Hertz Global Holdings Inc (HTZ) 2016 Q3 法說會逐字稿

Ladies and gentlemen welcome to Hertz Global Holdings third-quarter 2016 earnings call. At this time all lines are in a listen-only mode. Following the presentation we will conduct a question-and-answer session.

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

Good morning everyone. By now you should all have our press release and associated financial information. We'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 guaranteed the performance and by their nature are subject to inherent uncertainties. Actual results may differ materially. Any forward-looking information relayed on this call speaks only as of this date and the Company undertakes no obligation to update that information to reflect same 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 of our second-quarter and third-quarter 2016 Form 10-Q. Copies of these filings are available from the SEC and on the Hertz website.

Today we will use certain non-GAAP financial measures all of which are reconciled with GAAP numbers in our press release and related Form 8K which are 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. a publicly traded company. Results for the Hertz Corporation are materially the same as Hertz Global Holdings. This morning in addition to John Tague, Hertz's CEO; and Tom Kennedy, our Chief Financial Officer; on the call we have Jeff Foland, our Chief Revenue Officer who will be on hand for Q&A.

Now I will turn the call over to John.

Thanks, Leslie. I want to acknowledge and take personal responsibility for the fact that I underestimated the depth and the breadth and the complexity of the transformation we are now undertaking at this Company. I firmly believe that that does not change the full potential that we have laid out for this Company. When this work is done we know what the work is and we know we have the people to do it I firmly believe we will achieve the potential that we have outlined. Clearly we are behind schedule and we are challenged earlier than we thought.

Also I had expected more momentum as we moved through the process and face the inevitable challenges from our revenue performance that while stabilizing clearly has not provided us with the uplift to address the challenges that we are currently facing. Additionally we specifically made two mistakes that largely affected the income statement during 2016.

One is we over-bought in the compact car category. Why did we do that? We did it because it allowed us to achieve our fleet refreshment and our mileage goals faster than we otherwise would and because we thought we could align the fleet closer to reserves class.

It didn't work. We moved quickly to address that and it will have a significant negative impact on the year's financial statements as we begin to discuss in the first quarter of this year when we removed to reduce the life remaining on the assets to transition them out of the fleet as fast as possible and have taken subsequent significant charges to move the aircraft -- excuse me, move the autos into disposition pipeline.

The second mistake you are seeing in our performance versus expectations this year was an assumption that our ability to over-deliver and pull forward on cost reductions would continue. In fact you saw a tipping point in the third quarter and while we remain committed and will deliver the $350 million we were less successful in being able to pull forward the future agenda and realize it during the period. That should not diminish your confidence in the $350 million nor should it diminish your confidence in the total cost take-out that we've outlined for the Company in the future. It's merely a timing effect that worked against us that was working for us in previous quarters.

So what do we need to do as we go forward? We need to finish fixing the fleet. We are well on our way to doing that and that will be a comment that Tom will add to as he goes through his particular coverage of the quarter. We also need to continue to execute on the cost as the team has exceptionally well and to take down those costs as they are outlined in the future but not to become overconfident about our ability to pull that agenda forward particularly until we get more technology enablement.

And we need to improve our revenue execution. You are beginning to see that come through. Jeff will outline a very modest underperformance on an adjusted basis for the quarter and we are making significant progress there adding new systems now and at the end of the year but in order to get the revenue performance we need to provide an uplift on the margin here we really need to attract quality demand to the Company and we are doing that through a new choice product offering that we'll roll through 30 cities significantly enhancing our customer satisfaction scores, making additional investments in fleet and restoring the Hertz brand.

All of those things and time will ultimately bring us to our goal. We know the work. We know how to get it done. Time is clearly longer than we expected. The challenges are popping up when we have less momentum to deal with them but we are on the right path.

I take accountability for this large bump in the road in the third quarter and I take accountability for working with this team to bring it back on track. With that I'm going to turn it over to Tom to give you more detail on the quarter.

Thank you, John, and good morning everyone. This morning I plan to discuss our third-quarter year to date results, balance sheet, cash flow liquidity and financial leverage covenant. However, most importantly I intend to address the significant change in our forecast resulting from our lower-than-expected performance in the third quarter and subsequent implications they have had on our previous outlook for the fourth quarter. Finally I intend to provide some closing thoughts about how we are thinking about how these results shape our preliminary views for 2017.

As John mentioned we are clearly disappointed with our performance this year and the third-quarter results only heighten the level of urgency needed to get the business on a more predictable path. So what happened in the quarter and how did our expectations change so materially since our last call?

While the US RAC pricing has sequentially improved year over year in each quarter this year, US transaction days were a large expectation in the third quarter. At the same time US RAC vehicle depreciation costs were higher than projected, internal cost-saving stretch targets for the quarter fell short, international revenue pressure primarily related to European terror events in the first half of the year impacted demand and subsequently added pricing pressure far worse than our expectations.

Now I would like to provide a few examples in each of these areas and what we're doing to address them. First US RAC pricing volume. In the third quarter US pricing was largely within our expectations. Transaction day volume fell short of our expectations.

A number of factors contributed to soft volume including the following: OEM recall activity and weather related damage to our US fleet impacted supply and utilization and ultimately transaction volume during a seasonally peak time of the year. We believe the unusually high recall activity and impacted quarter to be largely transitory in nature. We experience softness in overall corporate portfolio and continue our efforts to recapture Corporate share which we now think will take longer to achieve.

We reached out to our top hired accounts and got their feedback on our performance and opportunities to improve and are incorporating this insight into our planning and investment plans including through new produces and services but also better account management. And while expected on a year over year basis to closure of our deep value brand in US, Firefly had approximately 0.5 to 1 point impact on volume.

Turning to US RAC vehicle costs. Our US unit vehicle costs is now likely come in at the high end of our original guidance. We believe has been negatively impacted by our fleet mix. You may recall that in order to achieve the 2015 large-scale rotation refresher in fleet age we had to over-index the compact and midsize vehicles mix. While we incorporated a vehicle depreciation readjustment in Q1 to account for expected weaker residual in compact and midsize vehicle, our updated outlook completed at the end of September based on third-party forecasts required us to further increase depreciation rates in these categories.

The third quarter rate review resulted in a $39 million unfavorable adjustment in third quarter and an initial $26 million impact in the fourth quarter for a total of $65 million impact in the second half of the year. To provide some additional insight in the process we go through in updating or non programmed depreciation rate, we complete a mark to market rate review four times a year. This mark to market adjustment is done by car class, mileage and model year and is based predominantly on a third-party foreign outlook on residuals with an initial qualitative and quantitative overlay based on our own near term remarketing history at our retail locations for Company specific experience.

The timing of this review occurs four times a year. Once in each quarter with the timing of the updated release for the third quarter determining when in the quarter this review is completed. For the third quarter and the first quarter this occurs at the end of the quarter while in the second quarter and the fourth quarter these are mid-quarter reviews.

The fourth quarter depreciation rate review will be completed in mid-November and we have assumed in our forecast an additional $30 million of depreciation expected adjustments associated with this review and our updated full-year guidance. We have shortened the whole period of our compact and midsize units which also had near-term pressure on depreciation. We have done so with the objective to rebalancing our mix of these categories to a more optimal level. Further we have worked hard with our OEM partners to negotiate capital costs to create decreases in our model year 2017 risk line and continue to focus on other initiatives to help mitigate the near term residual pressures that we do expect will continue into 2017.

Moving to operating expense and the full potential plan. In terms of operating expense based on the recent favorable experience internally we had expect to achieve our $350 million expense target in 2016 by an additional $75 million this year. Unfortunately the pace of the incremental savings for this year has slowed and the next level of savings requires significant process reengineering our technology enablement to achieve. Further we had to realign our focus and prioritize on those that would capitalize on near-term opportunities to address the Corporate share loss such as the choice rollout in operating our fleet mix.

While we are disappointed we had to slow the pace of the expense take-outs we remain committed to our full potential savings of $800 million to $950 million over a three to five-year period. The annual pace for savings will vary depending on investment and timing of the technology delivery in rebalancing priorities to what we are able to accomplish each year. It is our expectation that the level of savings will slow somewhat in 2017 and then accelerate thereafter as we bring technology online that will enable additional reductions in cost all the while improving quality in our front of house and back office operations.

While cost savings helped offset some of the revenue depreciation surprises unanticipated expenses were an incremental headwind in the quarter on top of those experienced earlier in the year. Recalls and weather-related damage, maintenance and transportation costs were unusually high in the third quarter. Finally we also decided to accelerate the modest investments to facilitate work on our revenue management and fleet areas to better position us for improved results in 2017. In total we estimate the combination of these factors had an impact of approximately $30 million to $40 million in the second half of the year.

Moving to international performance. In the international segment while performance is on pace to deliver a significant adjusted Corporate EBITDA improvement this year this pace is negatively impacted by the terrorist events and higher-than-expected liability expense that have combined to negatively impact the results for the year. European performance in the second half of August was particularly weaker than our expectations and we have seen the ongoing impact of the security concerns on inbound demand continue. However we believe the impacts of the terrorist events is largely transitory in nature. Further we have exited lines of business that were contributing to the higher liability expenses that we discussed during our second-quarter results and believe this too will improve as we enter 2017.

On a consolidated basis our third-quarter performance fell short of our expectations resulting in a year to date adjusted corporate EBITDA of $541 million. We expect our full-year end results to be between $575 million to $625 million an approximate $300 million reduction from the midpoint of our prior expectations. While a change of this magnitude is always of a concern we also recognize transformations of this magnitude required Hertz to reach our near term volatility from quarter to quarter and a journey to return to consistent and predictable results probably in hindsight was not realistic in the first year of a multiyear turnaround plan. We do fully acknowledge however that we need to a better job improving the predictability of our results in the near-term and balance the confidence we have in our long-term objectives with our more moderate near-term expectations.

So what have we done to address the forecasting challenges? First we have a new management team that with a view to drive an ambitious transformation agenda. However we recognize that we have to temper our ambitions with our capabilities in the near term to execute on this agenda. As such we have streamlined our objectives to establish a holistic process in prioritizing our initiatives and have subsequently narrowed and focused our near-term agenda.

Second, we have made some personnel changes to better align appropriate skills and experiences in areas of rental car [analogy] experience and more core to improve the predictability of our core performance in driving results. Third, we need to simply reduce our expectations near-term and execute on a simplified agenda and deliver on our communicated commitments before we can be in a position to expand that agenda.

Let me provide some additional insight for the quarter by segment. In the third quarter US RAC revenue performance as I mentioned earlier was characterized by improving quarter over quarter pricing albeit still negative year-over-year and moderate volume. US rental car revenues decreased 2% versus same period last year as a result of 1% increase in days, offset by 3% decline in RPD.

As a reminder, similar to last quarter, the impacted transaction dates accounting methodology related to the integration dollar (inaudible) the Hertz counter system as well as declines in areas such as fuel related ancillary revenues had an approximate 200 basis points unfavorable impact on year-over-year RPD. These are transitory issues. Adjusting for these factors third-quarter RPD would have declined by approximately 1% year-over-year.

Transaction days adjusting for the methodology change would have been flat. A higher mix of business at our off airport locations and an increase in average rental length, both which result in a lower overall yield per day impacted RPD by approximately 100 basis points year-over-year. On airport volume was flat. Leisure transaction days were impacted by reduced pay, rental volumes and the discontinuation of Firefly brand in the US.

Excluding the Firefly brand closure on airport leisure volume increased 1%. Business volume increased in the quarter. Its corporate weakness was offset by strong growth in government and replacement business. Off airport days increase 4% fueled by a significant increase in insurance replacement business.

Our insurance replacement volumes are turning back in line with 2014 levels after declining significantly in 2015. We are on track with our long-term axis to improve the mix of cars we rent, enhance the customer segment mix through greater customer preference and optimize our revenue management execution. Toward that end, in the third quarter, we completed the rollout of our first component to the next generation revenue management system and rollout another miles by the end of the year.

In addition to top line we remain sharply focused on improving how profitable and efficiently we utilize our fleet assets. Vehicle utilization (inaudible) were both impacted by an unusually high number of out of service vehicles driven by the recall activity at two major OEMs. Vehicle utilization decreased 50 basis points year over year to 82% and unit revenue is defined by revenue per available car date decreased by 4%.

As I mentioned in the quarter net depreciation per vehicle per month increased 14% year over year which resulted in a $63 million increase in net vehicle depreciation expense year-over-year as a result a decline in residual balance which was at a higher rate than what we had originally anticipated.

Looking at fleet disposition our retail disposition channel continues to form well. During the third quarter we increased our retail sales by 16% and achieved nearly 9% improvement in financing and insurance product income per unit on retail sales. Retail sales as a percent [of total rent] sales for the quarter reached a record 39% up from the 25% in the quarter last year.

Overall Alternative Sales Channels represent almost 72% of our non-program sales, a significant increase compared with the 60% achieved in the third quarter last year. Third-quarter adjusted EBITDA for the US segment was $199 million representing a 12% margin.

Turning now to international railcar segment. Excluding the impact of foreign currency total revenue has increased 1% primarily driven by a 2% increase in transaction days, partially offset by 1% reduction in total RPD. The decline in RPD was primarily driven by higher value brand mix and lower-than-expected demand and higher yielding long-haul business into Europe as a result of the terrorist tax I mentioned earlier.

Net vehicle depreciation per unit increased 1% from the prior year driven by decline in residual values partially offset by improved fleet management processes including strategic procurement and greater use of alternative disposition channels. In total the international segment adjusted Corporate EBITDA $151 million with a margin of 22% for the third quarter.

Now I'd like to try and update our balance sheet, financing, cash flow and financial leverage covenant. During the quarter we continued to strengthen our capital structure liquidity position. With regard to our non-vehicle debt we completed the redemption of a 7.5% senior note due in 2018 and also issued $800 million eight year and 5.5 senior notes, the proceeds of which we used in October to redeem a like amount of our 6 3/4 senior notes due in 2019.

On a vehicle financing side we secured long-term vehicle financing for our European RAC business through the issuance of EUR220 million bond. In addition the tenure of our vehicle financing facility and a new stand alone VSN financing to fund our New Zealand rental car fleet was established.

Additionally we are in the process of extending pre-existing bank funding vehicle facilities and expected to complete them by year-end. With the completion of these refinancings, debt maturities in 2017 will be limited to $7 million related to non-vehicle debt, $200 million related to US RAC MTM securitization debt and $400 million relates to the Donlen fleet release securitization amortizations.

Our liquidity position provides substantial support of our business needs as well as our limited amount of debt maturities occurring next year. After the end of the third quarter, our $1.7 billion liquidity position was comprised of $1.1 billion of availability as a senior revolving credit facility and $600 million of unrestricted cash after subtracting the cash amount earmarked for the October bond redemption that was executed.

From a corporate net leverage perspective, we closed the third quarter with a net corporate debt to adjusted corporate EBITDA ratio of 5.2 times. Given our financial outlook, we will not achieve our target lever ratio of being at or below 3.5 times at year end and expect to end the year in the high 4 to 5 range on a reported basis. However, we remain committed to deleveraging and intend to direct our free cash flow towards debt pay down until we achieve our target leverage ratio.

Let me address our financial covenants. The only financial maintenance covenants we have is the leverage contained solely on our senior revolving credit facility. Importantly the definition of EBITDA and the senior credit facility differs from our reported EBITDA because it allows us to add to the EBITDA the pro forma impact of certain cost saving initiatives we expect will provide future benefits. This costs savings add back is capped at 25% of reported EBITDA.

As a result of this difference, our leverage ratio at September 30 if calculated for purposes of the covenant was 4.5 times which gives a threshold of 5.25 times with a cushion of approximately $100 million of EBITDA or $525 million of net corporate debt. The leverage covenant threshold steps down in the fourth quarter and first quarter to 4.7 times and then will revert back to 5.25 times for the peak quarters next year. Even at the low end of our guides, we expect to remain in compliance with the leverage covenant.

It is also important to note that none of other debt instruments contain cross or faults to the senior revolving credit facility. They only contain cross acceleration triggers. This means that even if we have breached leverage covenant a relations bank would need to accelerate the loan before it impacts the remainder of our capital structure.

Free cash flow for the nine months year to date was $71 million and as we (inaudible) reduce our fleet in quarter four our free cash flow for the remaining year will increase.

Finally let me summarize to you the updated guidance for the full-year 2016. The approximate $300 million change in our guidance is largely implied in the four areas.

First US RAC vehicle depreciation utilization. As a result of our quarterly US RAC depreciation rate review completed at the end of September and potential implications on the fourth quarter from the November rate review, we have increased unit vehicle depreciation expenses from below the lower end of our previous guidance to the high end of our revised guidance to approximately $300 per unit per month.

Further while we have outperformed vehicle utilization the first half of the year and expect a moderation of this performance in the second half of the year we have further reduced our expectation utilization in the fourth quarter. The combination these two factors resulted in an approximate $100 million increase in vehicle ownership costs in the second half of 2016.

US RAC revenue contributions. While our US pricing has larger been at or near expectations third quarter we nonetheless have experienced lower transaction day levels contributing to an incremental $60 million decline in our adjusted corporate EBITDA outlook.

International. On the international front while we had experienced some softness in second quarter as a result of the terrorist attacks in Brussels in March and the additional attack that happened in July in France had a more significant impact on our business particularly the second half of August time.

Additionally, while we are approximately 43% per RAC vehicles in Europe, we are seeing some pressures on residuals and have adjusted our expectations with vehicle residuals in the second half of the year. As a result, we now expect international adjusted Corporate to be approximately $50 million lower than we issued in our previous guidance.

Costs. In terms of costs, we will expect to achieve our committed $350 million in cost savings in 2016. Our previous guidance assumed we would outperform this commitment by $75 million for a total of $425 million.

This is largely a timing issue and should not affect our full potential cost savings target over the three to five year horizon. However, it does impact our full-year outlook.

Further, other one-time and unanticipated costs increases such as gross damage, maintenance and transportation costs contributed to the balance of our reduced earnings expectation this year. Given these impacts we have updated our guide to the following:

Full-year 2016 adjusted corporate EBITDA of $575 million to $625 million. US RAC fleet capacity down 1% to 1.5%. US RAC revenue decline of 2% to 3%. US RAC net depreciation of $295 to $300 per month with our guidance assuming the higher end of that range. Adjusted EPS range of $0.51 to $0.88 per share.

Other cash flow guidance items include full-year net non-vehicle CapEx of $75 million to $85 million, non-vehicle cash interest expense of $280 million to $285 million. Cash income tax of $60 million to $65 million and free cash flow of $250 million to $300 million.

Finally as I stated earlier, we need to improve our ability to balance the aspiration of our full potential plan with our near term focus agenda. As we think about 2017 there are clearly new headwinds but also positives to build on going forward including the following: we will achieve our $350 million of cost savings in 2016 and we have the benefit of the annualization of some of the partial year initiatives in 2017. We expect to deliver a new cost savings in 2017 but as I mentioned are more likely to be less robust than 2016 as we move to a period of investment.

We expect a favorable industry environment and we will be disciplined in our fleet capital deployment and expect continued improvement in our revenue execution model. While negatively impacting the performance in 2016 we believe that terrorist events and a higher than expected insurance liability expenses in Europe to be largely transitory or addressed.

While we have seen unusually high vehicle cost increase in the US and expect continued pressures on residuals in 2017, we also recognize some of the impact to us has been disproportionately higher than the market and we have taken steps to moderate and expect an increase in 2017 while lowering the increased experience from 2015 to 2016. And we have continued to make investments in our core business to support the long objectives we have laid out.

With that I would like to turn the call back to John for some closing remarks before we open up the call to questions.

Thanks, Tom. As Tom mentioned there's been a lot of areas of progress maybe I will just recap for you what I think that we and you need to see over the next year to imagine this Company getting back on track to that full potential plan in terms of a margin aspiration for the business.

We're rolling out ultimate choice in 30 markets. We know from a market research perspective it is preferred by our consumers and gives many competitive consumers the opportunity and the desire to reconsider Hertz. That will be combined with an enriched fleet for our highest value customers.

It is in market in five markets today. We'll be in two more markets in the next 30 days and 30 markets by the end of next year following which we will have expanded the top 50 markets.

We rolled out new digital assets this year and then further enhance those in the middle of next year and we will be making an investment not only in how we go to market in digital but making an investment in go to market against the brand in totality. We will refresh facilities and rebrand facilities and Dollar, Thrifty, and Hertz as appropriate and reuniform our employees to present a more professional brand that matches the Hertz aspiration, the Hertz we will become again. We are going to be making investments to do all of that but as Tom said the momentum we have on the carryover of the cost takeout and the identification of new initiatives will provide us the resources to do so.

We need to continue to make progress on the tech transformation of the Company. A very important deliverable next year will be the fleeting system. Particularly as a multi brand Company we lack the systems to put the right car in the right pool with the right brand for the right customer. We are going to get that next year and that will be very helpful as we go forward. So as we make these investments and continue to deliver on our cost takeouts and they have time to settle in market and get the desired response from our customers and customers throughout the industry I remain confident that we will get back on track to our margin aspiration as a result of this work.

So with that I will turn it over to Leslie and any questions we may have.

(Operator Instructions)

Chris Agnew, MKM Partners.

Thanks very much good morning. First question was do any of the issues particularly around the small midsize cars bleed into 2017? And then I know you gave broad outline on 2017 but any update on negotiations with the OEMs for 2017? Any other additional color on the expectations for fleet costs in 2017? Thank you.

Hello Chris this is Tom. What we do is we mark to market our depreciation rates in our mid-and compact size. There will be -- as we had to carry those cars into 2017 there will some implications on higher multi-deep rates of those vehicles that we still have in service. And clearly obviously are looking at that quarterly.

We've assumed that additional $30 million adjustment in 4Q as I said our guidance. We expect there will be cost increases, residual costs pressures and cost increases next year. I think it's more of a macro effect, because I think we are trying to rotate out of these compact and midsize more expeditiously to a more natural level in the 16% range where we were 22% earlier in the year, as I mentioned, I think after our first quarter call. There may be some implications into 2017, but we believe that we are working to try to get those [tracked] in this calendar year and not have that as a carry-over risk.

Our 2017 model year buys around 90% of what we expect to buy. We have left some availability by design. Our negotiations -- our OEM partners have been very helpful in working with us and recognizing the residual pressures, I think the industry has or will face in 2017, and I think as a result we've negotiated on like for [what] half cost reductions on the risk fleet.

Program cars continue to be, I think difficult to obtain, as I have said in previous calls. Our current mix of buys is about 80 risk 20 programs. Probably not optimal from a risk management perspective, but clearly if you were to look at the program pricing relative to risk residuals you'd have to assume a fairly significant decline greater than any third party source, assuming in 2017 to justify going more heavy on program, but we are always looking to see whether we can optimize more program, as well as looking at used cars as we understand others in the market may be doing as well, which I think is an early sign that folks are cautious about next year's residuals.

So we are taking that very seriously, and we do believe that we were probably disproportionately impacted because of our compact and midsize mix, but I would also submit that it is a macro factor, and obviously others cannot be immune to this factor, and obviously, we think we have actions in place to try to manage through the fleet costs. Clearly the improved pricing environment we are experiencing in the third quarter. As I have said, we will probably always see in a lag effect, because I think it is positive in that the industry is rational and that will recover from an industry perspective, increase more input costs, and fleet costs.

Thanks and maybe sort of follow on to that. Your fleets a little bit larger than anticipated this year and utilization was a little bit down in third quarter? What are your thoughts around fleet levels going in the fourth quarter and then going into 2017?

Part of our fleet level will be a little higher than expected, as it will be out of service. There is about 60 basis points. As we have said, it kind of explains the entire utilization drop year-over-year. So I think that has been kind of a transitory effect in the third quarter.

We want to continue to keep fleet tight. We would like to keep it below projected demand slightly. We anticipate we will be very conservative with our fleet planning in 2017, but we obviously want to position ourselves to have the flexibility to flex up, as we believe we will recover some of the lost share we have had over the last couple of years. But at the same time we don't want to over fleet on the anticipation of that, but we want to create flexibility in the fleet that allows us to when we see that to flex up our supply and capture that demand.

Adam Jonas, Morgan Stanley.

Thanks everyone. A question on the fleet depreciation, the $5 increase per month in depreciation. If I multiply that by the amount of fleet and by 12 months, I'm coming out with only about $30 million increase in costs, let's say due to the change in the per month per unit forecast, meaning like to the market. That's a pretty small increase. That's like a 2% increase and we are implying well below less than a 1% decline in used values in the market.

So just kind of reading the text of the release it seemed like you were blaming -- let's say movements in the compact car class affecting your total mix there, but I'm only coming out with $30 million at least on the per unit. So I guess it seems -- suggests the rest of the DNA [crib] is just too many cars. Can you be specific on outlining how many in thousands, a round number even of how over fleeted you are, and kind of again when we cycle out of that?

Yes, Adam, I think your math you assume the midpoint of our previous guides and is obviously indisputable, and what I would submit, and you might go back and look through my text in my remarks. We had expectations that we were going to be at the low-end of our original guidance about 290, so we had projections to achieve something less than that.

We were frankly a little bit surprised by our third quarter rate review that happened really at the end of September and signed off in first week of August, during our close process where we saw residual pressures on compact and midsize, and frankly residual pressures on certain manufacturers that traditionally we have not seen or I've not seen [in this industry], residual changes that we've seen. So, I think what you'll see if you do that kind of math plus the utilization impact, that's how you kind of bridge to our [under] estimated $100 million. Again we've assumed a $30 million adjustment in our fourth quarter review as well.

Okay. So just to summarize it is -- you are not calling out numbers of cars so much, as just embedded in your assumptions was a better than $290, and so the $5 month, maybe it was more appropriate to use like a $10 or $15 per month in terms of what you had implied. Is that correct?

That's correct.

Okay. And can you just review here, because you were going a bit fast on the covenants there and it's a pretty important issue. My second question, given that you are over five times leverage and I know the definitions are different obviously as you point out, but over five times in a decent economic environment right now, can you just review those corridors for 2017. I think we'll have confidence you are going to remain within the covenants this year, but next year there is not a lot of room for error on the senior revolver. So review those corridors again and then tell us clearly what happens again with the accelerated payments if you don't make those -- if you do go above the 4.5 or 5.25 on that other definition? Thanks.

Yes, no problem. So the corridors do adjust quarterly based on seasonality, so we go from a 5.25 level in September to 4.75 at December 31 and March 31 and then back up to 5.25 at June 30. So the quarters do adjust to the leverage. As I said earlier this covenant relates to our revolving credit facility, as I mentioned in my remarks there's no cross [reap to fall] they only contain cross acceleration triggers.

That would mean that if we have breach leverage covenant, our relationship banks would need to accelerate the loan before it becomes -- impacts the remainder of the capital structure, and that obviously, very unlikely relative to [to what] our bank lenders have and obviously a lot of commitments to us on the fleet end and the non-fleet areas.

Chris Woronka, Deutsche Bank.

Hey good morning guys. I wanted to ask if you are rebalancing and remixing the fleet in terms of model. Is that going to create any kind of extra pressure next year as we think about fleet costs, or do you think a lot of that is going to be absorbed already in the second half of 2016?

What we had to do Chris was shorten the life of the compact and midsize this year, which had an acceleration of depreciation realized in 2016. That would be one of the unusual impacts of 2016 that should not reoccur in 2017, and as I mentioned to Chris, on Chris's question, while we carry those cars into 2017, some of the compacts and mix, we're going to have fewer of them, but clearly some of those will have to be at a higher deep rate.

We are still working through our planning process for 2017, and as I mentioned earlier we have some mitigating factors to help address what we believe will be another 2.5% to 3% decline in residuals next year similar to this year's experience, which is probably more at the 3% level now relative to our fleet depreciation this year versus our original estimate of 2.5%. So, we did things such as negotiating cap costs reductions on the risk fleet, things we are doing on the marketing channel, and obviously optimizing the mix in whole.

We obviously are going to look at that relative to also our fleet mix having more compacts and midsize and looking at what is optimal relative to customer expectation and demand perspective. It may require us to make some discretionary investment in fleet, but nonetheless we expect to increase from 2016 to 2017 to be less than what we have experienced between 2015 and 2016 on a year-over-year basis.

Okay great that's helpful. I also wanted to ask on costs, and I know you guys buck it out kind of savings versus inflationary pressure on other things, but can you maybe give us a little bit more color there. Is there a normal kind of inflationary rate you look at for some of your direct OpEx that doesn't relate to the fleet?

Labor is usually in the 2% to 3% range. Labor is obviously the biggest -- one of the bigger components of what the direct OpEx is, so that's kind of how we look at it. Year-to-year both from a management and field personnel perspective. Other costs have -- we had some success this year in negotiating reductions procurement, so we have managed to offset some of the preliminary -- some of the initial inflationary expectation folks had by improving our negotiated rates on certain things such as parts and supplies.

We have been working on some of our outsource vendors and renegotiating the rates there. So we have been trying to work things to mitigate inflationary pressures, but I think generally speaking a 2% to 3% range is what we assume we plan for and then we try to find a niche that is offset a portion of that.

Michael Millman, Millman Research Associates.

Thank you. Following up on costs. It does seem that you have column of corporate, which was up a great deal this year and seems like it's headed that way in the future. Maybe you could talk about that. Also regarding compact cars -- at least in the industry, and I am sure your people have realized that the compact car prices residuals were weak, [and demand] for over a year has shown they are down 7% or 8%. I guess a little surprising that it seems like you got caught short.

On the revenue side trying to reconcile some numbers that you ran through earlier it does seem that you -- to put it another way, that Avis performed far better in terms of volume, in terms of price, again trying to adjust, maybe you can talk about why you think that was happening, or how you can get back to a better increase?

Why don't I address the cost and the compacts and I will let Jeff address the revenue. So first, clearly I mean I think if you look at our GAAP financials we did see increases in SG&A and obviously schedules, supplemental schedules two of our press releases provide you the adjustments related to -- we had a -- we took a charge for an impairing -- for example, our NeverLost system as we moved to a more modernized system on navigation. So I would point folks to the adjusted items on supplemental schedule 2 that provides the three months to nine months SG&A and DOE costs on an adjusted basis, but nonetheless we obviously had some surprises -- ongoing cost items that nonetheless we need to address both in the SG&A and the DOE area.

On the compact mix, you might recall in the first quarter we did discuss -- I mean our financials were disclosed, we had an adjustment to some compacts and midsize depreciation rates both. In the second quarter, we further did some adjustments on whole period to accelerate. So I would say we were caught off guard. We do have a very robust process.

We use a third party review and then we obviously forecast and then we obviously, then take our own qualitative experience on our retail sales, for which we have 80 retail lots, and we have that real near term experience and we need to incorporate the near term experience on our own performance against that third-party forecast.

That can change from quarter to quarter, so I wouldn't necessarily characterize that we were caught short. I think you market is changing. I think the benefit that we have is the 80 retail locations where we see real time information, and that helps us mark to market I think more quickly when things do change.

Michael, it's Jeff Foland. I will address the revenue side that you had referenced. I will start with the volume. From a volume standpoint in the third quarter, there are really four factors that put a drag on those volume results. The first one that Tom mentioned earlier is that we did discontinue the Firefly brand. We expected to recapture some of that, but not all of that business given it participates in the deep value segment. That was about a point of volume.

Our corporate portfolio performance has been soft. It was certainly soft in the third quarter and we are taking actions to address that, also as Tom had mentioned. Then from a recall standpoint we were somewhat uniquely impacted by the recall given the brand and type of cars that were out of service, particularly during the July timeframe. When you look at the utilization for third quarter, actually from July is the only month where we were lower on a year-over-year basis from a utilization standpoint as opposed to the other months.

With respect to the pricing I will refer you to the slide in the deck that accompanied the call this morning, you'll notice that reported RPD decline was negative three points on a year-over-year basis for the quarter, about two points of that dealt with the Dollar Thrifty Days counting methodology change that we been talking about for a while now, due to the systems integration last year, and other points that dealt with the non-rental revenue related components such as fuel related ancillary revenues.

When you adjust for those the RPD was negative 1.0 for the quarter, and we had about a 1.5 point impact beyond that from a category that was broadly classified as mix. So a change in mix from the length of the rentals, change of mix from on to off airport business and a little bit due to fleet mix.

From a retail pricing perspective, the retail pricing on a like for like product basis in the quarter was positive. We expect that to continue to be positive as we go forward. It's really a mixed standpoint that causes the RPD to be negative on a year-over-year basis, and we will continue to work on that mix. A lot of that once again comes back to, we need better quality of demand coming into the funnel. We need to strengthen the corporate contracted portfolio and that will help us adjust the mix as we go forward.

Thank you.

Rich Kwas, Wells Fargo Securities.

Hello good morning. Tom, can you just run through the covenant counts again around what you can pull forward in terms of cost savings and how that works. I heard some of your comments -- just want to make sure that we have an understanding of what can be pulled forward over the next couple of three quarters?

Sure, Rich, no problem. First let me reiterate, we are not concerned about missing our covenant, because it does allow for pro forma adjustments for cost savings. We have those projections. We go through a very detailed review. There's definitions in the credit agreement of what is allowable and not allowable, but primarily operating type cost savings or things that are already approved in flight.

We have cushion based on what we have kind of included or assumed or forecasted. We could avail ourselves to additional opportunity in that if we needed, but we obviously don't think we do and we have done the projections based on the low line of this range, and we are well below where the covenant would be, and we have additional opportunity that we could adjust EBITDA for additional cost savings if we thought we had any additional risk and obviously, they would have to be credible costs savings and reviewed on our credit agreement -- allowable on our credit agreement.

So that 5.5 quarter leverage ratio, it declined to 4.75 times, we obviously did the review and expect to be below that and believe we will in line with our covenants. We've looked at it for early part of next year too, because we stay at 4.75 times and believe we will be below our covenants in next year as well.

All right and then can you just help us understand as we think about 2017. I know you gave some qualitative views, but how much of this adjustment is really nonrecurring? $300 million adjustment seems like there's stuff in there that shouldn't happen next year, but then there's also some stuff that's either semi structural or potentially permanent, and so I'm just trying to understand how we should think about the walk into 2017.

It would be particularly helpful as we think about where you were at the beginning of the year with your guidance of, I think it was $1.1 billion and that was including [Hert], but if you back that out you are talking a pretty significant decline. So how much of that ultimately gets recaptured and over kind of what timeframe are you thinking about?

I think, Rich, as we think about it there's some macro factors that are within the right trajectory. Clearly early in the part of the year with the pricing decline that the industry experienced, and the pricing gap we had relative to the industry, I think it was extremely unusual in nature. I have been kind of clear with that in the market. Our expectations of that will continue to improve. I'm not counting on that as coming back all the way, but we believe the industry's performance and management of fleet is rational and that will continue to be a favorable improvement on a year-over-year basis.

Clearly fleet costs have been higher than we expected, some of which is transitory, as I mentioned. If we accelerated the whole period of compacts and we taken those -- we're trying to sell those out. We expect to see some additional residual pressures next year, but we also would expect our revenue execution model to continue to improve, and we will continue to close the gap like we did in second quarter to the third quarter of what the industry comparables are.

So closing that gap is always a very important, I think, component to our outlook and it's within our control and not a macro factor. We have had macro factors that affected us and actually Company specific factors that affected us international. The terrorist events in March and subsequently early July clearly had impact internationally inbound into Europe.

I think our public comp also talked about that the acceleration of that experience happened at the end of August and into the balance of the year. I think that largely as a historically did our transitory [bonds], not additional terrorist attacks, but I think we will see a recovery in our international portfolio as well as, you know we experienced some fairly significant elevated insurance liability costs this year. We disclosed that in Q2. That was $20 million in 2Q alone as a one-time adjustment, that we believe we have addressed the core issues behind that in the market for which we are experiencing that as age cases that adversely developed, and we have exited some of those lines of business and so, we are already seeing improvements in our insurance rates.

We've done things in the US market to address our insurance by changing the portfolio of who we rent to, lower risk parties. Our initial outlook for 2017 on our risk liability, risk accrual in the US market will have an improvement year-over-year. We did have a number one-time items as we come out of the spin, as well as we get more visibility and get granular in our costs of cleaning up, so we had I would say, I think I said in my script around $30 million of unusual items in the third quarter somewhat into the fourth quarter.

So I think it's going to be a function of you know, we've got some unusual items with Europe, which is transitory from unusual cost items. Weak depreciation likely disproportionately impacted us with our over index of compact and mix, but I also caution folks that we do intend to invest in fleet next year and invest in product and service. We will be managing investment relative to our earnings outlook, but we believe investment is critical to continue to build up this company.

Rich, I would say we're still in the process of building that plan. We are going to be more conservative as we guide to the plan, as I mentioned in my remarks, because we want to -- we need to get to a position where we can deliver on what we say we are going to deliver, and not be aspirational and miss what the aspiration is. I think we will be cautious in setting expectations for 2017, but we also believe there are a number of items in 2016 that kind of add to a -- not a significant amount of money that can be addressed as we go into 2017.

An Singh, Credit Suisse.

Thanks for taking my questions. First off I wanted to follow up on an earlier question on the fleet costs. As one of the other guys had pointed out residual values for sedans in general have been softer for quite some time now, so I guess could you speak to a little more as to why your internal forecasts diverged so materially from the third-party forecast. Were you not seeing the softer residuals in your real-time sales?

Then I guess more importantly, what sort of checks and measures are you putting in place to avoid these issues going forward? Is it simply matter of experience as you were alluding to earlier, or was there something else that you need to do here?

The residual value perspective we had originally expected a 2.5% decline for the year. That has been under pressure. Our forward outlook has kept that up and the third-party sources we use have kind of a step up in that number. We are seeing that is more in the 3% range, and then there is some disproportionate impact on our own experience relative to the compact and midsize cars, and the shortening of that whole period by design, by our desire to rotate those out and really get calibrated to a more appropriate mix of those units as we head into 2017.

I think we have -- clearly any kind of estimation process can be continuously improved. I think we have a very robust process to go through to establish what our residual outlook should be every quarter. As I mentioned in my comments we do this four times a year and unfortunately 3Q and 1Q are the quarters in which the forecast and the third-party comes out near the end of the quarter, and it really isn't something we can update until the quarter is nearly at the end, but we do have an obligation from a forward perspective to update our outlook on residuals.

We also have our own retail experience, again as I mentioned earlier in a comment, that we have that experience in the 80 lots in which we are selling cars daily and that performance must be incorporated in our own third-party forecast to adjust our residuals according. So I do think we have a unique insight into what is going on in the retail market. Maybe it is unique to us.

I would suspect it's probably more not, because our retail locations are located all throughout the country. So we have a very good distribution of what the market might be feeling. I do believe that we have a very robust process, but I don't disagree that we should continuously try to look at how we are responding to make it more accurate.

As far as our overall forecast process is the thing I mentioned in my comments and script. Clearly we have had some surprises. We've had really kind of an aspirational agenda and we were making progress in our take off plan the first half of the year, way ahead of our goals and expectations of our [extensively] committed $350 million and we by design -- we had included that full $425 million in our last guidance update. Going forward I think we are going to more conservative and less aspirational in citing our expectations externally, but still setting pretty aggressive expectations internally.

We will probably recalibrate how we go about setting up forecast and setting an expectation outlook that is achievable externally, but one that would have more stretch internally as opposed to both.

Okay. Got it. That's helpful. And then on the volume side. Could you speak to why this Firefly exit had such a big impact on your volumes at 3Q? Why is the transitioning of customers from the Thrifty brand not working as you had expected. And if you could just talk about your airport business versus off airport with regards to how they drove volume at 3Q and their market shares?

This is Jeff. I will address that. We didn't expect to recapture all the Firefly business. It competed in a different category. It was in the deep value category. In the US we didn't think the economics and margins associated with that business made sense, so we decided to discontinue it, and we did that at the tail end of the second quarter. So it wasn't a surprise that we had some volume gap associated with that.

Now all of that being said in building on the earlier question as we look into the fourth quarter, we see reasonable volume. I think it will be somewhat better than we saw in the second quarter really for the other reason that we mentioned, and that had more to do with the recall activity and out of service that we had during the quarter.

From an overall volume standpoint. On airport volume was flat for the third quarter, largely impacted by all of the elements that I just mentioned that we discussed earlier. The leisure transaction days in particular, were impacted by the Firefly, the recall and in addition to that we significantly pulled down our lower yielding opaque distribution channel as well. That was purposeful as we were driving to balance rate versus volume out in the marketplace, particularly given the capacity we had available during the recall situation.

Off airport business continues to grow well. It grew 4% from a volume standpoint. That was really fueled by insurance replacement business, a significant increase in that business, but keep in mind that instruments volume replacement volume is really just trending back to 2014 levels, after we had a significant drop in insurance replacement during the third quarter of 2015, so it's not that different from a trend standpoint than we would have seen in the second quarter. We just happened to be flying over a valley on a year-over-year comparison standpoint relative to 2015.

David Tamberrino, Goldman Sachs.

Hello thanks for taking my questions here. Gentlemen, just thinking about what you outlined a year ago and where we are today. I think you mentioned in your prepared remarks three to five-year timeline. Are we still looking at that three to five-year timeline as being pretty well within your grasp?

Thinking about the cost take-out and the turn around, or are we potentially at the five-year plus at this point. My second question on corporate volumes. I know you mentioned that they were weak during the quarter. I'm wondering how much that was company specific, versus what you're seeing from a demand perspective within the market?

I think in terms of the three to five-year timeline, one of the caveats we have mentioned all along was it did not account for the possibility of a down cycle within one of the three years. So I think that obviously affects our view around timing and we don't really know what the answer is. I think having a year like this inarguably puts you further behind than where you would like to be.

Having said that I do believe that as we fix these customer experience investments, fix the execution on the revenue side, improve and invest in how we go to market, it's only a matter of time before you should expect a year or two of above industry performance on the revenue side, simply in effect the other side of the flip-flop that we experienced as we were under executing. So clearly for us to meet those objectives within those time frames, we can't see a down cycle year and we are going to have to see -- we're going to have to see some revenue performance kick in effect that corrects off this unexpected base degradation that we had in 2016.

From the corporate volume question, whether it's market versus company specific. It's actually both. From a market standpoint I would characterize it as there is modest growth in the market at best perhaps even stagnation as we go forward, but frankly it's been more company specific with respect to the corporate contracted portfolio volumes we've been achieving.

As John said we have much work to do and we have much work underway to win back those customers, grow that share intelligently, and ensure that we are the preferred provider in this marketplace.

Thank you. That's very helpful. And just one last one for me. As we think about the covenants moving into the end of the year and into early next year. Does that mean that share buybacks are off the table in the near term?

As I said in our remarks we intend to use our liquidity to deleverage the business until such time we get to our leverage target range.

Understood. Thank you very much for the time.

Brian Johnson, Barclays.

Hello yes this is Dan Levy on. Thank you. Just wanted to ask if you could broadly give us a sense of the visibility that you have, the different components of your business and what I mean by that is, you obviously don't have a macro crystal ball and macro will move around quite a bit, but it just seems like over the course of the year there been a number of issues whether it be business mix, or fleet mix, or different cost components, which sort of caught us by surprise. So just wondering if we should just anticipate that there should be a core level of variability versus forecasts moving forward on those items?

Well I think there is an element of getting to the other side of the technology transformation that clearly would help tighten the business and tighten up the visibility that we have around fleet and demand movements. I wouldn't suggest to you that there's nothing we can do until then. We are working on an interim forecasting improvement process right now to take the data and the systems we have and try and get them calibrated to a better outcome than they have been.

I think the final answer is probably within the systems, but you can expect that we feel accountable for making improvements between here and there, but also acknowledging there is volatility as we go through this, because we're really not rolling forward at constancy of outcome. We are transforming a company, be it the systems, the value proposition, the leadership, how we go to market.

All of those things and you get into when you have that many variables moving in constant, it's hard to understand the second and third affect. So we can get better. We will get better. We will ultimately get it fixed, but I think some degree of skepticism in the meantime has obviously unfortunately been well-earned.

Understood. And then just a question on the cost outs. You talked about not getting the additional $75 million stretch goal in 2016. As we are heading into 2017 is that stretch goal achievable at this point, and is it possible that you will be able to maintain all of the $350 million you think you will achieve in 2016, or is there possibly a step back as you increase your investments?

Really going to be sort of a [narrowing] of three things. So we have good visibility on the -- what I call the step-off effect of the $350 and how it will stick next year. We have good visibility on what the initiative yield will be. Out of conservatism we will discount that a bit.

But those two numbers will have to go one, to inflation and two to these investments we've been talking about around enhancing the choice product, investing go to market to really get at some of the long-term fixes, because in order for this business to perform the way you and I think it has to, it's got to end up being the preferred brand, getting there with a competitive cost structure, and having real customer advocacy and the revenue performance that goes along with it.

We're going to have to make those investments to realize that reality, and so that's going to put pressure on what we can produce for you in the next year or two from an earnings perspective, but that's what is going to give us the breakout we need to get to that full potential trajectory. Again, I hope that we have a little bit more tailwinds headed with us and little less headwind as we went through this, sort of going through the awkwardness of that process would not be something we are sharing on a quarterly basis, but it still is the right thing to do.

We need to take these non-value costs out of the business, but we need to invest in transforming this company and getting it back to a top of industry position, and the associated returns and customer loyalty that come along with it.

John Healy, Northcoast Research.

Thank you. John, I wanted to ask you. Clearly the numbers this year are not going to be what we all hoped for, but when you look at the transformation that you are working on behind the scenes and you look at the base of the business, from a technology and from a systems standpoint, how much are you behind where you thought you'd be at this point. And if you kind of had to put a mile marker down in terms of where you thought you would be, where are you today in terms of putting the practices, putting the technology, and putting the right people into place to make this company what it used to be?

I suppose if I looked at the peak of my [naive at bay], the first day I walked through the door I thought we could get the revenue systems up and done within a year. It has taken two, and I will also point out with those systems they've got to be in market both in terms of analysts learning, but also the data that causes the system to learn so I don't really expect full effect -- I expect benefit, but not full affectivity for six to 12 months.

So I'm a year behind in that regard. The fleeting system will come in next spring. That's probably six months behind what I had hoped, not what Tyler had promised me, but before I met Tyler I had a hope that did not involve him, that is probably six months behind. That will have real value for us. The ultimate value will be a multiplier once we get revs ran and we get interconnectivity between sales force, the import fleeting system, the new CMS revenue management systems, and the revs ramp system, then there becomes a multiplier.

We think we are onto ahead of schedule on the revs rent system, and I would tell you the first day I walked in here I thought we would need new tools, but not an entirely new platform. I learned in the coming months that this was going to be end to end and it goes back even to, original understanding of the company had quote end quote installed Oracle, but really all we had done is made Oracle middleware. We're going through in the next 12 to 18 months at a cost of over $50 million finance transformation alone to get Oracle fully embedded and get all the benefit of that system.

So I didn't think I was going to face a literally everywhere every quarter system, and frankly I wouldn't choose everywhere every quarter system if they weren't in the state they are in. The state they are in simply leaves us with no choice.

So I think we underestimated how much it was going to cost and the time it was going to take to work our way through this. I will also tell you that my own hypothesis is when we plug all the last wires together between all these systems we have probably vastly underestimated how it can change the effectiveness of the company and it cannot come a moment too soon.

I appreciate that. Appreciate the candor. The question I want to ask for Tom, was just when you look at the $75 million shortfall on the cost savings goal, could you help us understand what types of items were not within your reach this year? What type initiatives those were? What areas of the business those might be an?

Some of the areas for which are timing related. We did initiate our back office process a little delayed this year, which put some pressure of finding new initiatives to offset that. That was a delay from what we originally assumed earlier in the year to April, and then we had assumed we would find other initiatives to make up for that timing delay and stayed with our internal and external guidance not commitment of $425 that was incorporated in our guidance.

So there is a timing issue that was pivoting to unidentified initiatives to go pursue to offset that and we had made great progress earlier in the year of continuing to find unidentified initiatives, identified and then pocket it, and those kind of started to slow down in the third quarter. There is some timing delays and some issues related to all the personnel costs that we think we can get savings out of.

We have been cautious on executing some of our outsourcing initiatives, and again, I think this is largely timing with some of our back office outsourcing we are making good progress on, but we have been cautious because we have got to be careful as we go through quarter closes and things of that nature, offshore outsourcing things has risks and we have got to manage the risk kind of longer term relative to near term cost savings.

So pull from some of our back office and fleet and our back office in accounting and we are making progress, but we have had some delays in some of the initiatives there that we initially expected we were going to deliver this year and then move into 2017. So those are a few examples. Again I think as we said in our remarks, it is more of a timing factor than it is an absolute, and we don't think we can achieve the cost savings.

We believe we have derisk ultimately the full potential plan to achieve cost savings that would be worth the risk the nature. We are having risks of timing and we continuously try to look at that. And as I said earlier in my remarks we have had a need to refocus some of our efforts on some of the core issues that we are addressing such as, the fleet mix, corporate business, and some of our product rollouts. It does take management bandwidth to repivot to those areas and those costs savings, although important, they do take secondary to ensure we are getting the revenue top line going the right direction. The product going the right direction.

Justine Fisher, Goldman Sachs.

Good morning. I just wanted to ask -- sorry one more clarification on the covenant, and this is in terms of what you can add back to EBITDA. So I know that you said it was based on cost cuts, but is it currently that we should basically be adding $100 million to whatever our corporate EBITDA forecast is to that get to what your covenant EBITDA is, unless you guys go and I guess change that definition. Is that $100 million the right number?

It's 25% -- the cap is 25% of the LTM EBITDA. So whatever the LTM EBITDA you cap at that and it is based on operating cost savings not what you've achieved, but what you have prospective forward-looking that has tangible approved and [in flight] cost-saving opportunities. There are and that allows you, affords you a fairly significant cushion in our forecast and projections that allow us to reflect and represent that we don't believe we're going to be in a breach of any covenants any time in the -- obviously, this year in our filings, is a result that we obviously have cost savings based on our full potential plan that are prospective value in nature, and that have been reviewed and documented very thoroughly for both our internal purposes and our auditors purposes to represent the fact that we don't believe we will be in breach of our covenant.

Okay but you have a 25% of EBITDA let's say at the midpoint of your guidance is $150 million and so are the cost savings that you are assuming are they up to that cap already or is it something lower than that. I mean is it -- are you taking advantage of these full amount of that cap let's say.

No, we are not taking full advantage of the amount of the cap to represent and -- that we believe will be sufficiently under our leverage level at year-end. We are not taking full advantage of that.

Okay. There's no number that you can give us as we build our models going forward -- a rough number to see if we think that compliance will continue to next year -- so that $100 million -- we should not use that as just a number to add back?

Yes. Again it is going to change based on the LTM EBITDA, so that is going move, so the projections of what you think LTM EBITDA and the 25% cap, but at year-end it's around -- we have to [avail] ourselves with something less than the cap and LTM EBITDA using $600 million, you can kind of do the math and figure out that's what it is at 12/31.

Okay. So then can you just remind us what is the exact add back for this quarter's calculation that you used?

We did not disclose the add back, as again we were under the required leverage target on a reported basis of 5.2 versus 5.25 times. So it was not necessary to avail ourselves of the add back for this quarter, but from a forecast perspective assuming the midpoint guides, we have an inventory of cost savings and we do reflect those cost savings in our forecasted leverage target to ensure that we obviously are in compliance of our leverage ratios.

That concludes our question-and-answer session.

Thanks everybody we appreciate you joining us on the call today. We certainly will make mistakes when we make them we will be candid about them and what we intend to do to correct them. We don't expect that solution as a result of that. We know that we have to deliver over time. We are no less convicted in our ability to realize the full potential of this business all the underlying math, strategies and approaches to the market to do that exist.

I think today is more evident that road is going to be a whole lot bumpier than we thought and that we may have communicated in terms of an expectation, but we will get there when this brand is restored to a leading position within the industry. It will obtain revenue performance that is consistent with that, and it will benefit from the cost in the systems work we've done along the way to set the foundation. I look forward to speaking to you on the other side of that and along the way in between. Thank you.

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