Hertz Global Holdings, Inc.
Q2 2015 Earnings Call Transcript

Published: 11 Aug 2015

[Operator:]

Ladies and gentlemen, welcome to Hertz Global Holdings Second Quarter 2015 Earnings Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session, and instructions will be given at that time. I’d like to remind you today’s call is being recorded by the company. I would now like to turn the call over to our host, Leslie Hunziker. Please go ahead.

[Leslie Hunziker:]

Thank you. Good morning, everyone. Before we begin, let me remind you that certain statements made on today’s call contain forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of performance and by their nature are subject to inherent uncertainties. Actual results may differ materially. Any forward-looking information relate on this call speaks only as of this data and the company undertakes no obligation to update that information to reflect change or circumstances. Additional information concerning these statements is contained in the company’s press release regarding its second quarter results issued last night and in the Risk Factors and Forward-Looking Statements section of the company’s 2014 Form 10-K and in the second quarter Form 10-Q quarterly reports. Copies of these filings are available from the SEC and on the Hertz’s website. You should all have our press release and associated financial information. We have also provided slides to accompany this conference call that can be access on the IR page of our website. Today, we'll use certain non-GAAP financial measures, all of which are reconciled with GAAP numbers in our press release and at the back of the slide presentation, both of which are posted on the website. We believe that our profitability and performance is better demonstrated using these non-GAAP metrics. Our call today focuses on Hertz Global Holdings Incorporated, the publicly-traded company. Results for the Hertz Corporation differ only slightly, as explained in our press release. With regard to our IR calendar, we'll be hosting our Investor Day on November 17th in New York and look forward to seeing all of you there. This morning, in addition to John Tague, Hertz's CEO; and Tom Kennedy, our Chief Financial Officer; on the call, we have Larry Silber, CEO of Hertz Equipment Rental Corporation. Larry will be on-hand for the Q&A session. Now, I will turn the call over to John.

[John Tague:]

Thanks, Leslie. Good morning, everyone, and thanks for joining us. Performance in the quarter continued to reflect some of the execution challenges we’ve faced over the last few years. However, it also represented progress. The performance plan we have set in motion is beginning to take hold and early results give us the confidence that we are clearly moving in the right direction. In fact, I believe we are seeing evidence of an inflection point. In U.S. Rental Car fleet management is certainly one of the areas of greatest focus as we drive to improve operations. The quarter demonstrated the progress we are making and that we are well-positioned for the back half of the year. Importantly, we have largely completed our fleet transition, successfully bringing on over 125,000 cars in the quarter, while disposing of nearly an equal amount. This was accomplished with a high level of operational efficiency and with strong financial performance overall. In particular, in our alternative distribution channels, these factors allowed the company to maintain flat monthly depreciation per unit, while appreciably improving fleet condition and reducing risk through a higher mix of program cars. The results of these efforts positioned us well as we enter the back half of the year with the fleet condition meeting our objectives and capacity sized profitably. As we bring the fleet transition to a close and right-size our capacity, we are beginning to see expected improvements in utilization. We are also beginning to see the early results of improved revenue execution, with more reliable data and reporting capabilities. This combined with a more consistent performance management process, as well as strengthened team, which provides a good mix of new and existing talent are part of our broad based efforts to support our revenue execution. The company’s improvement initiatives are beginning to reverse the negative performance trends in the U.S. Rental Car operations. In fact, we saw the momentum shift to flat margins year-over-year and RPD flat as well, and we are seeing early indications in the third quarter of significantly improved fleet utilization, modest growth in revenue, importantly, driven principally by on-airport strength. So things are moving in the right direction. Across the company leaders are embracing the broad performance improving agenda, centered around the basic proposition that if we are to achieve our full potential, we must first simply rent cars better than anybody else. The path to truly realize that objective will create significant improvement in our financial and operating performance. Our ambition around this core belief is not limited to our U.S. operations. On the international front, while quarterly operating results were skewed by one-time legal accrual, our rental car operations overseas are making substantial improvements when you look at core revenue, transaction days and fleet efficiency. Total RPD was unchanged year-over-year due to a shift in a mix of volume to our value brands. We are encouraged by the international results year-to-date and have equally ambitious plans to drive performance improvement in the coming quarters. HERC, an Equipment Rental, HERC, like other participants in the sector has been negatively impacted by continued weakness in upstream oil and gas markets, and the transitory affects of the company and the industry, we deploying equipment away from this sector. Despite the challenging energy markets we are encouraged by the company’s performance in other sectors. In fact, excluding energy, world-wide HERC is gaining traction in its efforts to participate in industry growth levels as you saw in the second quarter 6% revenue growth and 1% price improvement, both on the constant currency basis again in the X energy or X upstream markets more specifically. While it will take time to offset the higher margin contribution of our energy business, we have other levers to close that gap and we are in the early stages of driving those initiatives. As you know, the consolidated company has an annualized cost efficiency target of $300 million, of which we expected to delivery $200 million this year. While most of the first six months was spent identifying initial opportunities, we have already realized $80 million in savings through June 30th as a result of variety of early actions. The balance will be achieved between now and the end of year as we capitalize on the momentum we have built. As we previously indicated, our aspiration and expectation to move beyond the $300 million and as we firmed that objective we will be communicating that with you in the future. Now, let me turn the call over to Tom, who will talk about some of the specific cost actions we are taking and walk through some high level drivers of our second quarter results. Tom?

[Tom Kennedy:]

Thanks, John, and good morning, everybody. This morning I’d like to provide you an overview of our second quarter financial results and give some additional color on the key drivers to the performance we have reported. While the second quarter results did not compare favorably versus the first quarter of 2014, there are line whether internal expectations and our consistent with our position that this was a transition quarter for what is a transition year for the company. We believe we have made significant strides to address some of our key issues as we exited the quarter, including renewing the U.S. RAC fleet, stabilizing the revenue management execution capabilities, aligning vehicle supply more closely with demand and gaining traction on our cost transformation agenda. While we are not at all satisfied with our results, the quarter reflects the fact that these efforts are starting to show sequential improvements and we believe will position us well for a continued improvement in the second half of 2015. So turning to the results, for the second quarter the company reported a consolidated GAAP net income of $23 million or $0.05 per diluted share and adjusted net income of $88 million or $0.19 per diluted share. Corporate EBITDA declined 15% to $379 million, which resulted in a corporate EBITDA margin of 14%. Total revenues for the company declined 5% versus prior year to $2.7 million. Excluding the negative currency effects, total revenue declined 1% versus prior year and it was driven primarily by lower transaction days in U.S. RAC segment, low ancillary fuel pricing in both the U.S. and International RAC segments, and the impact of the weakness in the upstream oil and gas markets in HERC business segment. These areas of decline were partially offset by a 4% growth international RAC transaction days. On the cost side, total direct operating and SG&A expense as a percentage of revenue increased 120 basis points to 67%. This resulted from a $31 million increase in SG&A expense, which was partially due to an increase in cost associated with accounting restatement, investigation remediation activities, HERC separation cost, a legal reserve and associate cost as a result of a termination of a contract and other consulting spending in support of the company’s transformation initiatives, partially offset by favorable foreign currency translation on expenses. The higher SG&A was partially offset by 6% lower direct operating costs due to the decline in fuel expense, reductions in personnel resulted from the U.S. off-airport location closures and the ongoing cost benefit from freezing our U.S. RAC and HERC defined benefit pension plans, and a termination of our supplemental executive retirement program. Worldwide rental car fleet cost improved year-over-year from a stronger than expected residual values and lower interest expense. With that context and the company's overall performance for the quarter, I’d like to now provide you some additional commentary regarding each of our reportable segments. Turning to U.S. RAC, total revenue -- total rental car revenue declined 3% versus last year to $1.6 billion. The decline in revenue was a result of a $240 basis point decline in transaction days and an 80 basis point decline in total RPD. If one excludes the impact of lower fuel prices and ancillary revenue per day, total RPD was flat year-over-year for the quarter. Approximately, half the decline U.S. RAC transaction days was a result of off-airport location closures and other intended business rationalization. In our on-airport business, we saw total RPD declined approximately 50 basis points over the prior year, with a decline in the HERC brand RPD partially offset by an increase in Dollar, Thrifty pricing. Excluding the impact of lower fuel prices on ancillary products, U.S. RAC airport RPD was up 50 basis points for the quarter. Airport transaction days were down 240 basis points year-over-year. In our off-airport business, excluding ancillary fuel, total RPD declined approximately 150 basis points during the quarter due to a shift in customer mix towards discount insurance replacement business. Volume was also downturn 250 basis points driven by our previously announced closure of 200 off-airport rental locations. Looking now at the bottomline, U.S. Rental Car adjusted pre-tax income of $174 million was down 5% versus prior year and corporate EBITDA of $203 million was down 8%. Improved direct operating spent as a percentage of sales was more than offset by lower revenue and higher absolute vehicle depreciation expense due to larger fleet. From an operational perspective, we experience a 400 basis point decline in fleet efficiency to 75% as we continued our fleet renewal program throughout the quarter and work to align supply and demand. A bright spot during the quarter was excellent execution by our team on our fleet renewal initiative and the corresponding fleet disposition process. During the second quarter, we deleted roughly 120,000 total vehicles, which is more than two times the number of cars we deleted in the same period last year and a record quarter for the company. This effort was further aided by the fact that the residual values remained strong for the rental industry during this period. Additionally, we double the number of vehicles sold or deleted through our alternative marketing channels versus the second quarter of last year, which on average result on higher net returns that had a favorable impact on net depreciation expense. As you can see the evidence of great work that the team accomplished during the quarter translated to the monthly depreciation unit rates of $259 for the second quarter and $273 for the first six of the year, which coincidentally both were flat versus prior year. With that in mind, let me take a second and give you the context of our full year 2015 guidance of $295 to $305 per unit per month and the math I anticipate many of you will do. Given the fact that we still six months left in the year, we feel it makes sense to take a conservative approach as you look at our full year net depreciation estimate given the couple of big variables to remain. First, the 2016 fleet buy has not yet been completed, and therefore the purchase price of new vehicles, some of which we will bring in the third and fourth quarters is only an estimate at this point. And secondly, and perhaps more importantly, third-party residual value forecasts are pointing to continued moderation in the back half and into next year. As a result of the uncertainty around both fleet acquisition costs and residual values, our depreciating guidance may reflect some conservatism. Turning to international, our international rental car operation was another highlight for the quarter with total revenue up 4%, excluding currency. Transaction days grew 4%. RPD was flat on a constant currency basis as mix of volume in Europe, our largest market shifted towards the Thrifty and Firefly value brands. On the operational front, fleet efficiency of 79% improved 200 basis points versus prior year. Looking at the net result, International Car Rental adjusted pretax income and corporate EBITDA were both down 21% year-over-year. However, if you exclude the impact of legal reserve and other related one-time write-offs taken during the quarter, year-over-year results were flat on a constant currency basis, driven primarily by lower net depreciation expense. Turning to HERC, HERC total revenues worldwide declined 2% to $375 million, or increased 1% on a constant currency basis. And our North American business second quarter equipment rental total revenue declined 1% year-over-year to $352 million. Excluding unfavorable currency impact, revenue was up 1%. This topline revenue growth resulted from incremental new accounts, predominantly driven by small contractors in the construction sectors, recent expansion efforts into specialty and niche markets to help diversify our customer base. These gains were partially offset by the headwinds from upstream oil and gas. For some additional context on how the HERC business was impacted by lower energy prices, upstream oil and gas revenue represented roughly 11% of North America equipment rental and rental-related revenue in the second quarter of 2015 on a constant currency basis. Upstream rental and rental-related revenue was down roughly 30% year-over-year, excluding currency effects, as major oil producers reduced spending. This was predominantly reflected in the volume weakness, although upstream pricing was down 3% in the quarter. In contrast, all-in our North American rental and rental-related revenue increased 6% with pricing up 2%, excluding currency effects. A key priority for improving revenue has been to expand and diversify with local customer base. Our progress is evident in a 300 basis point improvement in the local business as a percentage of revenue, bringing International Car exposure in North America down to 51% of total revenue from 54% in the second quarter of last year. Moving on, another way we're addressing revenue growth is by reorganizing the sales force to decentralize the reporting structure for better field accountability, more focused asset management, and improved customer service. The reorganization was undertaken last quarter. In the second quarter, corporate EBITDA was $147 million for the Worldwide Equipment Rental, a decrease of $19 million over the prior year period. Of the total decline, we estimate weakness in upstream oil and gas markets alone represent in excess of 20 million with the rest of the business recording a slight improvement. North American time utilization was 63% and dollar utilization was 35%. Improving utilization is another priority for us. We have increased our investment in fleet maintenance to reduce out-of-service assets and have cut our original net fleet CapEx plan by approximately 10% and it’s facing upstream oil and gas weakness. We now expect full year 2015 net fleet CapEx for HERC to be between $410 million and $430 million, compared with $433 million in 2014. On a positive note residual values remain strong related to our disposals. We are also addressing our store footprint for more efficient equipment sharing and we're working to increase our specialty mix of equipment, which will drive higher dollar utilization and provide entry into new markets. We recently added Chief Operating Officer, Bruce Dressel, who has extensive experience in specialty businesses and branch expansion, which will really impact the diversification in these new markets. For the full year, we still expect corporate EBITDA to be in the range of $575 million to $625 million having already incorporated the second quarter weakness in our guidance. Under Larry Silber’s leadership, the equipment rental business is focused on improving a fleet maintenance and product mix and quality by focusing on topline revenue growth through new accounts, customer diversification, and strategic specialty market opportunities. Moving on to interest expense, consolidated GAAP interest expense for the second quarter was $156 million reflecting an $8 million decrease compared to the same period in 2014. Adjusted interest expense declined $11 million versus prior year, primarily due to favorable foreign currency translation and lower US fleet debt rates, which more than offset higher US fleet debt levels. We expect this favorability will reverse as we execute capital market transactions to term out a significant portion of our US ABS fleet debt. In terms of taxes, the company expects its full year effective rate to be 37%. Adjustments to GAAP net income to yield the adjusted net income results for 2014 and 2015 are tax effective at 37%, the company’s forecasted effective tax rate. Turning to cash flow, free cash flow for the first six months of 2015 was negative $30 million. Cash flow from operations, excluding the fleet depreciation add-back was an $84 million source of cash and the net investment in our fleet growth and non-fleet CapEx is a $114 million use of cash. The components of our net investment were as follows. Net non-fleet capital expenditures totaled $123 million, including $37 million spent in our new corporate headquarters building, which is scheduled to be completed in late November. The investment in a net HERC fleet growth of $101 million in the first six months reflects timing of capital spending in the year. RAC fleet growth of a $110 million source of cash was an improvement in the US fleet debt advance rates more than offset by the increase in net fleet CapEx associated with our fleet refresh strategy. On a year-over-year basis, free cash flow increased by $659 million, driven by improvements in RAC fleet growth associated with higher overall advanced rates and the avoidance of certain inefficiencies that existed last year because of a late filing status. Turning to debt, we had nearly $1.6 billion of corporate liquidity available as outlined on slide 17 of the presentation Our net corporate debt leverage ratio was 4.9 times, up from last year’s 3.6 times. Although by year end, we expect 2015 ratio to be lower than 2014’s year end level of 4.4 times. For the balance of the year, we anticipate executing one or more term ABS transaction in the US, refinancing our Canadian, Australian securitization platforms, and issuing additional European fleet notes. Depending on market conditions and the timing of the completion of the pro forma financial statement that would reflect the HERC spend transaction we also may consider refinancing some of our callable bonds. With that, I'll turn it back to John.

[John Tague:]

Thanks, Tom. As the release indicates we are reaffirming our corporate EBITDA guidance of $1.45 billion to $1.55 billion. Clearly given the underperformance of the company, particularly in the first half of the year, the opportunity we see in front of us, this is result by no means represents our full potential. In fact, we're in the early innings of our transformation and expect to see significant improvement in 2016, followed by a multiyear agenda of continued performance improvement. We will have a more comprehensive review of the third quarter in early November and we’re looking forward to an even deeper dive during the company's Investor Day later that month. With that, Dan, let’s go ahead and open up call for questions.

[Operator:]

[Operator Instructions] And we do have a question from Chris Agnew from MCM Partners (sic) [MKM Partners]. Please go ahead.

[Chris Agnew:]

Hi. Good morning. Thanks very much. First question, just with the fleet transition this year, do you fewer risk cars at sell through the end of the year and essentially how far through the risk disposals for 2015 are?

[John Tague:]

Chris, thank you. We disposed a significant amount of risk cars. We still have more to come. I would say a disproportion share clearly was done in the first half of the year. I think our guidance reflects the assumption will have some additional risks with some potential exposure to residuals in the second half conservatively. But we completed substantial number of risks fleets during the first half of the year.

[Chris Agnew:]

Got you. And then if I can ask on volume headwinds you saw in the quarter, should we expect those to continue through the second half and maybe if you could break those down into different headwinds and maybe touch on what your approach to opaque channelize this year and how maybe that impacted in the second quarter? Thanks.

[John Tague:]

Yes. I think as we have indicated in the third quarter, we expect a US RAC revenue to be up year-over-year, that’s likely to be, though not certain, likely to be a balance of rate and the volume. It’s particularly supported by on-airport growth and we could see a flat to modest decline in off-airport. So I think it's a very different picture than we have in the second quarter. So I don't really think the second quarter is necessarily terribly instructive. I would say that some of the volume issues were self-inflicted, as we reach for a level of rate and dollar Thrifty that frankly turned out not to be supportable and continue to deal with some execution issues that we have resolved. Our issue on opaque is really based on the rate in opaque. We will sell opaque when we think the rate is an attractive option versus the alternative. I think in the second quarter I'm not sure what that was year-over-year. I think it was somewhat down and I don’t really -- and not really currently in a position to communicate an expectation in the third. But again, if we like the rate relative to alternatives, we will sell an opaque.

[Chris Agnew:]

Excellent.

[Operator:]

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

[Rich Kwas:]

Hi. Good morning. Just a question on what you’re seeing pricing-wise here? And here in the third quarter, given the move that you made back in June with a rate increase both weekly and daily, the acceptance rate around that seems to be mix. And just want to get a sense for how you're seeing great play on the third quarter? And then I have a follow-up on HERC. Thanks.

[John Tague:]

Yes. I think obviously the acceptance rate was or in effect, the competitive batch was weak. I continue to draw folks' attention too. Our objective is to drive realized rate improvement over time, really ultimately it’s reflected in revenue per available car day. So we get both the rate and the volume equation and how we talk about revenue efficiency. And when you look at that, the published pricing is really a small component of what is going to drive that outcome, and frankly probably the least likely component to yield to simplistic increases. I've always felt that base price was the most difficult. So one of the significant opportunities we have is to work against that sort of declining yield curve that exists in the industry. I don't expect it to be an airline or hotel curve. And I think particularly in the last year and a half, the curve hasn’t even really look like it previously look like in this industry with the degradation as you come towards pickup day being significant. So that’s an opportunity that we have internally around how we execute going forward. Ancillary sales and new products I think are going to be a big opportunity against realized revenue. We’re going to be frustrated with our progress in that regard because our systems are sort of inflexible. And it’s going to take longer than we would like to move that needle. Sales, effectiveness and value-based selling to the corporate market, I would say particularly around features and consequences as opposed to necessarily abate or sway other areas of opportunity. So I think that we would all be well served. I appreciate the validity and the insights of the pricing surveys that would all be well served to sort of compartmentalize those as really as small part of the story and probably telling a story that -- around the data that’s least likely to yield to improvement over the next few years. So I don’t want to suggest to you that we’re well on our way to realizing our realized revenue improvement objectives. But the story is much bigger than the pricing surveys and it will continue to be so.

[Rich Kwas:]

Okay. And then just shorter term, are you seeing a little bit of lift on price here on a year-over-year basis on the last year side of things?

[John Tague:]

I think we’re seeing what we would expect to see given the seasonality between the second and the third quarter and obviously tightening up our fleet. But as we’ve said, we expect U.S. RAC revenue to be up year-over-year through the mix of rate and volume.

[Rich Kwas:]

Okay. And then just a follow-up, I guess, this is more targeted at Larry with seeing the progress on the oil and gas piece, with some lower percentage of the HERC revenue based but with oil continuing to decline here into the low 40s, is the cost structure right size for a $40 to $45 barrel level or is there more work to be done there?

[Larry Silber:]

Well, look we believe at the moment, we are right size for the market conditions that exist today. We’re focused on really operational efficiency and operational improvements around the fleet, making sure the fleet is available for rent, making sure we have the right fleet available for our customer base. And we believe at this time, we’ve moved the product appropriately and our fleet appropriately around so that we are prepared for the current levels that exist in the market.

[Rich Kwas:]

Okay. Thank you.

[Operator:]

And we have a question from Anj Singh with Credit Suisse. Please go ahead.

[Anj Singh:]

Hi. Good morning. Thanks for taking my questions. I was hoping you could talk a bit more about your systems integration. Last call you mentioned, you had rented integration pilot in Dallas. Have you rent any pilots since that location? And if you could talk a bit about what you’re seeing in the locations that you have integrated, are you seeing any benefits in volume, pricing, cost or customer service and do you still expect to be done by the year end?

[John Tague:]

First of all, those pilots are in complete cutovers. There is only a portion of the location volume flows through that system as we work through in a fact, testing all of the potential transaction parameters. And they continue to go well. With these things, you sort of expect some bumps along the road but I don’t see any of those being unmanageable. And we do expect to conclude by year end beginning to phase in real cutovers later in the summer or late fall. Relative to the rest of the systems, we did cut over substantial amount of the accounting from Dollar, Thrifty in July. That went quite well. So we are encouraged by that. So right now, all systems go, we expect to conclude the systems integration by the end of the year. I think it will be a few months into next year before we’re able to decommission the systems because we’ll likely run with a side-by-side capability for a period of time but it’s on track.

[Anj Singh:]

Okay. Got it. Thank you. And as a follow-up, I realize your fleet buy negotiations aren’t complete yet but we’ve heard a competitor discuss how program cars are becoming slightly less attractive in their negotiations. Wondering if you have a sense of what your program and risk mix may look like for next year at this stage? And also if you could give us a sense of how your discussions with OEMs maybe fairing? Thanks.

[John Tague:]

Well, I think obviously as OEM negotiations are continuing, we are not prepared to discuss the details. Tom and I just sat down a few months ago. I just like to set the context for what we’re seeking and will have Tom talk about the specifics. We’re not necessarily seeking the lowest fleet deepen any calendar year period because if we were to do that, we would succumb to a higher risk position and we believe is responsible. So consequently even if the numbers suggest, we should go high on the risk curve based upon the program car offering. We are going to be balanced in that outcome. Tom can talk more specifically.

[Tom Kennedy:]

Yeah. So last year, our fleet buy was split from all year ‘15 in approximately 50-50 risk and program. And as I think I have articulated folks previously the economics were I think most closely aligned in their offerings. This year, we are seeing as you probably heard from other competitor some pressure on program pricing related to domestics. And we’re evaluating how that overall program mix might change by keeping kind of a balance between having good economics but also as John alluded to not being irresponsible on moving too much too risk or too much the program. So we can’t yet tell you what our program risk mix will be or the economics but it’s likely to be more risk than the 50-50 spilled last year but not to the -- where the company was a few years ago, where they were at 95% risk. So we’re going to be -- continue to be kind of balanced and iterate our fleet plan as a multi-variable kind of solution set. We sell for -- we sell for not only the economics of the program and mix but what we think from a program standpoint that provides us the flexibility for adds and deletes during the course of the seasonal nature of the business. It also is reflective of as you have more program mix, it allows you turn your cars more frequently and keeps the renewal of your fleet there. So there is lot of factors that go into our ultimate decision making. The economics of the overall buy is one of multi-variable that we are concluding on. So it’s a process we’re in. We are deep into right now and I think we probably have some more color when we come out for the third quarter.

[Anj Singh:]

Okay. Got it. Appreciate the thoughts. Thank you.

[Operator:]

Our next question comes from Michael Millman from Millman Research. Please go ahead.

[Michael Millman:]

Thank you. Could you talk about how much the State Farm deals and other IR contracts are losing, if the fact, losing and what can you do about it?

[John Tague:]

Could I just say no Michael? No, I’m stuck. Well, I think there is no secret to this. The IR business stands to come in at lower RPD but it has certain beneficial characteristics as well. All I can tell you about some of the controversial IR contracts, the company entered into over the last few years is we can clearly improve them but we are committed to the IR market and if we were to “exit these,” I wouldn’t exactly be redoing my guidance. So I think their impact has been overplayed. I don't underplay the tumultuous sequence of events it caused at the company. That was very, very significant in 2014. But I can't get all that back and make the decision differently than what it was made. I have to evaluate that has some cost and where are we today and where are we today, we’re not in a place, I would like to be. But we’re not in a place that causes us to question our participation in the sector and we’ll move to improve those economics over time.

[Michael Millman:]

Okay. Thank you. Second question, it’s actually about DTAG. Can you compare how the DTAG business is doing today versus what it was as an independent company?

[John Tague:]

We haven’t disclosed that. I think intuitively it’s fair to reflect that we’ve had some issues in capturing improving value with DTAG. I think to a certain extent we fell into the trap that you can fall into in some of these acquisitions. And that sort of reforming the acquired entity in a vision you had for it as opposed to how it went to market. And I think from one perspective, you can say how difficult can this be, we’re just merging to rental car companies. Well, I think we know it can be a lot more difficult than that. It was the referred company’s first entry into a multi-brand strategy. I think the way in which DTAG went to market was appreciably different from the way Hertz went to market. I think that DTAG was a clearly a value brand that participated across all the segments including business travelers, particularly those that were not operating under corporate contracts. And to a certain extent, I think we could be self critical in sort of refocusing more as a weekend leisure brand than it was appropriate. So now we have to restore real value brand proposition there. And I think enhance the deliverable product there not through necessarily significant investment but through cleaning up our stores, improving our execution. Again they were negatively impacted by our decisions to age fleet over 2013, 2014, which even within their comparative set presented challenges. So I think we are in a less desirable place than we would like to be. But I think we know how to fix that. And we are undertaking that work aggressively now.

[Tom Kennedy:]

And I would add, I think, when you look back at the history, the company as an independent Dollar in my last industry was the leader in international [down tour] [ph] and we kind of lost our way and that’s an important segment of the business. And when I was at Vanguard, Alamo was a distant second. And I think Alamo has done and Enterprise has done a good job of expanding their presence in international [down tour] [ph] in Dollars, we’ve seen in some of their markets. So there is an area, as John said, where as the brands could stand and we do stand for things for certain segments. And Dollar itself was one of the leaders in international [down tour] [ph] that is a segment that we obviously are going to be very focused on, recapturing some of that lost business.

[Operator:]

Our next question comes from Chris Woronka from Deutsche Bank.

[Chris Woronka:]

Good morning guys. Just hoping you could, I know the fleet plans are not done yet but maybe some directional thoughts on what you think in terms of fleet size growth for next year?

[John Tague:]

You said they are not done. I think as I have indicated before, we have a significant opportunity to grow transactions even if we were not to grow fleet because of the utilization improvement opportunity we have which is impart, enabled by simply getting the fleet transition which was a massive operational project for us, behind us. And also we’re doing a lot of improvement work, particularly on the supply chain and the support maintenance spend in car days and working our way to trying to compress supply chain spend and its effect on capacity. So we expect quite a big opportunity in utilization improvement. And I think we have to lock down whether we’re really going to be there before we’re in a position to determine overall fleet levels.

[Chris Woronka:]

Okay. And then just on the stock buybacks, I think you mentioned last quarter, you might -- you could start going to market when this 10-Q has been filed. Is that still, is that still relevant and do you expect to be active, buying back stock in the second half?

[John Tague:]

Our window is closed until this Thursday. I think as we’ve said we will continue to be opportunistic and I pursue that. I think you saw the liquidity that Tom moved forward to so. Some have suggested where is the capacity, I think you see the capacity right there and we’ll move forward in a prudent manner.

[Chris Woronka:]

Okay. Very good. Thanks.

[Operator:]

We have a question from John Healy from Northeast Research (sic) [Northcoast Research]

[John Healy:]

John or Tom, I want to ask a little bit more about fleet cost. As you look to 2016, is there at least a way you can help us think about kind of the movements in the purchase price and in the movements in the residual values, at least, you’re thinking about I guess from a like-to-like basis, maybe what a 2016 model year, vehicle looks like on risk car purchase versus ‘15 and maybe what you are initially thinking for the movements to be and the changes in the residual value offline?

[John Tague:]

Yes, sir, there is a way we can help you think about it. That will be on November 17th when we give you our 2016 guidance. Between now and then while we’re in negotiations, we’re just not comfortable putting together data points until we conclude that.

[John Healy:]

Fair enough. I guess I also want to ask as on the update you provided a few weeks ago there was a lot of talk about improvements in the service offerings and not going to battle with cars but going to battle with service. I was hoping maybe you could provide a little bit more color on what you’re doing there, maybe some changes in the field, some milestones we can expect, anything you could provide there?

[John Tague:]

Yeah. I hate keep deferring till November but most of that is still sort of in work. We are piling a few things that we’ll see how those go but we’ll be more descriptive about that. And I think, look, I mean Hertz has long been recognized as the premium brand within the industry. And we tested that brand proposition by diminishing the deliverable around what is more important than anything else the condition of the car. So we’ve clean that up but obviously, we’re not going to see that while we’re getting a very strong customer satisfaction year-over-year and frankly, at two year highs, all of our customers don’t have a ubiquitous understanding of the fleet having been transformed. So I think you’ll see continue traction month-to-month with a way customers are feeling about the brand as we evidence that in the cars that they are driving and that certainly the biggest thing we can do. We’re continuing to work condition down, in some cases below i.e. better than we’ve operated traditionally in the past. So that continues to be a lever we’re going to look at. So I think people are predisposed towards the willingness to place this brand there. We call that willingness into question. We’re going to have to frankly over correct in how we deliver service against that premium brand to bring that perspective back in the balance. And we’ll discuss that in more detail in November.

[John Healy:]

Great. And just with that, I mean are you able to do that without a meaningful change in the cost structure of those Hertz airport locations do you think?

[John Tague:]

Well, it’s the interesting thing in this business as you know the concentration in customer density and the small -- on airport number one and then relatively small number of locations on airport is pretty significant. So that’s been one of the encouraging thing I’ve seen in the model as I think we can make a difference on service with a responsible level of investment.

[John Healy:]

Thank you.

[Operator:]

We have a question from Kevin Milota from JPMorgan.

[Kevin Milota:]

Hey, good morning everyone. Was anyone going to give us an update on the cost reduction program obviously, the $200 million this year, $300 million next year. Would it be possible to give us a more granular view of what buckets you’re looking for in those aggregate numbers? And also on the net fleet CapEx side of things, Tom, I missed the numbers, was it 410 to 430? And was that only for HERC or could you give us a breakdown for what it looks like on the RAC side as well? Thank you.

[Tom Kennedy:]

Yeah. So let me start with the latter part of your question. And the net fleet CapEx was for HERC, the 410 to 430 range. The non-fleet CapEx range is consistent with our prior guidance that we’ve provided which is in the 290 -- the 275 to 295 range and off that 275, the 295 may we call it said about $70 million of that number is for the new corporate headquarters this year. So that’s the non-fleet CapEx and HERC fleet CapEx. As it relates to your first part of your question was on the cost savings. A lot of the, Kevin, the initiatives that I spoken to folks are well we would consider kind of the no regrets, kind of, binary decision, so we close the define benefit pension plans which in this supplemental executive retirement plan that drove $18 million of annualized savings. We eliminated significant portion of our aviation, excuse me, and kind of special events that’s $11 million. We reduced some kind of, I think, non-value added kind of sponsorships and things, and that was in the $10 million range. We have the navigations solutions business, which is the parent company that kind of manage the NeverLost System that was never integrated in the business and they had 300 people and three separate headquarter locations, and our whole executive management team that was never integrated in the business that was $16 million. So I can go on and on and give you kind of the areas of -- we had a renegotiated of an IT contract and that was $20 million. So there were big buckets of kind of quick hit binary decisions and that were part of the first $300 million. Some of them obviously got agreed to or executed during the course of the first quarter and second quarter, and that’s why you see $80 million and $200 million and starts to exploring the second half of the year, and that’s why we’ve said, we’ll have $300 million annualized. We aren’t finish to be clear on our cost initiative work. I think I’ve spoken to folks before. We still think there is a significant amount of opportunity in the business to take out cost, some which will take longer to get out through technology enablement and labor kind of capital trade-off. But we have significant amount of labor in the workforce that we think we can improve the quality of service delivery and reduce the delivery cost of that service. We have 1,500 people in the back office, which is quite double what it should be. Our call centers are probably double what they should be. Our IT spend is over $400 million a year and despite getting a quick head of $20 million, we think that could be half. And those -- non of those numbers are included in our $300 million target, plus there will be additional savings for which we’ll validate as party integration DTG and Hertz, which alone you can just take one -- easy one which is decommission of duplicate IT systems, which is a run rate of about a 1 million a month. So once we decommission, as John mentioned, we’ll have some time -- overlap time but once we decommission that that will be $12 million a year. So just -- we view that there is enormous amount of cost agenda that’s directly in our control that is an ability for us to go execute against, which to be clear it does not impair our customer service deliver or quality of product, we deliver and in fact, as John Healy asked, we believe we can invest in the product quality and still self-fund that and do it a very nominal basis to make a significant difference in the customer experience we have with our Hertz and DTI customers.

[John Tague:]

Yeah. I mean, the structural cost reduction opportunity here is very significant and it actually in many cases will improve quality as we take out cost. And importantly, it’s virtually unrepresented in the $300 million.

[Kevin Milota:]

Okay. Great. And you said the RAC fleet CapEx is what for the year?

[Tom Kennedy:]

So…

[Leslie Hunziker:]

We’ve said capacity was going to be around 0.5% t 1.5%.

[Tom Kennedy:]

Yeah. We just said capacity relating April capacity guidance, meeting your full year CapEx guidance on the RAC fleet, but we said, capacity be about a 0.5% to 1.5% for the year.

[Kevin Milota:]

Okay. And dispose…

[John Tague:]

… here in the back half.

[Kevin Milota:]

Yes. Okay. Okay.

[Operator:]

Our next question comes from Brian Johnson from Barclays. Please go ahead.

[Dan Levy:]

Hi. This is Dan Levy on for Brian. Thanks for taking the question. A question on understanding your back half pricing comp, understand that the third quarter of last year you were negatively impacted? I think you had -- you didn’t have enough fleet to service this sort of high rate leisure closing business. You also had mix dilution in the back half from more off-airport business. So can -- want to make the assessment that --now that your fleet is normalized and you’ve -- you’re not going to have that access off-airport business, should your second half comps be on the easier side? Just trying to understand how you view those comps are, and if there is some offset which we should consider?

[John Tague:]

Well, I mean, I think if you look at the sequence of results last year, they’re absolutely easier. Having said that, the first half health is passing over and improving against the easy comp. So I think it’s clearly progressed, but I wouldn’t indicate to you the results are indicative of what we think we could do in next year’s third quarter for example. So it’s a directional improvement, it’s not fully fixed.

[Dan Levy:]

Okay. But there is no big offset against, correct?

[John Tague:]

I don’t think so.

[Dan Levy:]

Okay. And then just a follow-up, I know you guided your fleet growth of up 0.5, up 1.5 this year. And I think your fleet growth in the first half is only up 70 bps. So, is there opportunity to grow fleet even below that back half? That 70 bps I assume is actually with increased fleet purchases. So just trying to understand how we should frame that and whether there is opportunity to come in below that up 0.5 level?

[John Tague:]

One sec. So we expect that the back half will be a modest decline year-over-year. Tom’s calculating your number here, hold on.

[Tom Kennedy:]

Yes. We’re up 70 bps for the first six months is correct. We expect the 0.5 to 1.5 probably in the lower end. It depends upon again the big driver potentially, if some of that fleet growth in the first part of year and lower in the second half of the year. Some of the higher fleet was result of the fleet rotation. So we’re not going to have the high fleet rotation kind of friction going on in the business driving kind of fleet growth. So that’s why there is a possibility it could be lower than that, but we still think the full year kind of 0.5 to 1.5 is in appropriate amount. There could be an opportunity to be higher end of that range depending on demand and it could be at the lower end of the range. It’s always set the range and kind of reconfirmed that range for this guidance again.

[John Tague:]

And if appropriate, we will update that in the third quarter call.

[Dan Levy:]

Your fleet growth is going to be just largely driven on where the volumes comes in, that’s correct?

[John Tague:]

Yes. So I think where the utilization comes in, obviously we’re got improvements to just stick a much higher utilization assumption in the out months, but we want to sort of earn that in every step of the way.

[Dan Levy:]

Okay. Thank you very much.

[John Tague:]

Thank you. I appreciate everyone joining us on the call today. Not a satisfying quarter but we feel very strongly it is evidenced that we are impacting the critical areas of nonperformance of the company. It won’t be fixed, it won’t be done in the third quarter, but it will be a much better story. And we think that we have several quarters in front of us where we can go out improving the basic nonperformance of the company. So with that, we appreciate your support and we’ll talk to you next quarter. Thank you.

[Operator:]

Ladies and gentlemen, that does conclude our conference. We’d like to thank you for your participation and using AT&T Teleconference. You may now disconnect.