -- these costs in the industry that reward the behavior of above average growth. When you combine that with a moderate slowing in GDP growth and Hertz's desire to recapture a maintenance of share, not a share growth but a maintenance of share, you can see there are a lot of things coming together, mild weather, et cetera, which created, I think, a much more severe reckoning than might have been predictable by any of us.

I think that reckoning is causing us, hopefully, and certainly individually and hopefully, the industry at large, to gain a greater understanding of what it's going to have to do to get this industry back on path in terms of free cash flow, financial performance, and return to our owners and we all have owners. So, I think there's reason to be encouraged that this is temporary. That's not to suggest that we're going to be giddy in three months.

Got it. And as it relates to Q1 fleet utilization and US RAC, it's some of the highest we've seen in a while. Could you give us a sense of how you're internally targeting fleet utilization for FY16 and longer-term? I'm just trying to understand where utilization can realistically go in the short-term and over time? Thank you.

So if you look at the first quarter it's a moderately easier comp. But I'll have Tom literally look forward. I think what's most encouraging about this is we're very, very focused on leasing fleet available-for-rent. And we're in the early stages of executing on that and we expect performance improvements going forward. Tom can indicate where we might end up.

First, as I've indicated previously, the first half of the year, we do benefit from easier comps because we're going through that significant rotation, fleet rotation last year. But coupled with that, we have made enormous progress on the supply chain management of the infleeting, defleeting progress and the cycle times to which cars are in each of those steps. And taking that fleet unavailable-for-rent down, as John indicated, by 20,000 units, or 34% improvement year over year.

If you look at the long-term history of Dollar Thrifty as an independent company and Hertz as an independent company, I believe the peak fleet utilizations of those companies operating independently is somewhere in the 82% range. From my background previously at Vanguard Car Rental, the peak was around 82%.

I don't think none of those companies were necessarily as sophisticated and nearly managed with big data and very big focus on process and de-cycle conscious and fleeting process. So I would say the objective was clearly to try to meet and exceed that level sooner and to get beyond that level, we haven't really given any guidance, but I've said publicly before is, we clearly should be able to beat that historical peak but what we really did see, the ultimate objective is, it's going to something above that.

You do have, obviously, a day a week peaking and dropping that you have to be cognizant of and seasonality, that you can't necessarily always manage around like the time period between Thanksgiving and Christmas, which makes it very difficult to drive utilization because you need the whole fleet for those peak holiday seasons. So there is some kind of natural seasonality in day a week peaking is that it's very difficult to overcome from utilization perspective but at the same time, I think we've gotten more sophisticated by our fleet management, the metrics we put in place, the discipline and accountability put in place in the organization to drive utilization above those 82% level peaks that the Company historically operated at.

Got it. Appreciate the thoughts. Thank you.

Chris Agnew, MKM Partners.

Thanks very much. Good morning. You highlighted three things that impact the total RPD: I think the Dollar Thrifty transaction day counting methodology, fuel-related ancillary, and mix. I wonder if you could break those out separately for us. Then how do we think about those impacting for the rest of the year? Are there any -- is there any seasonality to those impacts? Thanks.

Good morning. This is Jeff Foland. So about 70% of the decline in RPD was related to industry pricing and the DTG, days counting methodology that we have previously discussed before. Of the remaining 30%, it came in the form of a number of dimensions, a couple of which you have mentioned.

The fleet mix change, or the proportion of smaller cars that were rented on a year-over-year basis compared to the same quarter last year. Customer segment mix had a small impact as we saw some softening in the corporate travel sector and that traffic was replaced with other types of traffic that had slightly lower yield during the quarter.

And then as you mentioned the refueling-related ancillary components which as fuel prices have dropped in the marketplace, the associated ancillary revenues with that have dropped as well. So that's roughly how it breaks down for the on-Airport business and for the off-Airport business, we saw a somewhat similar mix as well.

Thanks. And can you touch on European book as separate questions. European booking trends, and then in particular, international inbound and level of visibility you have at this stage for the summer peak? Thank you.

I think it's too soon to tell, really, in that context. As we went through the first quarter, we really didn't see anything. Previous events such as we're experiencing in Belgium have turned out, in retrospect, to be more moderate than we thought. But we are watching given that this is a peak booking season for the summer, as that develops. So I think there's a moderate level of concern recently in terms of demand, particularly from the US market to Europe but nothing that we're prepared to extrapolate or that we believe can't be mitigated.

With respect to inbound into the US from international locations, we saw modest growth in volume in the first quarter, year over year. At this point in time, as John said, it's a little early to predict, or project what that will look like for the remainder of the summer as we head into the peak. And we had similar pricing pressures on that business, as we saw in the remainder of the portfolio as well.

Thank you.

John Healy, Northcoast Research.

Thank you. John, I wanted to ask you a little bit about some of the comments you made on mobility and Hertz's role longer-term. I was hoping you could give us an update on partnership with Lyft, what you're seeing in the Denver and Vegas markets? And maybe how your thought process is evolving as it relates to that business?

Additionally, I was curious to know with the partnership you have with Lyft, they've been in the market raising some capital and some new investors. Is that something you thought about and is that something you have the option to participate in with Lyft?

Certainly, we have the option to participate in those markets. We've sort of come to the conclusion that some -- a return for our investors on a risk adjusted basis, these valuations have moved beyond our -- us being able to have a strategic participation from that perspective. So we have no expectation that we would move forward with consideration on that level.

We do think that there's going to be supply partnerships and management partnerships. We've done pilots with Lyft, as you know. Donlen as operating some fleet services with Uber as we speak around their own fleet in their lease portfolio so we're committed to developing a profitable strategic partner relationship with these companies and I think that those discussions are ongoing and have been for some time. And we'll determine what the best outcome is. But clearly we're going to find any way to constructively participate in the segment's growth.

Great. And I wanted to ask two housekeeping questions. The $1 billion of EBITDA you're expecting in the rental car business this year, what's the expectation for full-year pricing in that guidance from US RAC? Then additionally, any updated thoughts on how you're thinking about leverage on the HERC business post-separation?

So I'll answer the first part and Tom will answer the second part. So look, we've been very clear that we provide EBITDA and selective additional guidance. And that's because I think the -- one's ability to be pressing it around pricing impact is not terrific.

Now, having said that, your next question is, well, then how in the heck do you come to an outcome? We come to an outcome understanding the leverage we have across the business and our ability to mitigate risk as a result of that.

Now, clearly, our guidance is predicated on certain residual value outcome and an improvement in pricing. But we're not left without levers to respond to both of those in our trajectory of cost savings in the rest of the business. And that's how we've accommodated it.

We're intentional enough, precise on that again, not with an intent to be evasive or lack transparency, we just wanted the team to be driving accountability to the EBITDA outcome would certainly, I would say, suggest some improvement in pricing but it doesn't suggest that we're going to be up year over two certainly.

And then it relates to the leverage question, John, as we indicated in remarks we said previously the leverage for HERC at spend, we're looking at a 3.25 times, 3.75 times range; that's up from our previously discussed guidance that was updated with the capital markets environment at 3 times to 3.5 times. Our original target back in March 2014, when we first announced this spin was 3.5 to 4 times.

It has moved around relative to the capital market environment but -- and the performance of the business, obviously. The performance of the business, as Larry outlined, is improving as are the capital markets which are both positive indicators to allow us to move that expectation from 3 to 3.5 times, to 3.25 to 3.75 times. Obviously, we've made a lot of great progress on establishing the capital structure for both businesses and more will come out as we get closer to date, but we clearly will have an objective to use the proceeds in such a way that will allow us to achieve our goal to be 3.5 times or less on the RAC leverage level by year-end 2016.

Okay. Thank you.

Afua Ahwoi, Goldman Sachs.

Hello. Thanks for taking my question. So just two from me, real quick. First, I'm trying to reconcile some of the comments that you made on the industry capacity and utilization, and maybe the answer lies in the type of car. But it strikes me as interesting that both you and Avis reported improvements in utilization but both mentioned that RAC fleet with 2.5% (inaudible). My question is where is that supply coming from or is it the type of supply that was available?

And then the second question is just on the residual value. I noticed you kept your 2.5% decline forecasted that you indicated earlier. How does that feed into what we're seeing right now in current trends which are obviously weaker than that, but does that mean it's temporary? Do you expect a back-half of recovery? Thanks.

Relative to the first comment, look, until all fleets are tight across the industry and in effect, until we're spilling demand. In other words, we're actually rejecting some demand, we're not gaining pricing power as a participant or at a sector level.

So I think the approach to this issue has got to change to a willingness and a reward for having a little bit less than what demand ultimately calls for as opposed to a little bit too much. So when that occurs, you will see corresponding improvements. Until that occurs, we will collectively be frustrated.

Afua, as it relates to residuals, I think your question was related to the 2.5% and what are we seeing current trends relative to some of the market, in the case, or Manheim and others. As we went through the first quarter, you can read our disclosure we did have a $27 million adjustment related to fleet depreciation, primarily related to midsize compact cars as it relates to the weakness we saw in the market.

So we believed and we were able to accommodate that within our guidance range of 2.5% decline because we came out, as you noted, earlier in the year and called it a 2.5% decline, albeit some people thought that at the time, might be conservative.

We thought it was appropriate relative to the market noise relative to how residuals were developing. We also believe that residuals were somewhat under pressure in the first quarter due to the, I think, what was an excessive amount of fleet -- defleeting by the industry, which did put some transitory pressures on the residual environment of certain fleet types.

So as we move forward, and look at our forward review of fleet residuals, we obviously look at it all the way down to a bin level. We use external sources as forecast and we do our own qualitative analysis on our own performance over the last six months, three months and one month of disposals on each channel and incorporate that into our core residual view and again, believe our 2.5% decline is consistent with our own expectations.

Clearly, 2.5%, some folks might think that is not enough. You might go back and look at the history when the industry was under significant pressure and it wasn't a 3.3% range decline overall for the average year. So again, we think our guidance is close to what we thought would be a very challenging historical comp to replicate and so nonetheless, we believe our 2.5% is appropriate relative to our expectations this year.

Okay. Thank you.

Kevin Milota, JPMorgan.

Good morning. A couple questions here. One, if you could give us a sense for how booked you are right now in US RAC for the second and third quarter?

Second question being that first quarter was down 10% on price; for the second quarter, is the cadence going to be similar or is it half that, downsized similar to what you achieved in the fourth quarter? Give us a sense for what the next move is on pricing; that would be helpful. Thank you.

I can appreciate while we'd all like to know the answer to those questions, but we're not in a position to provide specific guidance there. One of the difficult things about revenue visibility in this industry is the extreme shortness of the booking curve which is in partly, a function of pricing structure and excess supply.

I think it could be a much longer, more indicative booking curve than it is but for the time being, most of that activity is incurring within a 30-days of pick-up. So I don't know that booking trends, I would say, are positive but the data sample is small when you go beyond 30 days.

Rich Kwas, Wells Fargo Securities.

Good morning. This is Ron Jewsikow on for Rich Kwas. Just had a question. Has there been any pressure from OEMs to offload fleet or have you pushed back in any attempts to do so?

Ron, this is Tom. No, there hasn't been any pressure by OEMs to offload fleet. We're obviously monitoring inventory gains of all the manufacturers and any [program cars] reach out when we see what might be building up of inventories of certain model. Because we obviously want to be careful.

There is -- generally, there's availability of compact and midsize for which we discussed earlier which is something we were a little overweight in the first quarter. So we want to be cautious not to take fleet just for the simple sake of availability fleet.

As John also indicated very clear in the call, we want to be very disciplined in our fleet growth. So even though there will be or there may be availability from time to time of different types of fleet, we would be -- we would consider taking a spot rate only if we can accommodate within our fleet plans. So we will not be destructive in taking fleet for fleet's sake because it comes at a marginal lower cost than our average fleet and therefore, would take fleet.

So we'll be very disciplined from that perspective. But generally speaking, there hasn't been a large amount of fleet being made available for the -- for what we see in daily rental and the manufacturers have been very disciplined in what they offer. And particularly, as we've talked about previously, the program car content has been declined in the year-over-year basis, a model 2016 versus model 2015 and the pricing has increased.

And we expect similar behavior from all of your 2017 offers based on our preliminary discussions with our various manufacturer partners where program cars will continue to be difficult to be available and at higher cost.

Thanks for that color. And then on the (inaudible) revenue visibility, how is progress going on the implementation of prepayment options for customers?

This is Jeff. So, we actually have some prepayment options in the marketplace today, which has grown significantly on a year-over-year basis. What you may be referring to is the ability to capture the payment card information upfront across brands and the ability to offer various product offerings associated with that.

We are on track to have that capability by midyear this year for a portion of our brand portfolio and will be following with the remainder of our brand portfolio at a later point in time. Once again, midyear, we will have the capability and at that point in time, we'll start various end markets, programs and tests.

That's very hopeful. Thanks for taking my questions.

Brian Johnson, Barclays.

Dan Levy on for Brian. Thank you. First, I wanted to ask a question just on your purchases of fleet. Just given the pressure that we've seen in the small midsize car market, have you been able to get any benefits within the cap costs to see -- to reflect the weak sedan pricing that's happening in the newer retail market. Have you seen any of those benefits in your cap costs?

We don't get into specific disclosure and particularly, when we're in the middle of negotiations with OEMs on our cap costs year over year but to be clear, obviously, there has been residual pressure and as a result, discussions have to start with their cap cost-reduction relative to the residual market, aftermarket on those types of fleets.

So clearly, that's an objective. I'm sure all the industry has, as well as ourselves, and I think the OEMs are understanding of that need and given the residual values of those types of fleet types declining, there has to be a similar decline of cap cost.

Okay. Understood. And just a question just on broader fleet industry capacity following up on what had been previously asked. We saw in the quarter that in the first quarter, that OEM new car sales into the rental industry were up 12% quite significantly and I understand that a part of that is offset, you mentioned, by quite significant sales into the used market.

But can we just understand, if there was an issue of excess fleet, wouldn't you have had any ability to delay or offset some of those purchases so that there would be a net disposal? I guess this is more a question with regard to the broader industry but we would -- just would have assumed if you are having issues with excess fleet -- if the industry was having issues with excess fleet that some of those purchases could have been delayed or cancelled?

I think we've heard anecdotally that, that may have occurred in some cases. Our fleet was down 6% in the quarter year over years.

And I think, generally speaking, from a fleet planning perspective, it's very challenging once you make a commitment to a manufacturer and you come up with a supply plan to materially move that out. So I would not take so much focus on quarter to quarter, year over year add or sales to ramp the rental car because, A, to your point, you're missing the disposal component of that equation so you don't really know what happens to the net fleet for the industry.

And B, it is more difficult to effectuate change near-term quarter to quarter as a -- versus a longer-term horizon in a fleet planning perspective that daily rentals can then plan for and adjust for, along with the -- along in partnership with the manufacturers who are relying upon a supply plan and a commitment plan and an order plan for their own planning and their own factory orders.

So I would not take too much credence into a quarter estimate, quarter point estimate as an indicative issue that does not appear to be addressing what we believe was to be an oversupply. I think it's a longer-term horizon and again, I think when one does that, you're missing, to your point, the larger component of the equation which is the disposal component which we understand and you've probably have seen this as well, was very significant in the first quarter for all the dealer rental car companies.

And I think you need to look, as Tom indicates, we were executing on a capacity fleet reduction plan that was largely determined last September or October.

Understood. Thank you.

Michael Millman, Millman Research.

Thank you. I think you've indicated that over the last few years, you've lost share at -- on the airports. Can you talk to us about to what extent you're trying to regain that share has contributed to what's going on in pricing? And also sort of related, can you draw a line in the sand and say we will not rent below this price; we'll hold it for another day?

So first off, I think we've been consistent for some time. We're not going to try and regain share through price. We are going to try and participate to maintain share. So I don't think it would be appropriate to draw a line between those two outcomes. And I think that's evidenced by where you've seen our growth, both in capacity and transactions vis-a-vis other industry participants. So that would be our view in that regard.

I don't think it's helpful to be dogmatic about where variable costs are vis-a-vis the use of fleet. I think it's appropriate to observe some activity in the market at times. It seems like it may be below variable cost but we all have our own perspectives on that. So no, we would not establish a transparent minimum.

Thank you.

Ben Clifford, Nomura.

Good morning. Just one question. It looks like your cash tax guidance for 2016 is definitely elevated, maybe the highest levels we seen over the last five or six years. Can you talk about what's driving that and what the outlook on that cash tax number could be post-2016?

Yes. No problem, Ben. So I would say this year's cash tax guidance is somewhat higher than what we would say the normal rate would be due to potential expectations on where we might have some cash tax exposure in certain foreign jurisdictions, on some historical audits that are ongoing, so it's a conservative assumption where we may have to settle for an external audit.

It is not related to any change in our view of being a federal tax cash tax payer in the US and we don't expect that to happen anytime between -- based on the bonus depreciation extension prior to 2018 or 2019 at the earliest. So it is, in no way, related to any changes in fleet plans that folks have had concerns about or mismatching of LKE relative to fleet growth; it is simply a function of our conservative view on potential settlement of some tax disputes in some foreign jurisdictions.

Great. Thanks. And then a final question. How many -- how much of your disposals in Q1 were programmed cars versus at-risk cars?

Well, we didn't disclose our total disposals, but disclose a similar number of cars in Q1. I know the follow-up question which I will just anticipate and answer directly is what percentage of your risk of cars you have disposed of relative to your expectations for the year? Through the month of April, that would be in excess of 40%.

So we did have a fairly aggressive disposal and again, it was similar to last year when we were going through the fleet rotation of overall disposal. So as you can see from that, just vastly, we were pretty aggressive on managing fleet despite not going through a large fleet rotation. But our overall risk of disposals, at least through the month of April, which is my latest data point, would represent about 40%-plus of our overall expected disposal of risk fleet for the year.

Great. Thank you.

There are no further questions at this time. Please continue.

Thanks, Linda. John here. Look, I think we're clear that we have a path to deal with both perceived and real threats to value as opposed to a path that sees the opportunity we have as a Company around our internal ability to generate value in execution of excellence as well as our strategic ability to position the Company to be more relevant in a rapidly changing marketplace, that we feel clearly provides more value than it represents risk.

And we'll continue to report on our progress as we go quarter to quarter. We thank you for your engagement and support.

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