Hertz Global Holdings Inc (HTZ) 2016 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Hertz Global Holdings second-quarter 2016 earnings call.

(Operator Instructions)

I would like to remind you that today's call is being recorded by the Company. I would now like to turn the conference 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'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 their by 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 statements section of our second-quarter 2016 Form 10-Q. Copies of these forms are available from the SEC and on the Company's Investor Relations page on our website.

Today, we 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 publicly traded Company. Results for the The Hertz Corporation differed only slightly, as explained in our press release.

With regard to the IR calendar,, on September 14th, we'll be attending Morgan Stanley's fourth annual Laguna Conference on the West Coast. We hope to see some of you there. If you can't make it, the Fireside Chat portion of the presentation will be webcast.

This morning, in addition to John Tague, Hertz's CEO; and Tom Kennedy, our Chief Financial Officer, we have Jeff Foland, our Chief Revenue Officer, who will be on hand for Q&A. Now I'll turn the call over to John.

Thanks, Leslie. Good morning, everyone, and thanks for joining us. We remain focused on and committed to the performance objectives that we laid out in our full potential plan, as presented last November. Most notably, enhancing EBITDA margins over three to five years to 16% and 18%. To obtain that level of performance, we are building a more robust model through improvements in both quality and sustainable cost reductions.

The other performance of our revenue quality in the quarter masked the progress we're making. It is measurable; 6% lower cost per transaction day in the quarter on a consolidated basis, and importantly, approaching 8% in the US. This performance, when combined with improving our fleet management capabilities, will ultimately enable us to better manage through future industry cyclicality, including populations and residual values.

Price is, of course, an important lever and is among our biggest opportunities. The US and industry pricing trends are clearly improving. Retail published pricing turned positive on a year-over-year basis during the quarter, up markedly from the industry low point in first quarter.

RPD trends exiting the quarter were much better, and that sharp improvement was versus our April performance. In fact, our year-over-year decline improved by nearly 6 points over that period, and we've seen continuing improvement in July.

We are taking specific actions to achieve an outcome of improved performance in our revenue quality. Going forward, we are modestly rebalancing our mix and length of keep. While longer term, we are continuing the improvements we are making in our systems, as well as customer experience and go-to-market strategy to drive customer preference. As such, we expect to see better outcomes in the second half of 2016 and an accelerated rate of progress in 2017.

Improvements in asset management have been encouraging and are seen in every dimension of our fleet management, from supply chain, to maintenance efficiency, and improved operations execution. Our revenue per available car day in the US turned positive in the second quarter, as vehicle utilization improved by 700 basis points versus the prior year's quarter, reaching 82%.

As I noted earlier, cost reduction and efficiency improvements are running in parallel with our great -- our quality for our customers. Customer service for each of our brands continues to improve, evidenced by a 4% global improvement in the quarter. The Hertz brand now has had five consecutive quarters of year-over-year improvement, and in the second quarter, reached a new record level of customer satisfaction, both overall, and importantly, with our most frequent customers.

Against the backdrop of this improved performance, membership in our Gold Plus reward program is up 13% year over year. With respect to our Dollar and Thrifty brands, both achieved double-digit improvements in customer satisfaction during this quarter, [nearing] the improvement in the first quarter of this year.

Importantly, our focus on speed, convenience, and currency is clearly paying off. Driving quality up and cost down is not easy work. It requires building real execution muscle. For that, I want to thank our people all across the operation, as the team is doing a terrific job on these two fronts.

While Tom will go through our financial results for the quarter in detail, I want to draw your attention to our strong international performance, which was somewhat overshadowed by the unanticipated charges that occurred in the quarter. From a macro perspective, it doesn't appear that Brexit will have a material impact on 2016 results. However, security concerns emanating from France and elsewhere on the continent will likely soften our European growth expectations for the remainder of 2016. Despite that, we continue to expect year-over-year profitability improvements in our international group.

Before I turn the call over to Tom, I want to call out several accomplishments for the quarter. We completed the separation of Herc Rentals, in line with our stated timeline, and with the leadership and capital structure to successfully compete in their sector. We received $2 billion in proceeds from the transaction, which we used for corporate debt reduction, one of a number of actions we took during the quarter to improve our balance sheet.

Since the beginning of the year and through the course of the separation transaction, we markedly improved our liquidity and debt profile, thanks to strong market reception and great work by our finance and treasury teams. Importantly, our cash interest expense is expected to decline by approximately $90 million in 2017, of which $45 million we will enjoy in the back half of this year.

The work in our technology platforms and systems that we laid out in the full potential plan continues. During the quarter, we began implementation of the new CRM system and we completed negotiations on a new fleet management system that we'll begin to install in early 2017. As I mentioned earlier, our revenue management system is receiving significant upgrades now through the end of the year. That will lay the foundation for improvements in the competitive mix of our revenue performance.

During the quarter, we also discontinued our Firefly operations in the US, exiting the deep value segment, and we transitioned those customers to our Thrifty brand. We (inaudible) Firefly was constructed to overall US pricing; however, it continues to be a very viable brand for us internationally.

We reached an innovative new pro-rental supply agreement with Uber and Lyft. We believe these carve out a way for us to profitably participate in the ride-sharing sector with a unique low-cost model that's a win-win for the parties. Additionally, we made a strategic investment in Luxe, an app-based valet parking company that will play a critical role in modernizing our urban car rental product. Now I'll turn the call over to Tom as he discusses the numbers.

Thank you, John, and good morning, everybody. Today I would like to provide you additional details on our second-quarter financial results and revise our newly established guidance for the post-spin Hertz. On a consolidated basis, total revenues declined 2% to $2.3 billion, primarily as a result of a 6% decline in total revenue per transaction day, partially offset by a 5% increase in transaction days in the worldwide rental car sector.

The second-quarter revenues included a $6 million unfavorable impact due to currency movements during the quarter. Adjusted earnings per share were $0.41 and include $20 million of unanticipated charges that are largely related to the adverse development of insurance claims in Europe and, specifically, the UK, which we'll address further in a moment. We estimate that this unexpected charge had a $0.15 and 1% margin point negative impact in the quarterly results.

I highlight this second-quarter performance as the continued progress we are making in pulling meaningful costs out of the business, while at the same time building our capabilities to deliver on our full potential commitments. As evidence of that, I'd like to provide a few tangible examples of our work today.

First, our technology platform continues to be a key pillar in achieving the full potential plan. In addition to approximately $30 million of savings we achieved in 2015 related to the early work of our IT transformation, we expect to realize more than $80 million of additional cost savings in 2016, of which approximately $25 million have been realized to date.

The savings are driven largely by the outsourcing of our legacy IT systems during the second quarter of this year. We see the investment in technology as a critical component to our full potential plan and believe we'll be able to leverage these investments to drive further improvements in quality and continue to lower cost of delivery throughout the enterprise.

A few tangible examples where we're investing are as follows. We expect to roll out a new customer relationship management system in the late third quarter that will provide a 360-degree view of the customer, thereby modernizing our sales tracking and customer care case management. We started rolling out the first phase of our next-generation revenue management system capabilities in June and will continue to roll out components throughout the remainder of this year.

And we contracted in second quarter to develop and roll out a new end-to-end global fleet management system that will be delivered in 2017. Once functional the system will house procurement, maintenance, warranty, vehicle movement, car control hold management, and sale deep-fleet functionality. The enhancement to fleet system results in additional opportunities to improve vehicle utilization that will manifest itself and lower depreciation and vehicle holding costs.

A secondary focus and progress is in the US RAC business, and I'd like to acknowledge the great progress that Alex Marren, our EVP of US RAC Operations, and her team, have made over the past nine months in significantly improving the overall cost structure of the business while marketably improving the customer satisfaction and driving cost efficiencies. In total, we are targeting over $100 million of savings in year 2016 from this team.

These initiatives include the rollout of process and policy improvements across the organization. For example, we completed a comprehensive review and implemented improvements to our US RAC vehicle damage collection process. After doing this, combined with our changes to our debit card policies in certain locations, we have experienced nearly a 900-basis-point improvement in our net damage collections, delivering over $20 million of savings thus far in 2016.

A second area of focus is around improving productivity in the workforce management. As a result of the work to date, we are seeing a 5% improvement in our labor cost per transaction, which is being driven primarily by upgrading our workforce planning processes that better align labor scheduling with demand.

A final example is the work we are doing in the area of logistics. We are currently executing a project to drive efficiency and service improvement in our external transporters that move cars for us within our on-airport [off] properties. The early results of the restructured bidding process and newly defined service [spanish] for the transportive process resulted in up to a 25% reduction in cost in certain locations.

These are just a few of the examples of a number of products we have underway to we've have underway to overall our cost structure and drive efficiency while improving service and quality.

A third area of focus that we continue to make good progress on is the improvement of our back-office productivity and general corporate overhead costs. For the full year, we now expect to reduce these global costs by more than $50 million versus the prior year. The benefits are being realized through a reduction of our reliance on external consultants and identifying opportunities to outsource support capabilities, such as our accounts payable operations, which [will go live] for international this month, and portions of our vehicle administration of operations.

So in summary, we continue to make measured progress across our cost initiative portfolio and remain confident that we're in a position to deliver on our $350 million cost-reduction commitment in 2016.

Now turning specifically to US RAC operating performance, overall, the second quarter was characterized by moderate volume growth, very strong vehicle utilization growth, and despite lagging RPD, slightly positive unit revenues. We remain sharply focused on improving how profitably and efficiently we utilize our fleet assets.

Unit revenue turned positive for the quarter, increasing by 10 basis points on a year-over-year basis. The 6% increase in transaction days achieved with less than 2% fleet increase or utilization by 700 basis points compared to the same period last year, despite the early onset of a significant OEM recall activity during the quarter. In total, second-quarter revenue declined 2% versus the prior year, driven by an 8% decline in pricing, partially offset by a 6% increase in transaction days.

As a reminder, similar to last quarter, the impact of transaction days counting methodology result in the integration of the Dollar and Thrifty to the Hertz counter systems, as well as nonrental-related declines in areas such as fuel-related ancillary revenue, had an impact on year-over-year changes to RPD and transaction days. Adjusting for these factors, second-quarter days would have increased by approximately 5% versus the reported 6%, and pricing would've declined by approximately 6% versus the reported 8% versus prior year.

We saw meaningful sequential improvements in RPD throughout the second quarter, going from a low point in April. And, in fact, while it only represents a portion of the customer booking volume, retail published pricing turned positive on a year-over-year basis during the quarter, a marked improvement over what we saw earlier in the year.

Still, it goes without saying, the RPD decline in the second quarter remained unacceptably high. The decline was driven by a number of factors, including an increase in average rental length, an unfavorable shift in customer mix, and an increase in the proportion of smaller cars rented. Continued softness in the corporate contracted volume and a significant boost in off-airport volumes were key contributors to shift in customer mix as well.

We continue to progress our work to improve customer fleet mix, drive greater customer preference, and ultimately execute every facet of our revenue-generating machine better. As an example, as stated earlier, we started rolling out the first phase of our next-generation revenue management system capabilities in June and will continue that rollout throughout the remainder of this year. The first phase involves the rate management system, which better allows us to monitor and optimize yield across segments, channels, geographies, in a much more consistent and automated fashion.

In terms of volume drivers, strong leisure growth of 6% was partially offset by a 2% decline in commercial business. Inbound volume to the US increased by 3%, driven by healthy demand from EMEA and Asia-Pacific regions. Off-airport growth was fueled by OEM recall activity and an increase in insurance replacement business driven by challenging weather across parts of the US.

Turning to the US RAC fleet, net depreciation per vehicle per month increased 12% year over year in the second quarter as a result of the expected decline in residual values and higher program car depreciation rates. In the second quarter, we continue to build on our success around improved capacity optimization and managing the total fleet costs, as evidenced by our 700-basis-point improvement in vehicle utilization, and continued success in the remarketing of our [risk] vehicles through higher-yielding channels such as dealer direct and retail as it compared to wholesale.

To give a little more detail regarding our retail distribution channel performance, we are not only focused on growing the volume to this channel through our 80-retail store network channels, but we are also focused on improving the efficiency and effectiveness in our sales performance. For example, we have increased our sales per store by 10% and achieved a 25% improvement (improving the) finance and insurance product income on our retail sales. Overall, we've increase the net benefit for units sold through retail versus those sold via auction by 56% compared to the same period last year.

Another bright spot on the fleet side is related to our efforts to improve the cycle times for various components of our deep-[cleaning] processes. It ultimately reduced the number of days from last rent to cash. For example, based on this work, we have taken several -- full seven days out of the time from the last rent to retail sale in the first half of 2016 as compared to the first half of 2015.

As a result of our efforts in fleet management, and, in part, to the maturing retail car sales network and capabilities we have built, we were able to help offset some of the unfavorable impacts to our next depreciation expense line, driven by macro factors such as declining residual values. As a result, we are reaffirming our 2016 US [RAC] depreciation guidance at $290 to $300 per unit per month, which includes an assumed 2.5% residual value decline in 2016. So bringing together the US RAC segment, second-quarter adjusted corporate EBITDA of $168 million in a margin of 11% was 300 basis points lower in the same period last year.

The international rental car segment continues to perform well, despite challenges resulting from security concerns due to the recent terrorist attack and an unanticipated $20 million charge in the quarter to increase insurance reserves, both of which I will address shortly. Total revenues declined 3% to $540 million, inclusive of a $6-million unfavorable foreign exchange movement, or a 2% decline in FX-neutral basis. The decline versus prior year was driven by a 2% decline in total revenue per transaction days on roughly flat transaction days.

Net vehicle depreciation per unit decreased 4% from the prior year and improved fleet-management processes, including a strategic procurement and the greater use of higher-yielding alternative remarketing channels. In total, the international segment reported an adjusted corporate EBITDA of $42 million, or a margin of 8% for the second quarter.

As previously indicated, the results included a $20 million unanticipated charge to increase insurance reserves, primarily related to the adverse development of insurance claims primarily in the United Kingdom. While we cannot be assured that these will not experience additional adverse development of these claims in the future, we have taken the actions necessary to address the root cause of the activities in our operations that contributed to this unanticipated adjustment to the reserves. Adjusting for the $20 million of unanticipated charge to insurance, the international RAC segment would've delivered an $8 million improvement in the adjusted corporate EBITDA and a 15% year-over-year improvement, and a margin expansion of 180 basis points to 11.5%.

Lastly, before I move on, let me touch on a couple of macroeconomic items impacting the international segment. First, while still early, we do not anticipate the UK's decision to leave the EU will have a material impact on our 2016 performance. Secondly, we are pleased that the core business continues to perform well, despite security concerns based on the recent attacks in Europe. And while we do continue to see growth and inbound demand in the third quarter, it is expected to be at a slower rate than our original expectation as a product of these recent terrorist attacks.

Now, I'd like to provide an update on our balance sheet, financing, and cash flow. During the quarter, the Company completed 10 financing transactions totaling over $7.4 billion to establish strong and long-term post-spin capital structures for both Hertz and Herc Rentals, and to increase vehicle financing capacity for Hertz. This was a significant achievement that demonstrates the ongoing support of relationship [banks] and access to the capital markets.

Two of these transactions totaling nearly $3 billion were to establish a long-term capital structure an appropriate liquidity for Herc Rentals. The remaining eight transactions were to establish a new liquidity facility for Hertz in the form of a five-year $1.7 billion revolving credit facility, refinance a high coupon bond, issue new term ABS debt, and extend various vehicle financing facilities.

The Company also received $2 billion in proceeds from the separation of the equipment rental business, which was used to pay down a $2.1-billion term loan and retire existing ABL facility. The net result of the refinancing of the high coupon bond and pay down the debt will reduce annual cash expense for Hertz by approximately $90 million annually and $45 million will be realized in the second half of 2016.

Further, with these transactions, the Company has dramatically improved its corporate debt maturity profile and now has no significant maturities until 2019. Going forward, we will continue to assess market conditions with an eye toward further [metering] out the 2019 maturities.

From a corporate net-leverage perspective, we closed the second quarter with a net corporate debt to adjusted corporate EBITDA leverage of 4.5 times. Pro forma for the redemption of our 7.5% notes that occurred on July 8th, the net non-vehicle debt was $3.3 billion and corporate liquidity was $1.7 billion. We expect to generate strong second half-of-the-year cash flow, consistent with seasonal trends, and have increased our full-year free-cash-flow expectation to $500 million to $600 million from $400 million to $500 million previously due to lower cash taxes, lower non-vehicle capital spending, and continued aggressive vehicle asset management.

I would like to note that the share repurchases -- that debt share repurchases are outside of free cash flow definition. Free cash flow may be used to repurchase shares, pay down debt, or make acquisitions. We continue to expect to end the year at or below our 3.5 times net leverage target, as previously communicated, and would like to remind everyone that our net corporate leverage levels move seasonally by approximately 0.5 of a turn from the peak at the end of the second quarter to the trough at the end of the fourth quarter.

As it relates to capital allocation for the balance of the year, we'll use excess free cash flow to opportunistically repurchase shares consistent with our previously stated objective: to balance liquidity and invest in [these], along with achieving our year-end leverage target. The Board of [new] Hertz reauthorized our remaining $395 million on capacity of the originally authorized $1 billion in share repurchase capacity.

Finally, I want to address the proposed methodology changes Moody's is considering for rating the rental fleet securitizations. We have been in active dialogue with Moody's and a number of our ABS investors. While it is too early to know exactly how this will play out, our goal is to ensure Moody's ratings approach and criteria is transparent to the market, ratings volatility minimized, and that the final ratings criteria is concluded as soon as practical.

Before I turn the call back over to John, let me provide some additional detail on the guidance we established this morning for the new post-spin Hertz. Prior to the Hertz separation, we had previously discussed the proxy for the new Hertz full-year outlook was to take previously issued Hertz consolidated full-year 2016 guidance of $1.6 billion to $1.7 billion, less the Company's equipment rental segment's full-year 2016 guidance of $600 million to $650 million. Doing that math, one would surmise that the new Hertz guidance midpoint for 2016 would be in the $1.025 billion range.

We also indicated that given the first-quarter results, we did not have much headroom in our guidance that could accommodate any material unexpected results and needed to continue to experience sequential rate improvement heading into the peak earnings season. Subsequent to our first-quarter earnings call on May 10th, we have gained additional clarity items such as the second-quarter results versus our expectations; the impact of equipment rental separation on stranded costs, or corporate expenses that were previously offered by] the Hertz segment and now remain with Hertz; and an earlier look at third-quarter trends and potential impact for full-year expectations.

Some of these items included in the second-quarter results that adversely impacted our expectations include the following: $20 million second-quarter expense related to increasing international insurance reserves, $25 million of stranded corporate expense or expense previously (inaudible) with the Hertz segment but now it's been absorbed by RAC; $10 million additional expense in foregone revenue contribution resulting from storm damage to our vehicles, primarily from hail storms, and a high number of recalls with one OEM that negatively impacted our vehicle capacity available to rent by 1 percentage point in June; $10 million related to our strategic investments in fresh companies such as Luxe; and $5 million unfavorable movement in exchange rates.

So in total, since our last discussion back in early May, we have identified approximately $70 million of known factors that will negatively impact our previous expectations. In addition to what has already happened, when looking forward, we see additional potential risks driven by three factors.

First, while we still anticipate that our international RAC segment will continue to deliver strong year-over-year performance, we believe it is prudent for us to lower our expectations as a result of the slower growth of inbound visitors as a result of the recent terror attacks in Europe and the corresponding impact to travel demand. Second, the recalls we experienced in the second half of June in US RAC segment, which reduced our capacity to 1 percentage point in the month continued in July will have a correspondingly negative impact. And lastly, while we expect to see continued sequential improvements in US RAC pricing in the back half of 2016, we do not anticipate we'll be at the same rate of improvement that we had expected three months ago or so.

In summary, while we believe all these impacts are transitory in nature or addressable through management actions, nonetheless, when combined, require management to establish a full-year adjusted EBITDA guidance range for new Hertz of $850 million to $950 million. Looking at the balance sheet, we have raised our full-year expectations for free cash flow from Hertz consolidated of $400 million to $500 million to new Hertz of $500 million to $ 600 million.

Contributing to the increase in our free-cash-flow outlook is as follows: a reduction to our non-vehicle capital spending for $150 million to $175 million to $125 million to $150 million estimate, included in the previous guidance for Herc; a reduction in cash taxes from $125 million to $150 million to now $100 million to $125 million, a reduction in corporate cash [insurance] expense from $330 million to $345 million to now $280 million to $290 million, and other working capital financing activities. It should be known that $55 million of the $70 million of the known second-quarter earnings items are either non-cash or already been accounted for in our prior guidance, i.e., the stranded costs.

To round out the new Hertz guidance, the following items have remained unchanged from our prior guidance: US RAC revenue growth of flat to minus 1.5%, US RAC net vehicle depreciation per unit per month of $290 to $300 per month, and US RAC fleet capacity growth of minus 2% to minus 3%. It should be noted that while the absolute revenue guidance remains unchanged, our expectation of the mix between rate and volume has changed, which negatively impacts our prior expectations on contribution of the revenue outlook to earnings.

So in closing, with the separation of Herc now complete, we are keenly focused on building on the early success of our cost and quality initiates and continue to improve on our revenue performance in US rental car. With that, I'd like to turn the call back to John for some closing remarks before opening it up to questions.

Thank you, Tom. Good progress in many critical areas, including very strong free cash flow. Underperformance in revenue quality that [lugged] into the quarter in a much better place, and that strong trend has continued into the third quarter. As we successfully address the revenue opportunity, we are now configured for improved performance. That momentum needs to be seen on the bottom line in the quarters ahead, and I expect it will be. With that, operator, we will open it up for questions.

Certainly.

(Operator Instructions)

Chris Agnew, MKM Partners.

Good morning. The first question I wanted to ask about, I think you mentioned retail turned positive year over year. I was wondering does that refer to the month of June or was it at some point in June? And how are you defining retail?

And then I also wanted to ask if you could give a little more color on why average rental lengths were headwinds for pricing, particularly relative to what it was start of the year. I am just trying to understand why smaller vehicles, presumably you knew your mix going into the year, why those are a headwind. Thank you.

Well, I think those are headwind as it relates to the year-over-year comp, not necessarily our fleet (inaudible) in particular. Length of keep in some ways was constructive for sure in terms of the increase and was also driven in part by the strong insurance replacement market on and off airport. So we saw that in a number of areas. As it relates to the retail pricing comment, I'm going to turn that over to Jeff.

Good morning, Chris. Retail published pricing is essentially the pricing that customers can find published on online travel agency sites through Hertz.com, DollarThrifty.coms, and so forth, and also that business that our loyalty program members would be booking directly with us. It represents between 20% and 25% of our business. So there's a lot of bookings that are made that are not published retail pricing that go through areas such as affinity groups, various forms of contracted business and so forth.

So the published retail pricing did turn positive during the quarter. It was later in the quarter when we noticed it turning positive, and we, of course, scanned this pricing across the marketplace and it turned positive for the marketplace at large during that quarter.

And Chris, I'd like to add a little bit on the fleet mix. What wasn't unanticipated, in late May, we had a significant recall. We had 93,000 cars recalled, a disproportionate number of those are with one OEM. So our rotation that we planned to take out to compact cars was therefore put on hold and we held compact cars longer into this -- through June.

And then here into July, to accommodate for trying to make up for that recall capacity, we had over 32,000 cars that were on hold for multiple weeks. And we believe that our content of the one manufacture, which we were hit by the recall, is a double-digit increase higher as a percentage than our closest comp. So I think we were also disproportionately negatively impacted by this recall.

Now, recalls are a normal part of life, as you know, in the car rental business. This one was unusually significant, and unfortunately, hit us at a very unfortunate time and had an impact, therefore, in our fleet mix in the month of June.

Got you, thank you. And then if I could, one more. Can you break out what some of the stranded costs were? Thank you.

Chris, examples of that would be general corporate overhead that was allocated to Herc such as senior executive management, some property locations, some other general overhead. There was corporate overhead that directly went -- went direct corporate overhead that went with the spin.

Clearly, we had expected some corporate overhead. It was very difficult to estimate exactly the amount until you got through the transactions. As you can appreciate, these transactions, these separations are complicated. And you go through a process to try to estimate, which we did have a very good estimate on direct corporate overhead that [would go to the] indirect. And how that [falled] out, there was some changes in how inter-Company [settled] and how corporate expenses then got funneled finally when you get the separation done.

We were not pleased that it ended up being $25 million, but I would note that when we first announced the expand back in March of 2014, we had estimated that these stranded costs would be somewhere in the near to $60 million to $70 million for the Company. [Had] made significant progress. We unfortunately had a little larger number than we originally expected when we finalized the separation.

Thank you.

An Singh, Credit Suisse.

Good morning. Thanks for taking my questions. First off, in light of what you describe as meaningful improvements in pricing sequentially, with declines still being unacceptable, could you give us a sense of what your expectations were for pricing improvements at 2Q and the second half? And as we look at what you think the biggest limiting factors are right now to your revenue performance, is it more systems related or is it more related to the mix and ancillary-related issues that you had in the quarter?

I can't give you the specifics there, Anjaneya, but look, I think that our expectation in terms of RPD trend improvement was moderately lighter than -- was moderately heavier than we experienced. Having said that, when we talk about remediation, much of it's already underway and the realization of the trend we stepped off with in June and the results we're seeing within July.

So we're supported by a strong foundation in terms of industry conduct, a good foundation in the trends we see exiting June and leading into July. In addition to that, we are getting improvement in systems that's in place now.

I don't want to create the impression that you plug it in and the money starts coming down from the tree. It takes data cleaning, time, and experience, but we believe the changes we're making now are going to be very highly leveraged. And I think we're turning the dial a little bit differently in terms of -- moderately different in terms of volume, length of keep. And one of the system improvements we're actually putting in place will help us not stacked at better inbound mix but will help us manage the same inbound mix a little bit more dynamically to a better outcome.

So there's a number of underlying positive trends we saw, and we're certainly have some executional initiatives to add to that rate of improvement.

Okay. Got it. That's helpful. And as my second question, Tom, could you provide us with your outlook for fleet costs in the second half of the year and any early 2017 fleet commentary? Just interested to hear what your perspective is considering the first half seems to be running at the low end of your guide. And also any directional sense you could provide on fleet costs and mix as it relates to 2017. Thanks.

Thanks. So as you noted, we've been running somewhat favorable; year to date, I think we were running around $290 per vehicle per month. The low end of the guide is $290 to $300; the quarter came in a little less than that. And as we've said in the first-quarter resells, we had a somewhat unusually high reserve we took for the compact cars in Q1, which bumped it up a little bit.

We still believe that $290 to $300 is appropriate. You obviously can do the math roughly in the second half, the weighted average, and understand what our expectations are for the second half the year. And again, and consistent with our prior guidance, we're still assuming around a 2.5% decline of residuals.

We think it's prudent to keep the guidance at the $290 to $300 level, even though we came in at second quarter a little bit more favorable. Because we do rate reviews every quarter and we've got to continue to monitor how the deprecation can changes, despite what I think has been a favorable market trend with the Manheim Index firming and getting a little stronger. So I think that's positive. But nonetheless, keeping the guidance, I think, is prudent, where we are today.

As far as early returns on 2017, we haven't provided any guidance as far as our expectations. I would say we've been through about 85% to 90% of our expected buy we have contracted with, with our manufacturer partners. We are pursuing and have had real-life cap-cost reductions on the risk components.

I would say the model year 2017 characterization of the market has been, I think, getting a little bit more favorable early on in discussions. I think there was a little more challenge on expectations on cost increases, and particularly in program availability. The program availability has come a little bit more available, but I'd say the costs still are a little bit prohibitive from a program versus risk mix standpoint.

Right now, our program risk buy for 2017 is roughly 80/20 risk to program, so we're still getting program content, as we like the flexibility it provides, particularly in some of the peak seasonal periods. But right now, it's a little too early to say what the ultimate expectation is in our fleet costs, because we'll have to see how the residual markets are projected.

And obviously, as we get closer to year end, we'll have better visibility and transparency as to what next year looks like from a residual assumption standpoint. But early, early on, we've gotten the content we have wanted; we've gotten the mix we have wanted. We've got a decent program risk mix, and we have achieved cap-cost reductions on the risk content to date.

Obviously, market conditions are an important element of fleet costs, but I really want to emphasize we're extremely focused on enhancing our capabilities and our execution here. We really do believe that we can build advantage in how we execute and manage fleet costs. And I think we're seeing some early evidence of that, certainly some which was described by Tom.

Okay. Got it. Very helpful. Thank you.

Chris Woronka, Deutsche Bank.

Hey, good morning, guys. I wanted to ask you, go back to the back-half expectations, you had really great utilization pick up in the US in the second quarter. Do you think you can -- is there a notional maximum utilization that you could get in the second half if pricing does not pick up as much as you initially thought?

Hi Chris, Jeff Foland here. As you noted, we've been running reasonably high utilization. A significant focus of ours, as we stated for a while now is to make sure that we're very efficient in how we is the assets we have deployed in the marketplace. Do we think that we've hit the absolute frontier of what we can achieve in that area? The answer is likely no.

At the same time, we don't expect that utilization will have to increase much beyond where it's currently for us to drive the results we need to going forward. We understand it's running at high utilization today. Our objective is to keep it high and try to improve it from that point.

We're focused very much, and obviously, the biggest value driver here is when we can increase cars available for rent by decreasing out-of-service and supply chain spend. And that's where much of our ability to improve this has come from.

Okay. That's helpful. And then I just wanted to follow up on the insurance issue you guys found in Europe in the second quarter. Was that -- maybe could you give us the genesis of that and do you think you -- is it something you tend to have more visibility on or could there still be some further [adjustment]?

To be clear, reserving for insurance claims is a very specific, scientific process through actuaries out and actuaries in. And what you do is we do two times a year we can announce that actuarial study which assesses all the historical claims and how they may be developing from a settlement standpoint relative to how they have originally been reserved.

And what we identified in this example was in the UK, specific to the UK, we had some sector of business we were in in prior years for which we reserve for, but the claims on those businesses came in having developing adversely. And as a result, we had to increase the reserve a lot -- [we're outlooking into] those original reserves we had on the books for those.

What it is, is it's not normal course, I would say, the size and magnitude. Every once in a while I think businesses experience this adverse development, have to increase the reserves. We do reserve on a daily, a monthly basis, based on our daily transactions and assumed accrual rate for this year's activities that will ultimately be used to pay for future claims.

So this goes back to prior periods for which the -- unfortunately, the claims have just developed adversely. And it wasn't anticipated adjustment to the reserves required to support those claims that ultimately are developing, getting settled for this line of business which we have now exited to be clear. So it's not a prospective, we believe, a prospective issue, but it's just essentially increasing the amount of reserves we have for the ultimate settlement of whatever remaining claims we have for this sector of business we're no longer participating in.

I think the key, from a management perspective going forward is to develop more robust leading indicators on this, and that's one of the capabilities we're developing. It also led to, for example, the change in debit card policies on location-specific acceptance within the US. So this is really a key opportunity going forward is to use this more rich data that we have coming in to actually change how we sell and what we sell, and to affect this corrective outcome much earlier in the earlier cycle. But in this case, somewhat counter-intuitively, it was a very small revenue line with a very bad outcome, and we simply exited the segment.

Okay. Very good. Thanks, guys.

Brian Johnson, Barclays.

Hi, yes this is Dan Levy on in for Brian. Thank you for taking the question. I just wanted to ask on the volume in 2Q -- the US volume in 2Q, you had 6% growth, 5% if we're adjusting for [BPG accounting change, and it's] quite robust, and that's really a lot better than the run rate we've seen in the recent quarters. It's better than the organic run rate that we've seen in the business.

Can you just provide a little color on that growth? And in particular, given that this growth happened to coincide with lease pricing and increased utilization, is it possible that some of the incremental volume was taken at lower price? And just wondering a little color on the interplay between volumes and price would be appreciated.

In all honesty, I have to give you more detailed background on that, but I think its important to understand there were some underlying events that drove demand up, as we talked about. Broad recalls against the Takata airbag, very severe weather that drove insurance replacement. So strong off-airport growth that was somewhat possibly temporary and event-driven, but Jeff can provide more details.

John is exactly right. Look, our objective is to grow with the market in terms of volume in the on-airport environment in particular. That's the goal. We obviously want to maximize the efficiency of the revenue that we can generate from that in the of revenue per available car day. And as John mentioned, we had quite significant growth, about two-thirds of the same-store growth in the quarter off airport dealt with weather-related and recall-related replacement types of businesses.

Which obviously have a longer length of keep and it was somewhat a contributor to that overall. So we don't have obviously all the comparative data in, but we believe our on-airport growth will be very consistent with at or moderately below overall industry growth and that's what we're targeting.

Okay. So with that in mind, is it fair to -- could you quantify what percent of the future pricing on the quarter was due to mix?

Well, so customer segment mix was between 20% and 30% of the decline in RPD on a year-over-year basis. Now a portion of that is driven by softness in the corporate contracted business sector, of which we need to improve, and we certainly have plans to improve moving forward. As we go to drive traffic to compensate for that softness, that contributes to some of the customer mix. Rate softness that you would see in the RPD results.

Okay. Thank you.

Michael Millman, Millman Research.

Thank you. Following up on that last comment, while there was a negative impact from off-airport, typically we've been told that good LOR is very profitable. So where there's some offsets here between (inaudible) and profit, also you mentioned that your market price business is about 25% in total. To what extent is there flexibility in the remaining business or how often can you change the prices on that?

And then I was wondering if you could give the timeline on when you expect and how much improvement do you expect as you implement your technology regarding pricing -- fleet and pricing? Thank you.

I think I'd take the first few questions there and drive you to the margin line, which I think is evidence of the comment that you make. If I exclude the charge in the UK, the Company's overall EBITDA margin actually would've been very comparable, I think within 10 BPs of the public comp. So that validates that at the margin line we're competitive, but that's not good enough and it clearly has the remaining opportunity gap in terms of the quality of revenue RPD performance, that even if we close a moderate amount of it would lead to a strong industry margin performance. So I think that is an indication there.

In terms of the specific rate of progress looking forward, as we said, we closed 6 points of the decline year over year. We're closed between April and June exit. And we see further improvement in July as we have gone through and early indications around August are positive as well. So that's how we set up at this stage.

Yes, you or someone had mentioned ancillary revenues, and the degradation that we referred to with respect to ancillary is really in fewer related ancillary products, as fuel prices in the marketplace have obviously declined through. The overall ancillary portfolio outside of that has performed reasonably well, and we expect it to continue to grow as we go forward.

In terms of initiatives that we have in place, Tom mentioned the technology that we're rolling out in the revenue management space, in particular, during his earlier comments. The first phase is the rate management system, which allows us to monitor and optimize yields in a much more consistent and automated way across segments, channels, geographies.

We've rolled this out into a few dozen markets already to date. We expect a much accelerated and complete launch of this portion of the technology in the fourth quarter of this year. And as we enter 2017, we will be following that up with what we call contribution-demand modules in a system which deals with linking the forecasting the fleets and supply-and-demand characteristics of how we go about revenue managing in a much more automated fashion as well. So we feel good about that. We're progressing as planned, and much of that technology goes into place in the fourth quarter of this year.

Thank you. Just touching back on the non-market [slicing] piece of the business, could you give us some idea of (inaudible) there is some flexibility there, to what extent there isn't flexibility there?

Yes, look, I think that the improvement in retail pricing year over year that we saw in the quarter we would view as a leading indicator. And while there is not a direct correlation in terms of magnitude and timing, there certainly is a correlation. And I think you'll see the rest of our pricing, obviously, ultimately will tend to directionally follow that outcome. I don't think that we're fixed in place and you're going to see a disconnect in that relationship.

John Healy, Northcoast Research.

I wanted to talk a little bit more about the pricing in 2Q. I think you said a couple times now that the published retail pricing turned positive in the quarter. I'm still trying to wrap my head around how that happens and your RPD is still down, call it, 8%. Can you -- if retail is only 25%, what's going on with the 75% of the business and how much was that down in the quarter?

Look, I think as Jeff indicated, while it turned positive, it was relatively late in the quarter when it did turned positive. I would combine that with my comment that said we exited 6 points better than we started. So as it was turning positive, it's really not versus the 8-point decline; it's versus a number that's much better than that.

So as said I don't think that we see other pricing as necessarily not being related to, and this is a directionally indicative leading indicator. And we don't expect this -- I would say not a tale of two worlds in the context that it did occur very late in the quarter, and we expect other pricing on a related basis will move in time.

And I just wanted to ask about the charge in the UK. Was that an accrual or was there something that was written down? I was a little confused on what happened there necessarily that made it a charge.

John, it's an accrual for future expected from when a claim is related to historical claims that have been developing adversely. So it's an accrual increasing the reserves in the balance sheet and a charge for P&L for that increased estimate and ultimate [settlement] on these claims.

Okay. Thanks.

Rich Kwas, Wells Fargo Securities.

Good morning, this is Ronnie [Ipsco] on for Rich Kwas. Just had a quick question on the corporate segment EBITDA line. It came in a little lower than we would have expected. Given Q1 was down 27 year over year -- down 27 compared to minus 44 in 2015. But this quarter it was roughly flat with the year over year. How should we think about that moving forward Q1 relative to Q2?

I think the you're referring to is the corporate segment in our GAAP financials, and recall that we had a gain related to the sale of the car shares that flowed through that in Q1. So it's an unusual item in our GAAP. It's not in the adjusted earnings, to be clear, but I think that's what you're referring to.

Okay. Actually, it's the adjusted EBITDA line. It was minus 42 versus minus 47 last year, but the Q1 improvement was much more substantial; minus 27 versus minus 44. I was wondering if there was any other drivers of that delta and how should we think about it in the back half?

Yes. I don't know specifically. I think that's probably (inaudible) follow-up call. I think one item in the last year's items on corporate would've been an accrual of $9 million for a settlement of a future legal case that was in 2015's 2Q that wasn't in 2016. But I'd have to probably look through with you and we could do it offline on the call. Me and Leslie can take you through the corporate line.

Okay, and then I just had one quick question on pricing as well. You guys mentioned that published pricing is probably a reasonable leading indicator. I recall that most of your corporate contracts have been renewed at the same or better rates. Is there a reason that corporate pricing wouldn't have turned positive at the end of the quarter?

Corporate contracted pricing takes many forms, and in most cases, it takes the form of fixed rates combined with a variety of share commitment. So it's is not directly tied to published retail pricing in the marketplace. In the quarter, we renewed 96% of the accounts that were up for renewal during that quarter; and 67%, about two-thirds of those accounts were renewed at constant or improved economics during that time period.

So that is reasonably consistent with what we've had previously. But once again, the mechanism with respect to how pricing works for corporate contracted business and published retail business are a little bit different.

All right. Thanks for that color and thanks for taking my questions.

Thank you, and with that, speakers, I'd like to turn it over to you for any closing comments.

Thanks very much for joining us today, and as I said, trends are improving and we look forward to a more positive conversation, as there's evidence of that in the third quarter. Thank you.

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