Hertz Global Holdings, Inc.
Q4 2015 Earnings Call Transcript

Published: 1 Mar 2016

[Operator:]

Welcome to the Hertz Global Holdings' Fourth Quarter and Full Year 2015 Earnings Call. At this time, all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. I would 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:]

Good morning, everyone. By now, you should all have our press release and associated financial information. We've also provided slides to accompany our conference call that can be accessed on our website. I want to remind you that certain statements made on this call contain forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of performance and, by their nature, are subject to inherent uncertainties. Actual results may differ materially. Any forward-looking information relayed on this call speaks only as of this date, and the company undertakes no obligation to update that information to reflect changed circumstances. Additional information concerning these statements is contained in our earnings press release issued last night and in the Risk Factors and Forward-Looking Statements section of our 2015 Form 10-K. Copies of these filings are available from the SEC, the Hertz website or the company's Investor Relations department. Today, we'll use certain non-GAAP financial measures, all of which are reconciled with GAAP numbers in our press release, which is posted on our website. We believe that our profitability and performance is better demonstrated using these non-GAAP metrics. Our call today focuses on Hertz Global Holdings, Inc., the publicly-traded company. Results for the Hertz Corporation differ only slightly, as explained in our press release. With regard to the IR calendar, next week on March 10th we will be attending the JPMorgan Leisure Conference in Las Vegas, so we hope to see some of you there. This morning, in addition to John Tague, Hertz's CEO; and Tom Kennedy, our Chief Financial Officer; on the call we have Larry Silber, Chief Executive Officer of Hertz Equipment Rental and Jeff Foland, our Chief Revenue Officer will be on hand for Q&A. Now I'll turn the call over to John Tague.

[John Tague:]

Good morning, everyone, and thanks for joining us. We closed 2015 with over 2 points of margin improvement, a very strong cash position and a dramatically improved leverage ratio. We also delivered $230 million in cost savings, the first year in a multiyear cost takeout plan at the company. While we are pursuing to right sizing our U.S. railcar fleet and delivering higher fleet efficiency and significantly improved customer satisfaction. Our international operating performance was especially strong and in equipment rental we put in place new leadership and began to see real traction outside of the oil and gas segment. Overall we are pleased with what we have accomplished, significant strengthening of our foundation and importantly we have established a course for the railcar business to what was objective of 16% to 18% adjusted corporate EBITDA margins in the next three to five years. Our employees' hard work and dedication ensured that we hit our profit targets for 2015. This was accomplished through an intense focus on costs and asset utilization, while at the same time stabilizing our IP infrastructure and reducing the cost footprint associated with it, completed the Dollar and Thrifty systems integration and building much stronger for revenue performance and our customer experience. In the equipment rental business we completed the sale of our assets in France and Spain, enabling Hertz to better focus on its core and specialty market expansion strategy and we filed the Form 10 for the separation of the rental -- car and the equipment rental business which is still on track for completion by mid-year. I know there has been some concern by our ability to get the spin done due to the volatility of the credit markets and performance in the sector, but we have some flexibility with respect to Hertz leverage and Tom will cover that and we believe we remain on track for a spin midyear. We also continue to work on our opportunities in mobility. While the facts indicate a case for rental car versus ride sharing is quite different, we don’t dispute the fact that our customers want more convenience and speed in product and service delivery and we have work underway to significantly enhance our offerings in that area. While the market is focused on risk associated with this emerging trend, we are focused on the opportunities it presents to Hertz. With that I will turn the call over to Tom, who will walk you through the fourth quarter results.

[Tom Kennedy:]

Thank you, John and good morning, everyone. This morning I will begin by covering our fourth quarter and full year 2015 performance and then discuss our 2015 updated guidance. Let me start now this chart of our fourth quarter financial performance. Despite a challenging pricing environment we continue to make progress against our plan to drive steady earnings improvement as evidenced by the roughly 800 basis point expansion versus prior year in the Hertz Global Holdings consolidated adjusted corporate EBITDA margin. In the last three months of the year we eliminated nearly $75 million of excess costs from the business contributing to approximately $230 million cost savings in 2015 exceeding our $200 million target. As a result of improved labor productivity, reduced IT spending and greater process efficiency, fourth quarter GAAP joint operating SG&A expenses declined to 58% of revenue a 290 basis point improvement versus prior year. For the full year DOE and SG&A expenses as a percentage of revenue was 56% a 110 basis point improvement over 2014. World rental car depreciation expense due to small fleet size, better than expected residual values and greater use of higher internal alternative sales channel also contributed to the 220 basis point increase in consolidated adjusted corporate EBITDA margin for the full year 2015. Moving onto the business segment review, since you have all seen the press release and financial tables let me give you some additional color on the division operating results starting with worldwide rental car. As I mentioned last quarter given our intent to separate the car rental and equipment rental businesses in mid-2016, we believe it is helpful to begin discussing rental car performance on a worldwide basis. Of the total $9 billion of worldwide rental car revenue generated in 2015, 70% was from U.S. RAC and 24% came from international RAC and the balance was primarily related to the Donlen leasing business. If one excludes Donlen the split was 75/25 weighted to the U.S. Worldwide rental car adjusted corporate EBITDA margin which we define as Hertz Global Holdings less the HERC segment was 10% for the full year compared with 7% in 2014, as a result of lower direct operating and fleet depreciation expenses. For the fourth quarter worldwide rental car adjusted corporate EBITDA margin was 5%, reversing the prior year's quarter's negative trend. Turning now to U.S. RAC, fourth quarter total revenue declined 5% versus the year of which the decline was roughly split between our on and off airport businesses. Published pricing for the industry was highly competitive across all tiers, putting some significant pressure on RPD, revenue per day, especially late in the quarter. We remain sharply focused on improving how profitably and efficiently we are utilizing our fleet assets as measured by revenue per available car day and fleet efficiency. Revenue per available car day or unit revenue was flat in the fourth quarter over coming a 5% decline in RPD, as we complete -- as we increased lead efficiency by more than 400 basis points year-over-year. We reduced our average fleet size by 5% compared with the same period last year, while simultaneously increasing the availability of the existing rental fleet through cost improvements. While rental improvement efficiency metrics continue their improvement relative to the first half of 2015, achieving one of our midyear 2015 stated goals. Looking at our airport business, total revenue decreased 4% as transaction dates increased 2% and RPD declined 6%. RPD pressure had a more pronounced impact in the market such as Florida and Southern California where industry capacity appeared to be in abundant supply and a large number of regional competitors exist. Despite the overall decline we improved customer segment mix as a result of target sales and revenue management initiatives. Higher yield and inbound volume improved 5% continuing a turnaround from earlier in the year. Leads attracted increased 4% which is partially offset by 2% lower business traffic. Weakness in the business volume was driven primarily by industry travel softness, particularly in the energy sector accounts and by continued execution of our sales effectiveness strategy and in improving the company's portfolio profitability as opposed to just volumes. While our goal is to stop ceding share in the corporate sector, our primary focus is on margin improvement. In the off airport business total revenue declined 9% as volume decreased 4% and RPD decreased 5%. All of volume decline was driven by closure of the unprofitable stores earlier in 2015 and a tightening of debit card usage policies. While these actions accounted for a significant portion of the total U.S. RAC decline in the fourth quarter, they are margin positive over the long-term. On a same-store basis off airport transaction days were flat in the fourth quarter year-over-year. The decline in total RPD off airport was primarily driven by higher mix of lower yielding insurance replacement business. We saw continued strong growth in U.S. RAC ancillary sales an important component of our core potential plan we laid out during investor day last November. Ancillary revenue per transaction day excluding fuel related products increased 6% during the quarter. Looking ahead we continue to make steady progress on improving our revenue execution and systems capabilities as we drive towards our full potential of revenue excellence outlined last November. Among the other initiatives in our multiyear plan we are developing new pricing strategies and surveillance capabilities, taking targeted pricing actions when and where market conditions support them. We are testing and launching new products in the marketplace such as our recent rollout of cap mileage products with Firefly. We are continuing the technology work necessary to collect credit card information upfront the booking process and expect to be functional by midyear for some of our brands. We are continuing to execute on our sales effectiveness programs to improve margins in our corporate portfolio. We're upgrading our e-commerce capabilities driving ancillary revenue growth through better pricing, technology, product presentation and importantly we are taking actions to enhance the rental experience for our most valuable customers. On the costs side U.S. RAC fourth quarter net fleet depreciation per month was $259 per unit reflecting a 26% decrease versus prior year. For the full year 2015, our monthly depreciation cost was $267 per unit a decrease of 9% versus prior year. The fleet management remarketing issues we implemented in late 2014 and through 2015, along with continued strong residuals drove the improvement. As it relates to remarketing initiatives the number of non-programmed vehicles sold through dealer direct and retail channels increased 54% for all of 2015. On the total non-programmed vehicles sold, approximately 67% remarketed through these higher yielding channels in the fourth quarter as compared to 58% for 2015. As I mentioned at our investor day in November we are planning for 2.5 percentage points decline used car residual for 2015. The assumed 2.5% residual decline when combined with an increase of new model year 2016 program cars result in expected increase in our 2016 U.S. RAC monthly depreciation rates to between $290 and $300 per unit. As a result of the higher costs and lower availability to inventory for programmed cars in 2016, our 2016 model year fleet buy is more heavily weighted towards non-programmed vehicles this year. Fourth quarter 2015 adjusted corporate EBITDA margin for U.S. RAC was 5%, reversing 2014's negative performance resulted from significantly higher vehicle depreciation expense and maintenance expense related to the then higher mileage older fleet. The successful fleet refresh in 2015 helped reduce the maintenance expense resulting in a 100 basis point improvement in U.S. RAC direct operating SG&A costs as a percent of revenue in the last quarter. Looking now at the international rental car segment, we generated over 400 basis point improvement in total international RAC adjusted corporate EBITDA margins in 2015 versus 2014. The margin improvement which due to our internal projections was a culmination of a three-year comprehensive restructuring program which included the transformation of our network, accounts, fleet mix and retail distribution channels. During this time we also developed tools to improve the performance of ancillary sales, fleet utilization and revenue management. Other initiatives included centralizing functions, renegotiate labor agreements and broadly rolling out our value brands. The international segment performed well all year in the fourth quarter with no exceptions. Total revenue increased 3% excluding currency supported by improved mix of higher yield and inbound and insurance replacement referral business. Transaction days were flat due to macroeconomic pressure in Brazil and Canada. However European volume increased 2% year-over-year despite the geopolitical events and airline strikes in certain countries during the quarter. Revenue per available car day, our unit revenue increased 2% in the fourth quarter due to higher RPD and stable fleet efficiency. The international segment's fourth quarter adjusted corporate EBITDA margin of 5% increased 500 basis points versus the prior year driven by a 12% reduction in our fleet depreciation costs per unit and a 250 basis point improvement in the segment direct operating SG&A costs with a percentage of revenue. Now I want to give you an update on rental car business. I had like to turn the call over to Larry Silber our CEO of HERC, to provide an update on the Equipment Rental business. Larry?

[Larry Silber:]

Thank you, Tom and good morning everyone. I will start on Slide 17. In the fourth quarter we made significant progress in our previously announced initiatives and are continuing to focus on both short and long-term growth. We have assembled an experienced and savvy senior management team with strong equipment and rental industry experience and are in the process of implementing four major initiatives to enhance revenues and improve utilization. That will include organizational redesign, fleet optimization, operational efficiency and sales force effectiveness. We're pleased to report that we are already seeing progress throughout the organization. However our performance continues to be masked by the impact of the upstream oil and gas markets and by the sale of our operations in France and Spain in October 2015. Despite the declines in upstream oil and gas markets on a constant currency rate basis and excluding France and Spain total worldwide revenue declines was 1% in the fourth quarter and increased 1% for the full year. On Slide 18, in North America, prices declined just under 1% in the fourth quarter and increased about 1% for the full year as a result of significant downward pressure in pricing in upstream oil and gas markets. Volume in North America increased about 1% in the fourth quarter and rose nearly 3% for the full year. As you may recall, last quarter to provide greater transparency regarding the impact of oil, upstream oil and gas markets we broke down our North American rental and rental related revenues with and without major upstream oil and gas markets. As we go forward we believe it makes more sense to share that by market on a worldwide basis as shown in Slide 19 with the fourth quarter and full year performance using constant currency rates. The data on the slide also excludes our operations of France and Spain. During the quarter total revenue excluding upstream oil and gas and France and Spain increased 13% and accounted for 80% of total revenues. However revenues from upstream oil and gas markets which accounted for 20% of the total declined 33%. For the full year to revenue excluding upstream oil and gas markets increased 4% representing 70% of the total -- 77% of the total revenues of the total revenue. Revenues in the upstream oil and gas ranch markets declined 24% for the year and represented 23% of the total. As you can see on Slide 20, we continue to remain focused on controlling costs and optimizing fleet in our upstream oil and gas markets and are carefully monitoring each local branch. We disposed of or redeployed approximately $150 million in assets from upstream oil and gas markets in 2015. More importantly we made great headway in signing up new accounts as our energized organization focused on local horizontal utilization opportunities. New account revenue in North America increased in the fourth quarter by 42%, offsetting the declines in revenues from major upstream oil and gas markets. For the full year new account revenue in North America increased 52%. Local revenue as a percent of the total business increased 330 basis points in the fourth quarter driven by increased penetration and stronger growth in the local markets. We're making good progress in our strategy to diversify our account mix and to reduce our risk and drive better pricing. To better review our operating progress versus prior year, our dollar utilization rates are presented on a constant currency rate basis and exclude results from the operations of France and Spain. As we can see on Slide 21, the fourth quarter dollar utilization rate remained relatively unchanged from the third quarter, almost lower than previous year due to the impact of our upstream oil and gas markets. To adjust to the upstream oil and gas headwinds we reduced 2015 gross fleet spending and introduced new initiatives to improve ROI by increasing the availability of our fleet through dollar maintenance and by investing in specialty gear and higher margin equipment rentals overall. On Slide 22 you can see the rate of improvement in worldwide adjusted corporate EBITDA excluding upstream oil and gas markets, increased in each quarter in 2015 compared to the prior year and accelerated in the fourth quarter. Adjusted corporate EBITDA is reported on a constant currency basis excluding France and Spain. On that basis fourth quarter adjusted corporate EBITDA excluding upstream oil and gas markets increased 21% and is over 300 basis points higher than the fourth quarter in 2014. As reported adjusted corporate EBITDA for HERC was $166 million for the fourth quarter and $610 million for the full year which was in line with our guidance for 2015. Moving to Slide 23, in light of the continuing headwind in our upstream oil and gas markets, we consider it prudent to lower our guidance range for 2016 adjusted corporate EBITDA for HERC to $600 million to $650 million excluding standalone costs of being a public company. We're transforming the company into the new group rentals. We are implementing significant change through new initiatives, adjusting to the headwinds in upstream oil and gas markets to minimize the impact and continuing to invest in growth markets where we are seeing good results. Our overall long term prospects remain positive as industry fundamentals support growth opportunities and continual expansion through 2019. Upstream oil and gas industry spending will likely continue to remain under pressure until we see some stabilization in oil prices. So we carefully manage our fleet and control our costs in those markets. We are investing for future growth and currently expect net capital expenditures to be between $400 million and $425 million for the year of 2016. As John mentioned we are on track to spin HERC midyear. As part of our preparation last week we introduced our new brand and logo at the American Rental Association rental show in Atlanta as seen on Slide 24. We are excited about the opportunity to drive higher returns to shareholders with initiatives to grow revenue and profitability. I look forward to updating you on our progress and to meeting investors and analysts in the very near future. Now I'll turn it back to Tom.

[Tom Kennedy:]

Thank you, Larry. Before I shift to the balance sheet and cash flow update, this is probably a good time to address the concern some investors have raised about our ability to get the HERC separation done in the current market environment. Although capital markets have experienced a high degree of volatility we believe that our goal to spin off our Equipment Rental business even in today's market is very much achievable albeit at perhaps a lower leverage target at 3 to 3.5 times with the original target of 3.5 to 4 times. To the extent the high yield market improves, the low end of the original range mix will be achievable. The leverage level will ultimately be a function of market environment at the time of the spin. Now let me give you an update on the balance sheet and cash flow performance. The company generated free cash flow of $755 million in 2015 representing a $434 million improvement over 2014. This increase primarily was driven by higher earnings, disciplined U.S. fleet capacity growth, improved fleet utilization and higher overall advance rate on the fleet debt. We also continue to be disciplined in our non-fleet capital spending, have invested $31 million in fourth quarter of which $16 million is related to a nonrecurring investment of our new corporate headquarters. For the full year 2015 non-fleet capital spending was 25% lower year-over-year at $212 million and included $72 million for the new headquarters which is now complete. Corporate liquidity of roughly $2.2 billion at year end 2015 reflected the highest levels since 2011. Our strong liquidity position and the fact that outside of the corporate ABL which is supported by the HERC assets we have essentially no corporate debt maturing until 2018. When it comes to capital allocation our strategy has been to balance share repurchases while reducing our leverage position and maintaining ample liquidity. During the quarter we bought back 20.2 million shares of Hertz holding stock for $343 million and at the same time further reduced our net corporate leverage ratio by more than a half turn. In total for the year we repurchased 37 million shares for $605 million. Proceeds of the $236 million from a reduction of our Car Inc. investment along with proceeds from the Hertz France and Spain sale helped more than half the share repurchase last year. Again our priority for capital allocation is to remain balanced. At the current stock price we believe share repurchase a very compelling use of capital. However as always we will need to be balanced in our approach by ensuring we maintain sufficient liquidity, continue on our path to meet our target leverage level in the U.S. RAC by yearend 2015, and then determining the appropriate balance of reinvesting in the business and share repurchase activity. Moving to the capital structure, in the first quarter of 2015, we issued $1 billion of medium term ABS notes despite the volatile capital markets. The issuance was up sized from the original $500 million due to the investor demand. As a reminder this issuance follows the fourth quarter closing of $600 million ABS note offering for the U.S. RAC business and we also extended the maturity by one year of the $3.3 billion of U.S. revolving securitization facilities and our €4 million of securitization. Our primary focus is now on the spin financing activity. For HERC we will need to refinance the existing ABL and to support that with high yield notes. For RAC we are planning to put in place a cash flow revolver front end the bank market and possibly a new term loan. It is anticipated that the distribution from HERC along with the new RAC financings we will use to pay off the existing term loan. But our focus remains in the ultimate RAC leverage target of 3.45 times below by year end 2016. In addition this year we expect to execute normal course fleet debt extension and we will continue to prudently access the ABS term funding market to better balance our U.S. RAC mix of fixed and floating debt. But before I turn the call back to John let me walk you through the adjustments we made to our 2016 preliminary guidance that we gave it to you in our investor day back in November. As you saw we reduced our consolidated adjusted corporate EBITDA forecast by $100 million primarily driven by more conservatism on the top line given the weaker trends in U.S. RAC revenue driven primarily by pricing since the end of November as well as incremental headwinds for HERC revenue as pressure in the upstream oil and gas sector continues. In the U.S. rental car we set our preliminary 2016 guidance estimates based in part on how we expect the 2015 to finish. As the top line weakness accelerated in the late half of the fourth quarter we again reset the basis for the 2016 guidance. That weakness has continued into the first quarter. As such we have now brought our U.S. RAC revenue guidance growth down 10 points to 1.5% to 2.5% growth from 2.5% to 3.5% growth. We have also adjusted fleet capacity. While we still expect airport transaction days to grow in line with GDP forecasts overall growth will be affected by the reduction in volumes of off airport as a result of store closures and changing credit acceptance policies. We are now planning for a decrease in total fleet capacity of 2% to 3% but with volume growth funded by an improved fleet efficiency or utilization. As communicated by us at the investor day meeting in November we expect free cash flow to be $400 million to $500 million that assumes $330 million to $340 million of corporate interest expense, $120 million to $150 million in cash taxes and $200 million to $225 million of consolidated net non-fleet CapEx. The free cash flow is lower than last year's primarily due in part to some improvements we achieved in advance rates in 2015 that are expected to be flat in 2016 and higher cash taxes are either expected to increasing the profitability of certain of our foreign operations and a recognition of deferred gains in certain U.S. states. Non-fleet CapEx was lower than originally forecast as we tightened our business plans since last November's preliminary estimates. In terms of the U.S. rental car monthly depreciation per unit we still expect to be between $290 and $300 per unit based on the new programmed car costs and 2.5% assumed decline of residual values is projected in part by BlackBook a third party automotive forecasting service. We expect to continue to leverage the higher returns from our strong alternative distribution channel to optimally manage fleet sales. As John said, we remain confident of our ability to achieve our long term full potential plan and we are already making significant progress on this year's [$350 million] of cost savings target. Work is being done to reenergize our premium brands and re-launch our value brands and new products and services are in development. With that I will turn it back to John.

[John Tague:]

Thanks, Tom. We recognize that there are concerns in the market around where we might be in the cycle, access to capital and residual value in the U.S. rental car fleet. We are running our business consistent with those potential risks as I think Tom outlined specifically for you. I want to point out that our pursuit of a very tangible 16% to 18% margin for the rental car business has never presumed a tailwind. So we are not surprised by some of the headwinds that we may face in the market and we remain committed to that margin improvement goal with $350 million in additional cost takeout this year. I will point out there is a flip side to the residual values that we have experienced in the market over the last several years. The industry has gone through an environment that provided an unprecedented incentive to up fleet. That has its own consequences. So while Tom pointed out that we are expecting declines in residual values over time we do expect to corresponding decline in capacity plans and an improved pricing environment that we are still optimistic about over the longer term. So we continue to be focused on managing the business in a conservative fashion with strong liquidity, improving leverage ratios, assuring our continued access to capital as we demonstrated in the fourth and first quarter and staying the course in pursuing our plans of a very achievable 16% to 18% margin within the rental car business. That's the right decision and the right path in a strong market or a weak market and we are committed to maintaining that course throughout the next three to five years for Hertz. We truly believe that the sharing economy as it grows presents equal opportunity as well as risk. We will manage both of those and we are very, very ambitious about what our world maybe not only in supporting the industry but in response to the trends of declining car ownership within the U.S. We were after all a 100 years ago almost the first car sharing company. So with that I will turn the call over to questions.

[Operator:]

[Operator Instructions]. First question is from the line of Afua Ahwoi, Goldman Sachs. Please go ahead.

[Afua Ahwoi:]

Hi. Good morning. Just a few questions from my end. First of all, as you think about your capacity guidance for 2015, is there any concern that as you look to shrink your fleet, and your peers are not doing the same, is there any concerns about share loss on that front? And then given that shrinking fleet, maybe given pricing year-to-date is weak, what are your expectations for the back half, so basically embedded in your 1.5 to 2.5 revenue guidance, what's the volume pricing split if you can share that please?

[John Tague:]

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

[Tom Kennedy:]

As you know we don’t give separate guidance for rate and volume. I think it implied with the weakness that we saw in the last part of the fourth quarter continue into the first quarter and with the rising fleet costs our expectation is there will be some improvement in pricing in the latter part of the year but we don’t break out separate rate and volume guidance.

[Afua Ahwoi:]

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

[Tom Kennedy:]

Well our assumption is 2.5% and that roughly if you can see between that and non-program cars, is that the impact rose before out other initiatives to help improve fleet costs, resulting in about $150 million to $160 million increase in fleet depreciation overall on the total business. So I think the sensitivity of that 1 percentage point is roughly is $70 million to $80 million on an annualized basis across the fleet. So it gives you kind of the sensitivity but it gives you those two data points you can work with.

[Operator:]

The next question is from the line of Christopher Agnew, MKM Partners. Please go ahead.

[Christopher Agnew:]

Thanks, very much. Good morning. Wonder if you could share a little more color on what you saw in Florida and California in the quarter, and is it possible to quantify the impact to overall pricing volume, and maybe was this more of a demand, i.e., weaker international inbound, or was there any change in competitive positioning of regional competitors, their ability to access markets or maybe new entrants having a greater impact? Thank you.

[Jeff Foland:]

Chris this is Jeff Foland. Thanks for the question. As Tom had mentioned in the prepared comments earlier and as you point out there is a more pointed net impact in some of these heavily leisure markets such as South Pacific and Florida. It is difficult to pinpoint exactly the reason for that. We have also got a very large number of competitors in those markets. Inbound volume actually held up reasonably well but the pricing environment tends to be more severely impacted in those markets.

[Christopher Agnew:]

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

[Tom Kennedy:]

Yes, Chris we didn’t break that out specifically. I think we gave you some information that would help from a triangulate around the answer about net fleet CapEx. We also taken on the slide presentation provided a non-fleet CapEx, how much we have assumed to be HERC. Then you have the HERC earnings, clearly the free cash flow is going to change relative to the capital structure of those companies. So, we will obviously be providing kind of an update post spin for both companies. I am sure Larry will provide with his team, his own view. At that point in time, separate independent public company will update ours in the result if there was any change but, just to provide an overall view and you can kind of get some of the data points to try to come up with an estimate. Only as of current Hertz configuration as to what the free cash flow for HERC is.

[Operator:]

Our next question is from the line of Michael Millman from Millman Research. Please go ahead.

[Michael Millman:]

Thank you. On cost price, we -- the investment community hear about an announcement to price increases, so the question is, what seems to happened, why don't they seem to have been implemented? Also related to that, we hear that there is a partner programs that is your AAA has been a detriment to raising prices and maybe you can talk about that as well? And then in the first quarter, we have a very early Easter but it doesn't seem like you are suggesting that that's going to have much impact and maybe you can speak about that as well? Thank you.

[John Tague:]

As you know, all the industry participants have taken actions to improve price over the last several months. Clearly, seasonally this is the most difficult time of year to realize the price increase given the fleet circumstances. We remain optimistic that as fleets tighten over the spring and summer that we'll see an improvement in price. As you point out there are a lot of non published channels available at the end of the industry that have an equal import on price but I think generally the trend is positive but struggling to realize that given the seasonality. With respect to the second part of your question on insurance replacement business in the off airport channel, look we're very focused on margin improvement in that part of our business. In fact we on 16 of 16 insurance replacement accounts that came up for renewal in 2015, we had improved terms in terms of pricing for that business. When we refer to a mix issue in the off airport business has more to do with self pay replacement business versus insurance replacement business. With respect to the third component of your question and the Eastern holiday and peaks and combinations with spring break this year, we're working very hard to ensure that we position our pricing structures in our products, in a way that we can yield up to the maximum point possible and we feel reasonably good about how our position is doing [better] as we go forward.

[Operator:]

Thank you. Next question is from the line of Anj Singh, Credit Suisse. Please go ahead.

[Anj Singh:]

Good morning. Thanks for taking my questions. First off, I just wanted to get a sense of what your fleet levels may look like on airport versus off airport? I'm trying to understand the drivers of your fleet capacity cut since November, it seems most of the change in your EBITDA guidance for RAC its pricing driven but then you're also cutting fleet growth. So if you can just help us to understand, what's changing that outlook for fleet capacity? Thanks

[Tom Kennedy:]

Yes, I would say, we don't breakout separate capacity information and utilization information per se by off and on airport because as you know, the fleet is very fluid and dynamic and can be moved. So it's a little bit of point in time versus on average that you could be conducive if I gave you a specific number because of the fluidity of the fleet being shared. But nonetheless I think, when we got into our capacity back in November, it was arguably a little bit -- we're probably at a little bit at the lower end in our initial planning stages. We've obviously continued to get visibility on demand trend as well as our own ability to execute and continue to drive utilization and get greater confidence in that. As John mentioned, we do believe there is a significant opportunity for improvement of fleet efficiency utilization and I'd say that previously particularly in the first half of the year. So, we're really very balanced and cautious as related to our fleet growth. We believe that over supply is not healthy for the industry and not healthy for creating a good pricing dynamic and environment. As a result, we've been very cautious on our fleet planning process and with the residual assumptions that we've had in our plan list and our expectations around demand, and our expectations on fleet utilization, we appropriately brought down our fleet growth as a result.

[Anj Singh:]

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

[John Tague:]

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

[Operator:]

Next question is from the line of Chris Woronka, Deutsche Bank. Please go ahead.

[Chris Woronka:]

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

[Jeff Foland:]

Thanks for the questions. It's Jeff. There has not been a significant shift in channel mix in fourth quarter on a year-over-year basis. We leverage our business across the all of the channels, be it the corporate channel business through retail agencies, a lot of business through our direct channels of course and a degree of opaque channel business. Where we utilize that channel and tool is market specific and market demand specific, when we need to generate more demand at a certain point in time in a market, we would tend to use the opaque channel more. So we probably take a balanced approach. We're taking clearly a margin centric approach as we drive this business. It's not just about volume, it's not just about market share, but it's about trying to drive a profitable business at the end of the day. So, we're balanced and we expect to continue to be balanced across those channels as we go forward.

[John Tague:]

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

[Chris Woronka:]

Okay, thanks, last year you guys had announced a few partnerships with a few of the ride sharing companies, can you give us a sense as to kind of how that's going early days and whether you plan to expand that or change in any way?

[John Tague:]

It is very early days as you say, but we do think there is a fleet management opportunity within the ride sharing business that we're going to continue to pursue. And we also think there are a lot of use cases between ride sharing and car ownership that we intend to build products and services to respond to. So we've really have not seen an impact, I don't think that our numbers would be very different from our public comp in terms of what impact we may or may not have seen from ride sharing but we do see an opportunity in these trends within the market.

[Operator:]

Next question is from line of Bryan Johnson, Barclays. Please go ahead.

[Dan Levy:]

This is Dan Levy on for Bryan, thanks for taking the questions. First a question on your revised 2016 guidance, I understand the headwinds related to HERC and on U.S. RAC pricing and the impacts of that. But in the fourth quarter you did see better cost sales I think that was like $30 million benefit over what you were previously looking at. Also free costs were better than expected for the year. So we're just thinking of the year on year bridge from '15 to '16 why does that, these factors don't provide an offset to the HERC and pricing headwinds?

[Tom Kennedy:]

I can give you the very high level bridge, I think it would be helpful for folks to hear that. We obviously but just specific to company specific questions and I'll give you a high level bridge. The better than cost performance is timing. I mean, we're still are maintaining our commitment as we laid out on Investor Day that the cost savings in calendar 2016 are $250 million. We did not change our net fleet deep guidance either as you probably noted from $290 million to $300 million that's remained the same. So the benefits in the cost increases are especially in line with what we had laid out back in November and as you walk through that the pricing was not something, we expected at least in the latter half for the quarter into the first quarter and so we started the year with a lower 2015 base to build our plan from than we originally had built our preliminary estimates. And then we had to accommodate more understanding that you can't -- it's a similar step off in the 2016 with improved pricing versus what we're seeing in late November and early December. The big picture you got your cost savings a little laid out, you have your investments as we have laid out in Investor Day, so that's an offset to our improvement next year with roughly $100 million of investments, we've previously announced in IT, sales and marketing and other areas of the company. We continue to invest in the business. We are not just cutting costs. You do have fleet depreciation and interest headwinds and we laid out in Investor Day and those are consistent as I said. Earlier in the call, the $150 million to $160 million in U.S. RAC fleet depreciation and then fleet interest expense between the U.S. international based on what our plans are to refinance debt and term it out, adds about $50 million of cost on top of that. And then you have other inflationary costs and things like that as an offset. So the cost savings and the revenue improvement essentially offset in fund, the fleet depreciation and interest and investments and then other inflationary costs. We've not obviously assumed that they -- and we said on our Investor Day our plans do not rely on a similar industry pricing, albeit we have as John last said that we expect to see continued opportunity there with all industry participants having impacts of that major input factor increasing across the residual decline assumptions going forward. So our view is that, there is opportunity for pricing, but we aren't relying on that, and we're not making commitments based on industry conduct. As we've said before we don't necessarily dictate industry conduct, we obviously believe that at some point and basically industry behavior has been such that everyone, I think believes that industry pricing is given where input costs are should add in or those are added, it is something that we're going to continue to push for.

[John Tague:]

It's early in the year, we're where we are in terms of the current pricing environment and we thought it was appropriate to adjust guidance on that basis. But obviously we're working hard on the cost and pricing set.

[Operator:]

Next question is from the line of Rich Kwas, Wells Fargo. Please go ahead.

[Rich Kwas:]

So just Tom give your thoughts with, what happened later in the fourth quarter and what just changed for itself for in the first quarter in terms of pricing? What do you make of what's going on in the industry, just you take a step back, Hertz had the fleet issues in '14 and the early stages of '15 and that got unwound. One would have thought that with the comparables, with your business more in line from a fleet standpoint, pricing would have behaved better generally speaking. So what do you make of what's going on in the industry? I know you reiterate confidence in pricing longer term but one could also counter that the industry is just not set up to drive consistent price. So just interested in your perspective given that you haven't been in the industry a long time, you've been in travel business a while but just curious on what your big picture thoughts are right now?

[John Tague:]

I think, it's really a straight forward. When we're giving up share and shrinking, on an absolute basis, it provides a foundation for above market growth from some new sector. And while we are not focused on necessarily growing share, we are not prepared to continue to shrink and that in unless it causes a corresponding change, is going to create over fleeting temporarily in the industry.

[Rich Kwas:]

From a competitive standpoint, it seems like from a capacity standpoint you are taking more --most rational approach but you wouldn't say that. It just seems like the industry is not necessarily there yet but I don't know what would drive that other than?

[John Tague:]

Look, I think we should take some solace. This is an industry that is focused on profitability. I think there are generally rational behaviors across the industry. I think if you look at the earnings results across the sector, you're seeing some very strong earnings relative to previous periods. So I have confidence in the industry being a responsible industry over the long-term, but we got a changing balance here both due to our self inflected issues as well as other dynamics in the market place. We were basically ceding share and ceding that share provided profitable above market growth for the rest of the sector. We can't continue to do that. As I said, we're not going to rationally compete for share, but we certainly are going to maintain a modest growth rate somewhat at or below industry levels and we'll see how that transitions in terms of the corresponding behavior in the industry. But I think this has to occur at some point in time and that's where we are.

[Operator:]

Thank you. Next question is from Kevin Milota, JPMorgan. Please go ahead.

[Kevin Milota:]

Good morning, everyone. A couple of questions here. One on the commercial demand side of the business. You'd cited weak to lower commercial demand excluding the energy segment, hopefully you could give us a sense of what's happening with the other side of it or I guess, the bigger side of the commercial business excluding energy? And then secondly on commercial and leisure pricing, could you give us a sense for what's happening with your -- both segments? And then lastly, given both of you are from the hotel and airline businesses in a prior way, maybe you can give us some thoughts on what's happening with rental car pricing on the commercial side and when do you think, we can possible see some price increases for your corporate customers? Thank you very much.

[Jeff Foland:]

Thanks for the question. This is Jeff. I'll start with the last part first. In 2015 in our corporate portfolio, the 71% of the accounts that came up for renewal were renewed at equal or better terms from a pricing standpoint throughout the year. So we feel reasonably good about that. With respect to the first part of your question, we saw a degree of softening in business travel in the market place in the fourth quarter but outside of the energy sector, it was a more muted softening in that demand. So that will describe a portion of the volume decline that we saw. But the other portion of volume decline is that we are going through a self effectiveness transformation. We are trying to be very rigorous about the accounts in the portfolio, the profit levels we need to achieve with that portfolio and that has certainly contributed to the volume decline during that time period. Once again we are trying to look at margin for the portfolio and where margins over time in a very responsible way. So some industry softness outside of the energy sector but it was certainly more muted softness than we saw in the energy sector which had a precipitous decline.

[Operator:]

Our next question is from the line of John Healy, Northcoast Research. Please go ahead.

[John Healy:]

Thank you. John, I wanted to ask a question about the U.S. rental car guidance again. I know you don't want to disaggregate the volume- and the pricing-specific metrics, but is there a way to think about the -- what I hear is that maybe a disconnect between investors are thinking about those metrics and how you are talking about the business? When I look at the guidance, it implies a 4% improvement in revenue per car per month. If you look at that number, how much of that improvement is driven by the conventional volume and price that we've all grown accustomed to looking for from you? And then how much of that is due to some of the initiatives you outlined at the analyst day and is there a way to think about a couple of those initiatives that might be more contributing to that growth in 2016?

[John Tague:]

No. I think look, incumbent in the guidance we believe we have a strong opportunity to improve utilization and that's certainly the biggest driver and we also believe we have a strong opportunity to improve ancillary. But I would not say that there is a lot of per se say risk in that. We are not presuming a lot of new initiatives. So it's fundamentally presumed that we will have -- I think, the environment you would expect, along with an improved utilization range point for revenue production.

[John Healy:]

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

[John Tague:]

We have set our targets in the low 80s and I think frankly they might be a bit conservative over time. I think we can pull it that up a little bit more towards demand of the fleet. As we even have very good experience on improving utilization by improvements in the rentable fleet, reductions in supply chain, support maintenance, et cetera. So we are very focused on -- and the RACD metric or more commonly within the industry the revenue per unit per month is more what we are focused on to drive profitability on the revenue side.

[John Healy:]

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

[Tom Kennedy:]

From an operating fleet standpoint the rough number is I think we go from an operating standpoint of something like 77% was risk in 20154 calendar year and it was the mid-80% as an operating fleet from a risk standpoint. The buy in model year 2015 was more 40% to 45% to 50% per rent and its significantly less program in model year 2016 just because the availability of the program economics are -- the economics that was offered in model year 2015 frankly you would have to have assume a multiple entry of our assumption of residual value declines or you would be indifferent between taking a risk in a program car. So if we were profit maximizing to be clear in 2016 model year buy we would have bought zero program cards. So we try to be somewhat balanced and continue to kind of use program as an operational flex as well as a risk hedge but not be too responsible and go to all risk and not be -- not kill the earnings and go to too much program. But the program availability frankly was somewhat limited. You may have heard that from one of our public competitors. So we had to kind of balance our fleet buy relative to what was available on the economics.

[Operator:]

Thank you. Our following question is from the line of Neel Mehta of Morgan Stanley. Please go ahead.

[Neel Mehta:]

Good morning. This is Neel on for Adam Jonas. So, you cited highly competitive market pricing in top tier markets due to more regional competition. Just want to understand the nature of the competition. Are these new players or just the existing ones stepping up their operations and capacity? And lastly, if you could just provide an update on the Lyft pilot program in Las Vegas and your updated thoughts on what the opportunity for that could be moving forward? Thank you.

[John Tague:]

I think this is traditional competition from the industry sort of characterizes third tier flyers. So nothing unusual there. So we really don’t see an overflow of ride sharing price impacting those markets particularly. Our pilots with Lyft I think are going well. I would still characterize them in scale as pilots. But we think that there are potentially opportunities for us to extend the life and in fact have a secondary disposition channel by parts of improvising pooled cars and we have the technology and the business model to do I think. So that represents an opportunity to extend this the core business to the developing trend.

[Operator:]

And we have no further questions in queue at this time.

[John Tague:]

Thanks everybody and we look forward to talking to you after the first quarter.

[Operator:]

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