Hertz Global Holdings, Inc.
Q3 2008 Earnings Call Transcript

Published: 7 Nov 2008

Operator:

Ladies and gentlemen thank you for standing-by and welcome to Hertz Global Holdings third quarter 2008 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and -answer session. Instructions will be given at that time. (Operator instructions) The company has asked me to remind you that certain statements made on this call contain forward-looking statements, 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 the company’s press release regarding its third quarter results issued yesterday and in the Risk Factors and Forward-looking Statements Section of the company’s 2007, Form 10-K and its Form 10-Q for the three months ended June 30, 2008. Copies of these filings are available from the SEC, the Hertz website, or the company’s Investor Relations Department. I also want to remind you that this call is being recorded by the company. I would now like to turn the call over to our host, Rich Broome. Please go ahead sir.
Rich Broome:

Good morning, and welcome to Hertz Global Holdings third quarter 2008 conference call. For those of you I haven’t met I service the company’s Corporate Affairs and Communications Officer and on an interim basis I am also serving as Investor Relations officer. I look forward to working with all of you. You should all have our press release and associated financial information. We have also provided slides to accompany our conference call which can on our website www.hertz.com/investorrelations. In a minute, I will turn the call over to Mark Frissora, Hertz’s Chairman and CEO. Also speaking today is Elyse Douglas, Hertz Chief Financial Officer. In addition, joining us today for the Q&A session are Joe Nothwang, Executive Vice President and President, Vehicle Rental and Leasing, The Americas and Pacific, Michel Taride, Executive Vice President and President Hertz Europe, Limited, and Gerry Plescia, Executive Vice President and President of Hertz. Today, we will use certain non-GAAP financial measures, all of which are reconciled with GAAP numbers in our press release which is posted on our website. We believe that our profitability and performance is better demonstrated using these non-GAAP metrics. Our call today focuses on Hertz Global Holdings, the publicly traded company. Results for the Hertz Corporation differed only slightly, as explained in our press release. And, now, I’ll turn the call over to Mark Frissora.
Mark Frissora:

Thanks, Rich, and good morning, everyone thanks for joining us today. Let’s start if can with slide five. You will recall that we reported good results in the second quarter by overcoming a challenging business environment, because of our efficiency initiatives in our global revenue footprint. We first experienced declining volumes in the fourth quarter of last year, and unfortunately conditions continue to deteriorate. We are currently experiencing twice the level of volume contraction that we have encountered historically and the third quarter was challenging for both the macro economic and our industry. Accordingly, we implemented aggressive strategic actions to improve liquidity and customer satisfaction and those actions which I will describe in a moment, negatively impacted third quarter earnings by more than $58 million. However, we believe these actions better position Hertz to optimize growth and liquidity going forward and especially in the current quarter, when we generate most of our cash flow. The other headline is that our liquidity is already strong, almost $4.6 billion at the end of the third quarter, in part because of $825 million Variable Funding Note facility we completed in September. Make no mistake that everyone on the management team is committed to improving our results, which I would know file on exceptionally strong third quarter last year. We have already taken additional structural actions to right-size the business. These actions include, further reducing wage and benefit cost. Headcount has been reduced by almost 7,100 full-time employees were 22% since August of 2006. This includes the programs we initiated in September to reduce headcount by almost 1,400 employees. Accelerating vehicle and equipment deletions and at least temporary delay in additions to right-size the fleet to current demand levels, we sold over 4,500 more cars than usual in the U.S. and our ended U.S. fleet is 6.8% smaller year-over-year. Our average fleet is 4.5% smaller. We believe we are right fleeted, right-sized right now. Rationalizing our location footprint, turning 80 net locations while adding others, primarily in the U.S. of airport market to accommodate new business and implementing recent significant price increases in our major businesses. Looking ahead, I believe Hertz will grow profitably, when conditions improve because of our strong liquidity in market position and our streamline cost structure. Our goal is also to improve the ratio between revenue levels and profit in this difficult environment and of course that will have a much sooner if demand and/or pricing stabilize. Before I get into numbers for the quarter, let me describe the dynamics of the current business environment. Please turn to slide six; we are encountering several factors that are creating short-term strain in our profits. The first is reduced volumes; we have experienced a period of rapid volume contraction across all of business, domestic car rental, European car rental and worldwide equipment rental. The declines have happened very quickly particularly in car rental where both commercial and leisure demand responded in lock step with the economic slowdown. Higher fuel cost and reductions in airline capacity, along with increased airfares led consumers to rent fewer cars. Business has also cutback on employee travel. There are some bright spots for example inbound business to the U.S. grew double digit last quarter. While HERC it continues to gain industrial business and remains solid in Canada. Nevertheless as fuel prices have moderated recently, the credit crisis appears to be our latest impediment to corporate and leisure travel, a crisis which could also affects HERC as well. The second trend relates to our asset efficiency. Inevitably utilization suffers somewhat when demand declines rapidly and it is impossible to adjust the lead quickly and up and consequently depreciation and fleet related cost increase, as a percent of revenue. The volume reduction and temporary excess fleet level led directly to the third trend lower industries pricing. As the immediate reaction to lower demand is to a cars and equipment as much as possible on rent even have reduced rates. Worldwide car rental RPD, in the third quarter was 0.8% lower year-over-year driven primarily by Europe. Although, September pricing was 3% lower in the U.S. and for worldwide HERC, pricing decline by 1.6% year-over-years for worldwide HERC. You will recall our sensitivity to pricing, a 1% reduction in pricing equates to an annual pretax profit decrease of approximately $55 million for car rental and $13 million for worldwide equipment rental. Price reductions occur in a climate of rapid volume declines, because company’s cannot reduce fleets quickly and up and low yield rentals are preferable to an idle-fleet. The both trend is lower residual values, every company in the industries suffers to variant degrees, including Hertz. Although, we believe we began and continue to right size our fleets faster than the competitors. In fact, we sold historically high levels of cars throughout the third quarter to position us for a higher fleet level -- tighter fleet levels in the fourth quarter. However, inventories have build out car actions and in other disposable channels, and when combined with tighter credit and lower consumer spending residual values do suffer. We continue to have our fleet right-size while maintain a maximum upward flexibility should demand improve. The good news is that history also shows that rental pricing trends to become more rational, once the industry rebalances the fleet. The credit crisis, volatile equity markets and worry consumers have created a difficult macro environment which we all hope will stabilize and improve in the very near future. However, until stability occurs it is not possible on our view to forecast with any reliable certainty. That’s currently we will be suspending guidance temporarily and I will discuss guidance in more detail later in the call. Now, turning to slide seven let me move on to key financial metrics for the quarter. We achieved third quarter revenues of $2.42 billion slightly below last year. On a currency adjusted basis revenues declines by $85.6 million or 3.5%. Revenue growth was constrained due to our strategy to preserve liquidity in a tough environment, and we deliberately walked away from low contribution business. Elyse will discuss our GAAP results shortly. Adjusted pre-tax income for the quarter was a $169 million resulting in adjusted pre-tax margin of 7%. Corporate EBITDA was $386 million and represents 16% of revenues. Adjusted diluted earnings per share were $0.33 and adjusted net income was a $106 million. These metrics were all well below those achieved in the third quarter of 2007, but represents solid margins in a very challenging environment. Turning to slide eight; it’s important to remember that we took actions that effected profits in the third quarter to help preserve liquidity in the current quarter and beyond. Specifically $58 million of the reduction and third quarter profits can be attributed to three factors we have laded to liquidity and customers services. Number one, aggressive fleet deletions including higher maintenance cost to prepare cars for sale as well as penalties incurred for early turn backs. Number two, increased advertising of our industry leading gasoline, refueling and services guarantee programs. Number three, higher gasoline cost associated with the refueling program. As I mentioned earlier we maintained a strong focused on cost control and efficiency as well as cash management. As a service company significant portion of our expense relates to staffing. As you can see on slide nine, we began the process of reducing labor cost in August of 2006. As I mentioned earlier we have decreased headcount by 22%, which recently includes voluntary early outs offered in certain geographies to help right size the business to current business conditions. Both the U.S. and international operations achieved strong double-digit headcount reductions over the two year period, and if we look at productivity in the past quarter that is revenue before foreign exchange for employee. The improvement is 7.9% year-over-year. Our goal for full year 2008 continues to be $300 million of realized savings and as in addition to the $187 million of savings announced in 2007. For projected cumulative savings of $490 million through 2008 and while we expected tough volume environment in 2009, we believe we will generate an additional $215 million of savings next year. This will be achieved primarily through our strong focus on business process reengineering, not just reductions enforce and strict spending controls. As a result, we believe that we are right on target to achieve cumulative savings of over $800 million by the end of 2010, including the estimated benefits of outsourcing and process reengineering which we have previously discussed with you. Essentially we are achieving the bulk of the $800 million in savings a year earlier than we have been forecasting. We will provide an update on 2010 savings when we have visibility later next year. It’s fair to ask them with all of the efficiency initiatives where did the savings go. There are several factors that prevented higher levels of efficiency from generating higher profits including, one lower volume as previously discussed; two inflation in key categories, higher fleet depreciation as we accelerated vehicle and equipment sales in a tough residual value environment, fuel cost and vehicle maintenance and repairs, three increased vehicle deletion cost, four lower pricing in September. As for inflationary trends in the business we have teams working on improvements in all categories. In fact we beat our targets in many fleet metrics as our reduced deal personnel managed and extraordinarily high level of fleet deletions. In this economy we continue to revaluate our expansion plans and carefully review the operating performance of existing stores closing some location that are not critical to our network coverage. Overall we have managed our worldwide location network to meet growth opportunities while pruning in light of the current economic environment and at September 30, we had over 4,800 corporate locations compare with 4,600 last year. In the past 12 months we have added a 130 net location to further increase our ability to serve the U.S. off-airport market. Our goals to be the lowest cost highest quality car rental and equipment rental company in the markets we serve. This will sustain our profitability during the tough times and make us the best positioned company when the economy strengthens. While we are fully committed to maximizing savings, we continue to invest back into the company. On a year-to-date basis, we spend an incremental $48 million on our facilities, brand and people. This includes several car rental licensee acquisitions in the U.S. and France which added 14 locations in over $12 million of annualized revenue. Now, I would like to bring your attention to several major accomplishments that we achieved during the third quarter on slide 10. I am pleased to particularly with Hertz profitability this past quarter. Although revenue declined by 6.8% year-over-year, the Hertz team did an excellent job aggressively rebalancing the fleet, selling more equipment then our top two competitors combined and reducing equipment-related expenses, which help the unit, achieve adjusted pre-tax margins up 18.7% and a corporate EBITDA margin up 46.1%. HERC also closed 20 locations in the quarter. You will recall that in 2007, we determined that we could retain corporate EBITDA margins in the 40s, 40% range, even with the 10% reduction in revenue, although the actual revenue decline was slightly below that level our corporate EBITDA margin exceeded those expectations. Even with the cost initiatives and staffing reductions, we continued to provide high-quality service to our customers. Our car rental operations in the U.S., Canada and Europe all produced significant year-over-year improvement and North America car rental achieved it highest ever net promoter score this month. Since we introduced the 10 minutes service to standard per online check-ins, we have also received pure complaints related to consumer wait time. Also complaints about refueling prices have turned into compliments for implementing our local pump prices refueling program. Additionally, our Kiosks check-in continues to gain popularity, as cross that 100,000 transaction threshold on October 7, with a 135 Kiosks operating at 27 major U.S. airports penetrations ahead of schedule. We have also started testing Kiosks and Spain for international implementation in 2009. We are very excited about the upcoming launch of Hertz’s car sharing initiative, designed to meet the needs of customer primarily in urban areas, members both accessed to fleet of vehicles for a flat fee, which will include the cost of insurance, gasoline, maintenance and cleaning. Vehicles are reserved over the internet or via telephone in customers accessed cars with an electronic key card, which activates an onboard computer in the car to verify a member in reservation. By year end we will be begin operating in New York, London and Paris. Car sharing as breakthrough service for our large existing customer base as well as a new generation of customers who may car ownership differently for a variety leasing ranging from convenience to economic or environmental factors. And with car sharing, we will have our goals provide global rental solutions for customers, who need a car for as little hour work far as long as a year. Just about year ago, we launch Simply Wheelz in Orlando as a pilot based on its appeal to more cost conscious to customers we have expand at the program to several important leisure markets in Florida and California, with more to come in early 2009. Although, our location in Orlando operates separately, we are introducing a virtual Simply Wheelz concept where customers can use key as it traditional Hertz airport location to complete the rental process. This will help us further penetrate the online leisure marketplace. Please turn now to slide 11, as I review quarterly cash flow levered after fleet growth as it’s typically the case in the third quarter with negative $335 million versus negative $203 million required in the same quarter of 2007. This change is due to reduce fleet growth partially offset by lowered advance rate in the new international ABS facility anticipated declines in cash flow from working capital and lower earnings. A strength however, in our business model is that in tough economic times we are able to down size our asset base accordingly. This is best illustrate by looking at the total net cash flow generate by the company using this measure total net cash flow was negative a $150 million versus negative $200 million in the prior year with resulted in a $42 million improvement year-over-year. Working capital days outstanding were negative $19.6 million flat to the prior year and a very strong performance. As we repurchasing less new fleet for Hertz we have lower payables in this impact for calculation. We continue to work to improve payments terms on have increased our focus in the question have receivables. Our negative working capital is an important cash flow benefit because it means we collect fronts from our customers faster then we pay our suppliers. Please turn to slide 12. In worldwide car rental total revenue was flat compare to third quarter 2007, as a favorable foreign exchange impacted 2.6% offset a 3% decline in truncation days 0.8% decline in pricing. As in previous quarter as part of the RPD or rental rate revenue per transaction day decline relates to the change in mix towards leisure and off-airport rental which are typically longer in length? In the equipment rental side of our business total revenues was $433.1 million representing a decline of 6.8% from prior year. Strong revenue growth in our Canadian operations and our industrial product lines, reduce the impact of lower rental activity and year-over-year price decline of 1.6%. The foreign currency benefit on revenues was approximately 1.3%. Turning to slide 13 on a consolidated basis, 37.5% of our reported revenues come from international operations compared to 35% a year ago. International revenue grew 6.2% on a year-on-year basis, without foreign exchange the decrease was 0.6%. Our product in market diversification also helps support revenue in the past quarter. International car rental operations experienced rental revenue growth of about 7% driven by foreign exchange and 1.9% transaction in the growth. This help to offset some other softness we saw domestically. In down business to the U.S. in the third quarter remain strong and our revenue from this market increased by 26.3% and represents 14% of our total U.S. airport revenue. Other sources of year-over-year revenue growth were government rentals and rentals for specially vehicles in our Fun, Prestige and Green collections. The U.S. airport market generated $278.5 million of revenue in the quarter, despite a 1.6% decline in transaction days, which was partially offset by 8.6% increase in RPD. Our commercial government in toward transactions days increased year-over-year. On our second quarter conference call, we have mentioned that replacement rental activities for the industry have been impacted by higher fuel prices in the economy and this trend continues to be evident. The latest sophistic from the Federal Highway Administration, show miles driven declined by 3.6% year-over-year for the month of July. This leads to fewer accidents in claims. In addition climates, in current economic environment appear to be differing vehicle repairs and some incidents. We experienced a 5.2% decrease in the quarter in insurance replacement transaction days. However, we now have relationships with our 185 insurance companies out of top 200 or self and are working closely with these companies to grow or share the business. In equipment rental, we achieved growth in our initiative such Hertz plant services, which is our industrial division pump power generation and trench shoring and this partially offset the slowing of our base non-residential construction business in the U.S. and in Europe. Our acquisition of Quilovat and a power generation company in Spain, has been growing well providing a base just disrupts to extent power generation services to our locations in that region. Our Chinese operation is gain traction as well exceeding our expectations in equipment rental. We have over $8 million of fleet by year-end and are already a top competitor in the Shanghai rental market. During the quarter, equipment rental volume pressure continued particularly in Florida, California perhaps in Spain. You will recall all that in the third quarter of 2007, our volume flow already under full pressure and we imported worldwide HERC revenue growth of only 2.6% for 2007. On the positive side, sequentially from Q2 pricing pressure has been moderate and a supply of equipment in the industry has been fairly well balance with demand considering the overall economic environment. Across all our business, as we continue to broaden our customer base by adding new commercial accounts and resigning existing customers. In Colorado, our global sales approach continues to payoff as we enhance our relationship for commercial accounts of operate worldwide. Even in the tough environment, we are able to convert business to Hertz, as evidence by the over 30 accounts gained in the third quarter on a net basis. On partnership front, we just resigned AirTran to a three year exclusive agreement and we resign signature aviation and million in our each on exclusive national multiyear contract and Europe is part of our ninetieth anniversary marketing program, we used our broad travel partnership base promote the Hertz name and special in our promotions. Hertz was recognized that number one, Reader’s Choice by Conde Nast Traveler for the 15 consecutive years for both rental cars to both domestically and internationally. Hertz U.K. was awarded to prestigious award a best car rental company by the travel trade gives that for its commitment travel partnerships. We continue to penetrate the online leisure market is demonstrated by the 6.1% year-over-year increase in car rental revenues both to hertz.com and third party websites with good growth in both the U.S. and aboard. This represented over 33.2% of our worldwide car rental revenues. In equipment rental in the third quarter, we have 13 major new account gains in reversed industries and the contraction industrial and fragmented sectors. Now, slide 14. I would like discuss briefly our car rental fleets in our new sales channel diversity. In car rental, we continue to diversify our channels of disposition. This past quarter, we sold over 15,000 cars worth 37% of the total U.S. cars sales through dealer direct and web-based channels, including online options. As you recall these cars typically sell faster and have a better payment cycles then were sold to the traditional auctions. The car sales market have been difficult as the credit consequerence to consumer auto loans, but diversification of sale channels we believe, can only strengthen our position. On the acquisition side, we have been working with manufactures to reduce new car deliveries in light of lower demand. Being able to hold the existing fleet longer should also help with our residual value exposure. The average age of our fleet at September 30, was eight months, compared with 6.5 months last year. Today we would like to update you on our liquidity position, which you can see on slide 15. At September 30, 2008, Hertz had total debt of $12.8 billion and total liquidity available of $4.6 billion. The breakdown by source is $730 million in unrestricted cash, $1.1 billion in unfunded corporate debt capacity and $2.8 billion in unfunded fleet debt capacity. Both subject to borrowing based of availability. Include in the fleet debt liquidity is $825 million credit facility, which was finalized on September 15, 2008. Establishing this facility in a difficult credit market demonstrate the strength of our collateral pool, purchase track record and strong relationships with our bankers. Our credit facilities are fairly well diversified from both of corporate debt and fleet debt perspective. We have over 50 different banks participated in our four major revolving facilities, which are the ABL, the two variable funding note facilities for U.S. car rental fleet and in our international fleet financing facility. In addition, we have smaller facilities that finance fleet in different countries, such as Belgium, Brazil and the U.K. The facilities that are provided by a more limited bank group such as the recently announced two year $825 million fleet financing and the international fleet facility are with institutions with which we have had long relationships. Purchase investment policies always been prudent monitoring exposure to counterparties and observing concentration limits to ensure diversification by geography, institution, instrument and fund. In light of current environment, we have increased the percentage of government securities to ensure our liquidity. This concludes my strategic overview. Let me now turn the call over to Elyse.
Elyse Douglas:

Thank you, Mark and good morning everyone. I will begin this morning by discussing the operating environments and outlook for the car rental and equipment rental businesses. Let’s start with the third quarter operating results for the Rent-A-Car division. On slide 16, we have included a table showing the major car rental operating statistics. The table highlights and brings other metrics to volume declines Mark mentioned earlier. As you can see, transaction days in the U.S. decreased by 5.6% year-over-year driven by a 7.3% decline in on airport days and a 1.6% decline in off-airport volume. A key driver was a reduction in corporate travel during the quarter. Transaction day decline was partially offset by the increase in average rental length in the U.S., which was positive 4.2% in the past quarter with growth across almost all major customer categories. This reflects the shift online leisure rental stores and strong growth in international inbound customers. Hertz domestic rental car pricing in the third quarter as reflected in RPD, finished slightly above prior year by 0.4% for the quarter. On-airport the pricing increased by 0.7% and off-airport by 0.6%, also impacting RPD was the increase in the proportion of off-airport rental activity in the overall mix. During July and August, the summer peak season, we were able to increase rates and take yield action to improve RPD. However, overall pricing soften in September. Commercial pricing was under pressure throughout the period. Nevertheless, we resigned over 99% of customers to contractors from negotiated in the third quarter. Recent action have been taken to improve fourth quarter car and equipment rental pricing as you may have seen in our recent press release on this subject. This increase impact about 40% of our worldwide car rental business and 80% of our equipment rental business. International car rental rate revenue grew 7%; however excluding foreign exchange rental revenue was down 1.4% in the quarter versus the prior year driven by positive transaction day growth of 1.9% offset by negative RPD. In Europe commercial, monthly and replacement rental activity was positive year-over-year, but slowed in September and our operations in Australia and Brazil continue to experience double-digit year-over-year transaction day growth of past quarter. RPD for international car rental was 3.3% lower primarily due to pricing pressures with some impact from mix in Europe driven by the relative strength of business rental activity in the quarter. Currently Europe is experiencing both lower volume and pricing. The leisure market especially rentals from the U.S. continues to deteriorate and commercial volumes are also being impacted. Truck and van activity is goes as well. We expect these volume and pricing trends to continue until the freed in the lines with reduced demand. Slide 17, highlights worldwide fleet efficiencies, which is defined as the percentage of days a vehicle is rented. This metric was lower by 24 basis point year-over-year as demand decline faster than fleet reductions and it was driven primarily by the U.S. was the decline of 90 basis points. However, the decline reflects the high number of cars, which were in the process of being sold throughout the period and utilization would have been higher year-over-year but for our aggressive defleeting effort International operations efficiency improved to 100 basis points year-over-year by reducing fleet downtime and maintaining fleet levels inline with volume demand. Let me next address the issue of car rental residual value. In the U.S. Manheim Index quarterly average for the third quarter decline by 4.2% year-over-year. We experienced a 3.3% year-over-year decline in the average residual value as a percentage of the initial capital cost on the 40,000 cars we sold in the third quarter. Our results for such lengthening of the average age of car sold from 13 to 16 months over the same period. Demand for younger used cars is negatively affected by volume incentives to promote new car sales. Tighter credit conditions and reduced consumer demand. Starting in September vehicle sales as a percent of vehicles offered per sale adoption decline by overhead. However, as a result of actions taken in the third quarter, we are not relying as heavily on risk car sales in the current quarter. As we have stated in prior calls, our performance versus the Manheim Index is the result of having a younger, diverse fleet with limited exposure to any single manufacturer or model, such as SUVs, and the ability to age and sell our fleet more selectively through a variety of channel. At September 30, 2008 the percentage of non-program cars in the U.S. fleet decreased slightly from 63% to 59%. However the risk car percentage is expected to increase as we turn back program cars in Q4. Additionally as we reduce the number of program cars going forward, we complex our fleet age and reduce exposure to the auto manufacturer. We took actions to the lead more risk cars during the quarter when the used car market is seasonably better to reduce exposure to residual value declines in the current quarter. Internationally the percentage of non-program cars is 55% compared to 46% a year ago. The used car markets particularly in Europe continue to experience reduced demand in pricing and we have intensified our efforts to develop additional channels for selling our cars in Europe. On the subject of car cost we expect U.S. vehicle rental depreciation expenses per car to increase in mid single-digit year-over-year in 2008. In Europe we expect fleet cost to be up 12% in 2008 before foreign exchange, although the absolute dollar vehicle depreciation per unit for Europe remains below that of the U.S Let’s now turn to worldwide HERC starting on slide 18, in terms of the operating environment we continue to be impacted by the softening U.S. construction market. This was partially offset by strong demand in Canada and steady growth in industrial and specialty equipment such as power generation. In North America revenue from residential and non-residential construction dropped from 50.6% of total revenues to 47.8% year-over-year and industrial revenues increased from 18.9% to 21%. Our Europe operations experienced double-digit declines in revenues year-over-year. However, power generation driven primarily by the kilowatt acquisition in Spain continued strong, but construction was dramatically impacted. As a result of the deteriorating economic conditions from the beginning of July through October, we closed 14 locations in Europe. For the quarter, our world wide same-store revenues declined by 5.5% compared to 0.5% growth in the third quarter of 2007 versus 2006. Canada remains the bright spot driven by the West Canadian oil service business. Compared to third quarter 2007, worldwide pricing declined by only about a 160 basis point driven by 2% decline in the U.S. and 1% decline in Canada. However, compared to past downturn this is a modest decline. In previous downturns they were large in balances between the supply of fleets and demand have resulted in declines and pricing after 5% year-over-year. This time around the industry as actively managed to fleet relative to current demand and then able to maintain reasonable pricing. Based on the macroeconomic outlook, we expect to experience further declines in non-residential construction start. I would remind you that we just look at 10% price increase for short-term business and 5% for long-term monthly business in U.S. and Europe. Also we expect to still take advantage of industrial opportunities to our strategic focus in global expansion. During the quarter, we continue to age our worldwide fleet to 34 months a year-over-year increase of more than five months and an increase of two months when compared to fleet age at June 30. With our current fleet plan, we expect the average age of the fleet to increase by another month of selling 2008, which should not impact on maintain cost for our customer service. In the third quarter net CapEx for HERC was a reduction of $54 million representing a $242 million cash flow improvement for the quarter. As Mark discussed, we’ve take an aggressive deriding actions during the past quarter. Equipment sales on a first class basis total $187 million a quarterly record for our company, generating a record for the quarter of $340 million of less investment in fleet growth year-over-year. In order to achieve this level of fleet reduction about 50% was sold to the equipment auctions as opposed to the normal retail sales channel. In the U.S. we also diversify the active fleet away from earthmoving equipment. This now represent 24% of total fleet compared to 29% a year ago. Overall we believe that our fleet will be well matched to the expected demand level by year-end which will well position us for 2009. Hertz fleet efficiency metric calculated by dividing total Hertz revenue less, equipment sales and other revenue by the average fleet acquisition cost was 3.3 percentage points below prior year, as we continue to rebalance our fleet away from earthmoving equipment. This calculation understates efficiency due to the impact of the decline in pricing on revenues. As Mark mentioned process reengineering and fleet management should improve fleet efficiency moving forward. Let me now turn to our consolidated financial results for the quarter shown on slide 19. Looking at our GAAP metrics, pretax income was $26.2 million and net income was $17.7 million. On a diluted earnings per share basis we earned $0.05 compared to $0.50 in the prior year period. The year-over-year decline was due to higher restructuring and restructuring related cost this year. Decreased volume in pricing and cost associated with the strategic actions Mark mentioned earlier including cost associated with the new fuel and service offering and defleeting actions including depreciation. On a non-GAAP basis adjusted diluting earnings per share were $0.33 this past quarter compared to $0.65 in Q3, 2007. While we are achieving our targeted cost savings, direct operating expenses and selling, general and administrative expenses on an adjusted basis increased 360 basis point and 70 basis points respectively year-over-year as a percentage of revenue. More than a third of the DOE variance is due to higher cost on items such as gasoline that also have a revenue component. The balance is driven by the impact of negative pricing across the operating units, increased operational cost due to inflation in store growth and higher vehicle damage. Within SG&A the increases the result of higher planned advertising expenses. Total cash interest expense for both fleet debt and corporate debt was a $194.9 million, an $11 million below last year. The improvement as a percent of revenues was 40 basis point. Now please turn to slide 20, which focuses on the strength of our balance sheet and overall liquidity position. At September 30, our consolidated leverage ratio with 3.5 time and the consolidated interest expense coverage ratio was 3.7 time. These ratios are well within the convenient limit that not financing agreement. Under our tightest covenant deprecation we have for corporate EBITDA is $513.5 million and for indebtedness the cushion is $2.5 billion. Looking at our debt portfolio at September 30, we estimate that 1% change in interest rate with produce the $32 million change a net income over a 12-month period. Let’s look at our debt servicing requirement. Slide 21, shows our upcoming debt maturities five quarter but the remainder of 2008 and full-year 2009. These are shown on the basis of the contractual maturity day, but we also reflect to the amount in debt amortization slightly to take place over the six months proceeding that maturity date. Amortization payment made since quarter end and already reduced the free debt maturity for Q1 2009 from $771 million to $617 million. Through 2009, we believe we have ample resource for debt service even that our current fleet levels, which could decline further consistent with expected demand. As you know there are additional maturities in 2010 and we are already reviewing financing alternative and we’ll keep you updated on this data this alternatives on future call. Moving to slide 22, for the quarter the GAAP effective income tax rate is 10.9% and 34% for 2008 and 2007 respectively. Cash income taxes paid in the third quarter were $7.7 million and $10.5 million in 2008 and 2007 respectively and finally, on slide 23 we show LTM cash flow results. As Mark mentioned earlier an important focus for Hertz cash flow and deleveraging. We already reported on the third quarter total net cash flow and deliver cash flow. I’ll review with trailing 12-month period compares to the prior year period, which captures the seasonality of our business. Looking at leverage cash flow, which measures cash flow available to reduce net corporate debt in the 12-month period ended September 30, 2008 we generated $324 million compared to $354 million for the same period a year earlier. The differences due to higher cash invested in acquisition to year-over-year. Looking at total net cash flow generated over the trailing 12-month period. We generated $555 million in total net cash flow compared to $17 million for the same period a year earlier. Fleet reductions year-over-year more than offset lower earnings and higher working capital requirement. As you have seen, we generate cash flow from earnings, but it is also important to note that we generate cashes de-fleet in response to reduced rental demand. The current economic environment is difficult with unprecedented volume decline, pricing pressure and declines in residual value. We are tacking all of these issues and working in diligently to drive cost control to preserve and enhance our profitability. Also we have taken aggressive actions as Mark mentioned, to reduce fleet levels in both RAC and HERC to be better positioned for the month ahead. Tight credit markets in higher funding cost demand we maintain a strong focus on all assets of cash management. These are the areas of focus to the organization toward shareholder value in the month ahead and now let me turn the call back to Mark.
Mark Frissora:

Thanks, Elyse. Our initial guidance for the full-year of 2008 was weighted towards the third quarter and fourth quarters based on expectations that the economy would strengthen in the second half of the year. Based on what we experienced during the second quarter and into August, we lowered our guidance on August 8, conference call to what we thought were sustainable levels. Since then, we have seen conditions deteriorate further across all geographies. It is clear that we will not meet our revised guidance. Additionally, the impact of reduced demand, lower pricing have residual market conditions on profitability has become increasingly difficult to assess. For this reason, we are suspending giving specific guidance on individual financial metrics. What is the economy and market conditions stabilize in our visibility over our businesses improves, we expect resumed guidance. Typically, Hertz is considered a leading indicator of economic activity. Car rentals tend to slow early in the cycle as corporate and discretionary travels curtail as then in one of the earliest industries, we are one of the earliest industries recovered due to pent-up demand. As discussed, we haven’t then just hoping for an early recovering. We have been moving aggressively to right-size the business to achieve the best long-term results possible. That said we expect the total company and each of business segment to be profitable for the full-year 2008 on an adjusted pre-tax basis. We also expect to generated levered cash flow, which will enable us to reduce net corporate debt and net total debt. We continued to be comfortable with our debt covenant cushions and overall liquidity, which exceeds $4.5 billion subsequent borrowing base of liability. We gladly, we will not be more specific and provide you with dollar amounts. This past quarter was certainly challenging, but the Management Team is determined to deliver performance at the highest level possible regardless of the economic conditions. Our cost cutting purpose we believe is fair to low among our competitors. Our revenue diversification in growth platforms are strong multi passage in global. Although, these industries are giving us ample runway in this difficult environment, we believe the real payoff comes when the economy stabilizes and improves. We are still relying as I believe that Hertz will merge some current conditions with a wider lead over the competition due to our global brand recognition, expansion geographic networks to Hertz product lines and customers sectors. Streamline organization and strong liquidity in balance sheet. Now, Operator we are ready to take questions.
Operator:

Thank you. (Operator instructions) And our first question is from the line of Chris Agnew with Goldman Sachs; go ahead please.
Chris Agnew:

Thank you very much, good morning. Mark first question on the fleet, I think you mentioned that you believe fleet levels are currently tight today. I was wondering if you could give us a specific number domestically, and then can we get a sense of what’s your flexibility next year? And maybe what are your plans for fleet levels next year? To make sure your fleet is tight versus demand. I mean as assuming that demand is going to be down year-over-year? How do you cop going into 1Q, 2Q and 3Q? And related to that your 10% pricing increase, in lease or I mean how much you are actually realizing today in the 40% of the fleet that you are addressing?
Mark Frissora:

Okay, let’s sketch the questions. One is related to fleet and you got it right Chris. We feel that today as I am speaking we are actually tightly fleeted in both Europe and the U.S. and I can tell you that we’re experiencing utilization improvements. So, that’ what the best I can tell you because of a, part of our fleet strategy is to, it’s competitive if you will source of competitive advantage. So, in terms of next year’s fleet planning, it significantly reduces. We’re still planning with that right, but I can tell you that number is significantly different than it was for a fleet plan for 2009. So, our 2009 fleet plan and what cars we’re going to buy for 2009 is down and it’s based again on preserving the capacity go up because we feel like, we can get cars we need them. It’s an environment where it’s fairly easy to get cars as you might imagine, much harder to sell them, so, we’re making sure that we’re tight with the option to flex up quickly whenever we need it and we feel like, that is kind of the strategy that we’ve embarked on the last 60-days and for the fourth quarter, again we haven’t really given much guidance in this area, but we do feel that for the fourth quarter as it relates to the fleet. We will be very light weighted and we will be able to take advantage of liquidity that basically is the after effect of having that type, we think fourth quarter environment is pretty weak. Right now, at the end of the Q3, U.S. cars are actually down 17,000, we have 17,000 less cars in the U.S. as it relates to pricing, again I can’t talk all of that pricing on this call other than the fact that if we have 40% of our revenues are kind of tied in the U.S. to that price increase we announced. So, that if that pricing holds and you can do the math on what the net impact would be for us in the U.S. Anyone, Elyse anything you want to add to not.
Elyse Douglas:

No, I think that’s pretty much --.
Chris Agnew:

Okay, and then maybe one more question before I move on. On debt financing I mean a lot of your competitors are ageing their fleets aggressively amongst other actions to reduce overall fleet financing needs, and then they are withdrawing cash collateral out of the fleet financing subs. Is that some and they are doing at I think more out of necessity, could you do the same? And would you consider that in terms of than using as paying down our net corporate debt?
Elyse Douglas:

Chris, this is Elyse. We did the same thing in our program as cash goes into the HPF to the extent that it is not required for credit enhancement. We do dividend effect to the corporation and that’s done on a regular basis, and yes it could be used to pay down corporate debt to the extent. We don’t need it for enhancement.
Mark Frissora:

But we did not age our fleets to the extent our competitors do.
Elyse Douglas:

Not to the same extent.
Mark Frissora:

Not nearly as much. So if could we age them more and do that more absolutely if we wanted to, but that is not something we choose to do.
Elyse Douglas:

The average day’s cars sold this quarter was 16-months versus 13-months a year ago.
Christopher Agnew:

And then just finally, I mean should we be expecting in that book value of your fleet to reduce overtime I mean I guess there is other factors like risk mix and I guess the size of cars, types of vehicles?
Elyse Douglas:

Yes, given what we are seeing in the marketplace yes.
Mark Frissora:

Absolutely, yes.
Chris Agnew:

Great. Thanks a lot.
Operator:

Thank you and next we will go to Manav Patnaik with Barclays Capital; go ahead please.
Manav Patnaik:

Thank you. Hi, guys. First a few follow-up question on the fleet side, typically going into the fourth quarter on a quarter-over-quarter basis it seems just sort of your average number of vehicles at least on the U.S. side has managed to comedown 5% plus. Could you give us a color on – if given the situation in the auction market if you things it comes to reduce that fleet number by at least 5% level?
Mark Frissora:

Yes, I think the answer to your is yes easy, what we did and just to be clear on this, as we exercise and sold a lot of risk cars in the third quarter. So, and then we took obviously the hits on those risks cars, but we did have strategically and we will have purpose knew that we would take again to earnings and we sold those risk cars and then the cars that we delete in the fourth quarter are program cars, where we take no hit if you will, so a very little hit. So, the end fleet again at the end of the third quarter was down 6.8% and most of the Q4 deletions will be program cars. Yes, though in Q4, fleet will be down 20,000 cars, which is probably another the net year-over-year probably around 7%.
Manav Patnaik:

Okay.
Mark Frissora:

So in the U.S.
Manav Patnaik:

Alright and then from the utilization perspective, I mean clearly you mentioned that you would lower pricing a bit just to get the utilization levels higher as opposed to having an idle car line in the lots, but is there a certain range like a limit in the utilization of that would like to see without – drastically having to go down on the pricing front?
Mark Frissora:

Well, I would say that yes, I made a comment that in some cases, you will yield manage, you will go down in order to get utilization, but I would say in general, I’ll just say you understand our strategy as we are running tight fleets and we are yield managing up. So, in general we were not taking business at low margins and that we get a little bit of that when we would lose our fleet at in during some of the third quarter, but again as I mentioned to everyone on the call, we have tight fleeted and so we are yield managing now. We are not really taking what I will call low contribution, low yield business that something we are not doing.
Manav Patnaik:

Okay and two final questions, first on just your general visibility. Can you distinguish sort of what your visibility ranges from the, I guess from your commercial accounts to, I guess on the leisure side and also just what your expectations are for the insurance replacement market?
Mark Frissora:

As, you know we are not providing guidance. So, you are asking for us to guide you and unfortunately everyday, we see significant volatility, it’s positive and negative and it is jumping around a lot, very difficult for us to with any kind of reliability to give you good numbers, so I apologies, but that is why we through guidance.
Manav Patnaik:

Okay, but at least could you address just a general visibility timeframe that you have in front of you on any given day with respect to like volume trends. I know it is volatile, but is there a different between those the leisure customer in your commercial contractual customers?
Mark Frissora:

Our visibility typically is gotten less and less, where we use to have advance reservations that has reliable information that where sixty days out, what people are doing now is they are not basically giving those advance reservations, than that demand will show up, but it shows up, it could be 30 days two weeks. So, the window is getting smaller and smaller, people are reserving in shorted time windows. In general volume is soft, I will say that and I said that on the call in my remarks. So, there’s been softness in the marketplace that entire rental industry have seen...
Manav Patnaik:

All right. Great, thanks a lot guys.
Operator:

Thank you and next we have John Healy with FTN Midwest Securities; please go ahead.
John Healy:

Hi, Good morning. Mark, kind of big picture question for you and if you look at the industry and it magnitudes, but there is a lot of headwinds on pricing demand and residual values and financing and the industries are left these thinks before, but never really at this same time. You came out with some comments about reducing, headcounts and locations, your competitors have done the same thing, most like you guys are trying to lead the way and take a strong foothold on pricing. I was hoping your could arise just your thoughts on the industry and your thoughts on, where you see the industry going? If you believe you we’re in the beginning of a structural change in the industry, where people realize that locations have been built out, fleet have been too big for too long and they are needs to be underlying changes in the industry and can do you think that transition is taking place and if so, maybe how are you seeing morphing it once we get out this -- once we begin the recovery?
Mark Frissora:

Well, I certainly think conditions are right for industry consolidation and other than just at a high level obviously, the strongest brand in the best balance sheets often times, are able to take advantage of industry consolidation economic time. So that’s about that broad and as vague as and it’s specific cycle, but yes, I think it’s clear to say that this industry needs consolidation and I believe it will happen and the timeframe will be determined by how soft, how the credit crisis and how the economies go forward. I know we feel very safe and very good about our liquidity and that’s a positive for Hertz in these tough times. It allows us to opportunistically take share what we need to and position ourselves right for consolidation in a good way.
John Healy:

As in the consolidation, I mean how do you feel about the profitability of the industry once we begin the recovery? I mean as Hertz -- with changes you’re making, you feel more confident or may be less confident in the future profitability of the company as maybe as well as the industry?
Mark Frissora:

Well, I’d tell you this that we’re in a very good spot as a rental industry as a whole I mean you might say well, how could that be. When residual values start to really fall, pricing from the OEMs get better, right. So, for us in the middle, we’re able to take advantage of marketplace conditions whether it’s at the retail level or if it’s at the acquisition level. We kind of have that flexibility to be able to provide profitability. It just gets lumpy if you end up having again a quarter or two where you have issues. So you’re asking about the overall industry and whether or not the macros are such that it will squeeze profitability. I would tell you that based on what we see is when the industry becomes right fleeted, pricing doesn’t sue. We think that’s going to continue. I think pricing will improve as the industry becomes more tightly fleeted and we feel that we’re ahead of the curve on the tight fleet right now and we think as our competitors more tightly fleet that -- again, overall the industry improves on that. I think that on new technologies, we believe like car sharing is a great technology. We’ve invested a lot of money in over the last 14 months. We continue to invest and it changes really that technology, we believe, will change the margins of the business. It requires less labor, it’s more intimate with the consumer, and more flexible and we believe that can be a very -- have a very positive impact on the profitability of the industry as it gets adopted. We are trying to be first in that with patents that -- and patented technology that we will bring forward. So, the fundamental business model can gain strength and come out of this weakness with strength based on consolidation and based on new technology. We also think global rentals in general, there’s a very -- it’s very important to understand that it’s global travel industry. The world is getting smaller and with that if you have increased travel patterns globally. If people traveling to different areas of globe at a more frequent implications that will occur overtime. That’s just kind of a long-term macro that we view as positive as being the only global rental provider, the truly global rental provider. We think that’s an advantage for us with our corporate contracts because it gives us leverage there at the corporate level. So, again, I don’t see a weakness in margins. Now, our business model doesn’t say we get weaker. Once we come out of this current crisis, we believe we’ll be stronger.
John Healy:

Okay, great. That’s very helpful. Thank you.
Operator:

Your next question is from William Truelove with UBS. Please go ahead.
William Truelove:

Hi, I had a question about the monthly holding cost relative to the cash flows of the vehicles. As you extend -- if I assume that previously the correct ratio of that was that kind of lifecycle of vehicle. Now that you’re making the vehicles last longer, why is this new longer life of the vehicle still more optimal and is that because the revenue situation has changed so much that the -- even though the greater residual downfall and what not and greater maintenance expenses still better to hold the car longer, because it’s just gets confusing for me as to why holding cars longer now is more optimal than why wouldn’t we hold cars longer previously. Is it something do with the revenue situation? So can you walk us through how that ratio works?
Mark Frissora:

No, I’m going to -- Elyse and I will tag team this, okay? Just in general, if you’re in an environment where cash is important to you and you see a declining market where volume is contracting, right, that changes your fleet strategy and imagine if you will -- I will make a very simple model for you. If I’m buying a car, a new car, I paid more for that new car than the cash that I get when I sell the new car in depressed environment, right. So, if I’m – or say delete ten old cars in a depressed market and I buy ten new cars, the cash sound is pretty loud. It sucks, okay basically. So, when you go into a contracting environment, instead of deleting, if you will, old cars into a weak residual market and buy new cars, which cost you more money than the old cars you’re selling. Again, if you -- what you try to do with age the fleet that’s one of your techniques. You do that and you age it and you’ve aged it by mix and models so that you don’t suffer residual loss going forward later so you manage to mix in that and at the same time, you preserve and replace those cars that still have decent residual value in the market, for the slower, if you were slowing of the selling and the slower of buying.
William Truelove:

Okay, versus?
Mark Frissora:

In order to preserve cash while contraction occurs. Now, when you start getting to flat, to increasing levels of growth, then your fleet strategy changes, right, and you start bringing the fleet -- do a fleet in at better prices and you can again start -- again, the fleet starts to get younger, but that’s I’m just trying to give you overview and now Elyse, you want to add to that?
Elyse Douglas:

No, I think you hit the nail on the head, Mark. It’s really a liquidity issue. We are trying to preserve liquidity. Ageing the fleet is a better alternative. We do look very hard at the maintenance cost and everything associated. When we evaluate the scenario of holding the car of when we look at total holding costs. We include all those maintenance cost as well. So, we do factor that into the model.
William Truelove:

Okay, so --
Mark Frissora:

So just as summary, as cars further -- as we age cars further than selling into the weakest residual market we’ve seen, right, the market is currently weak almost residual values and reduced demand and as a result, we got these tight credit markets. So it’d be silly to not age the fleet. I would to put that way too. Go ahead.
William Truelove:

No, that’s okay. Thanks.
Mark Frissora:

Alright, sure.
Operator:

Thank you. We’ll go to Michael Millman with Soleil Securities. Go ahead please.
Michael Millman:

Thank you. Following up on some of the questions on fleet, I’m not sure that you answered question as why under ordinary circumstances wouldn’t you want to age the fleet? If I understood what you said, it sounds like the age from the fleet is more related to slowing your buying really than it is to the selling part. You don’t want to lay out the cash and Hertz. It’s really ahead of the curve on bringing down the fleet. It doesn’t matter if the industry hasn’t brought down the fleet because you have to compete with their pricing and then given what you said about the residual market as the industry kind of miss the boat and being able to take down the fleet and then a question, could you explain what you mean when you talk about subject to borrowing-base availability?
Mark Frissora:

Okay, so just in general. Competitors ageing the fleet it does matter to us and we watch that. We always want to have the youngest fleet and we know we think that today we do and if you look at the competitors’ numbers, you’ll see that we do. So, for us, it’s not about ageing the fleet to preserve cash at all costs or anything else. We do it in a way that still provides competitive advantage for Hertz which is to have a younger fleet than anyone else. Go ahead and answer the question about the --.
Elyse Douglas:

Yes on the borrowing base, yes. As you know, we have $4.6 billion of liquidity and what we make -- the statement we make is that 2.1 is not relevant to the borrowing base. So what that means is the other $2 billion, let’s say we have $1 billion of fleet financing, but we could only tap that if we’re actually increasing the fleet to levels above where we’re at today. So, $4.6 billion, we wouldn’t have to increase the fleet levels in order to access $2.1 billion of it, but if we wanted to grow the fleet levels above that, we could access the full $4.6 billion. Does that answer the question?
Michael Millman:

Okay, so in effect you have this $2.1 billion available for --?
Mark Frissora:

Anything.
Elyse Douglas:

We can tap it tomorrow.
Michael Millman:

And --?
Mark Frissora:

And then rest of it is for fleet.
Michael Millman:

And that’s going to be available for how long?
Elyse Douglas:

Well, pretty much to mid-2010.
Michael Millman:

Okay
Mark Frissora:

Before we have to refinance it.
Michael Millman:

And just getting back to all those fleet questions, you might have a younger fleet, but if everyone is over fleeted currently, how do you get the price increase? And does this continue, because it’s very difficult in the current market to sell risk cars as you have pointed out? And some of your competition in order to get out of cars quickly, I actually sold their programmed cars?
Mark Frissora:

I know we’ve held onto our programs cars and now we’re defleeting program cars because this is when you need to do it, right. We have to rapidly defleet in the fourth quarter. So, we sold the risk cars in the third quarter and then the defleeting that we had to do in the fourth quarter, it’s all programmed cars for us so we didn’t have to take the hit.
Michael Millman:

I understand that.
Mark Frissora:

So strategically, we will -- we did it perfect and we took a hit and earnings to do that in the third quarter unlike what we think our competitors do and we’ll see how that goes, but that’s our opinion based on the information we get from the auction houses and what we see out in the marketplace. No one else was aggressive as we were at defleeting and then, no one else had pretty much delayed orders from the OEMs in November and December as we have in order to preserve liquidity. So we’ll see how fourth quarter goes. We feel like we’re in a very good position relative to our competition heading into the fourth quarter.
Michael Millman:

But my question is more about the pricing, if you’re defleeted and the industry isn’t pricing is still going to be weak?
Mark Frissora:

Look, pricing I can’t comment on, right. But I will just tell you in general, Hertz has a Simply Wheels format that we just said we expanded. So in terms of pricing we have a leisure brand that’s very competitive with the low price people and we just said we expanded it in many markets in the Florida and California. We’ve opened it up there as well, the two biggest leisure markets in the United States. So we feel comfortable, but we have a pricing strategy that is competitive at the low-end where it needs to be and at the same time, we think that the rest of the industry is defleeting right now and because they are that the pricing has an opportunity to strengthen given the fact that sometime this quarter we’ll be more tightly fleeted as an industry, and this is based on the input from the auction houses and dealer relationship that we have.
Michael Millman:

Okay. I have to take this up with you later. Thank you.
Operator:

Thank you. Then we’ll go to Emily Shanks with Barclays Capital. Please go ahead.
Emily Shanks:

Hi, good morning. Thanks for all of the details. I have just a couple of very quick follow-up questions because I want to make sure that I’m interpreting the slide right around availability. Just speaking specific to the ABL, the $1.1 billion that’s on their capacity that’s taking new account the borrowing base limitations, is that your full availability right now?
Elyse Douglas:

Yes, that’s correct.
Emily Shanks:

Okay great and then around the ABL, it looks like it was just a little bit higher than what we’re forecasting yet the fleet get it was a little bit lower. Are you utilizing your ABL more so than you have in the past to fund some of the vehicle related financing versus the ABS set or the (inaudible) or no?
Elyse Douglas:

What I would say Emily is that we are being conservative on the liquidity front and so we’re not as, we are not paying down debt as quickly as we might have in prior years.
Emily Shanks:

Okay, and did you have to or did you choose to use ABL trying to fund any needs to meet enhancement requirement down at the ABS level?
Elyse Douglas:

What we do have a situation that’s slightly lower than trades primarily on the international fleet because as we move to the new international ABS structure from the bridge facility that had a lower advance rate.
Emily Shanks:

Okay.
Elyse Douglas:

And the advance rate changes in the U.S. facility based on the mix of the cars. So, that changes every month.
Emily Shanks:

Okay, so you are pretty comfortable with your ABL draw versus what you’ve got funding out of you’re basically your vehicle financing box?
Elyse Douglas:

Yes.
Emily Shanks:

Okay, and then just one last overall question, around what fleet level worked like in the industry this month and going in, well, the month of October and going into November. I was hoping you could give a little bit of color because one of your competitors was saying that they felt that the fleet industry was over fleeted. Clearly, the numbers that you’ve given I think as it just said, your fleet is probably pretty well-maintained like, can you just give us a sense of how you view the overall industry fleet levels this month and last month and then, this month? Please.
Mark Frissora:

I guess in general, I think October most of the industry excluding Hertz was loosely defleeted. Input from the auction houses and dealer relationships we have right now see if the industry is defleeting right now and in fact, I think November, we’re in November now that this month will be a month where defleeting will continue at a accelerated rate and our hope is that the industry sometime in, let’s say December January period, will be fairly tightly fleeted like a tight, tighter than what they’ve been the last 60-days. Okay. Is that good enough?
Emily Shanks:

Yes, I think so. I guess maybe just one follow-up question to that. Are you feeling as though you can’t move your vehicles fast enough? Do you feel that?
Mark Frissora:

No, I think there was a period of time in September where things slowed down, slower than what we thought they would. So, this is the period September, but now we are very comfortable that we can move vehicles exactly as fast as we want when we want and again, that’s because most of the vehicles that were moving --our programmed cars, that’s like 90% of what we’re moving now. So as we wherever depletion needs we have, they’re all programmed and you know how those works Emily so,
Emily Shanks:

Right.
Mark Frissora:

There’s just no issue at all, so.
Emily Shanks:

Okay, alright, superb. Thank you.
Operator:

Your next question is from Christina Wu with Soleil Securities. Please go ahead.
Christina Wu:

Hi, good morning.
Mark Frissora:

Hi.
Christina Wu:

Hi, I have a few questions on the HERC business. You mentioned that your sales of used equipment during the quarter was strong, can you comment on the strength of the used equipment market in general and whether there are any significant differences between earthmoving equipment and the other types of equipment you sold?
Gerry Plescia:

Hi, Christie this is Gerry Plescia.
Christina Wu:

Hi.
Gerry Plescia:

The used equipment market is very good. The auctions are very liquid and the strength is really being driven by international buyers. It’s really helping to hold off the demand for equipment in all categories. There seems to be obviously a bigger push of selling earthmoving truck machines, excavators just based upon the demand levels on the rental side within the marketplace. So, there is some pressure on the earth-moving side but I will say it is very liquid and we’ve been able to sell essentially anything we want to at auction. The aerial side is much stronger from a pricing perspective, power generation, specialty equipment, but overall, it’s very liquid and the residuals are being supported pretty well.
Christina Wu:

And for the earthmoving where you said that there’s a little bit of push back, are you still able to sell that equipment at greater than your book value?
Gerry Plescia:

No, on the earthmoving side, we are selling below our book value and part of that is our choice to sell a faster pace or larger amount at one time. So, as you sell more quantities, we have to sell some of that earthmoving at below our book value and of course there’s an auction fee involved which adds to the cost, but overall the earthmoving is being sold generally middle to large size equipment at below our book value and that’s not unusual when we sell at auction.
Christina Wu:

Yes and the other pieces are selling above book value than the non-earthmoving?
Gerry Plescia:

It depends on the category. Generally, yes.
Christina Wu:

Okay. Gerry, can you give us an update on your comfort with ageing of HERC equipment? And any update on expected cash flow generation from HERC for 2009?
Gerry Plescia:

The ageing as we talked about we are 34 months today. We’re not buying much new fleets so that will age another one to two months before the year is over. We spoken previously that we are comfortable with mid-30s and as the fleet mix changes away from earthmoving, we’re comfortable at an even higher level, high 30s, 38, 39 months, that’s certainly not out of the realm of possibility or outside of our comfort level. So as the mix changes, we can age that fleet a little bit more and at the present time, based on the slower demand environment, we’re comfortable with a high 30s fleet age. Related to the cash flow, essentially as we defleet -- as far as predicting exactly where we’ll be in '09, it’s tough to tell right now, but certainly a very positive cash flow environment heading into the end of the year and certainly into '09. It may not be as strong as '08, just based on the amount of units we’re selling in '08. As we balance that fleet though there’ll be less of a need to sell the same quantities. So, certainly there’ll be a little less of a positive cash flow, but certainly positive.
Elyse Douglas:

Just to add to that Christina, the net CapEx for HERC for the year will be somewhere in the $50 million to $100 million range.
Christina Wu:

For 2009?
Elyse Douglas:

For 2008.
Gerry Plescia:

2008.
Christina Wu:

Okay.
Elyse Douglas:

For the full-year.
Christina Wu:

So $50 million to $100 million and it sounds like if you’re comfortable ageing the fleet to the mid-30s, sometime around mid 2009, we should expect to see you investing a bit more CapEx, replacement CapEx into the HERC fleet?
Gerry Plescia:

It all depends on the market conditions, but I would say yes, that would be a good possibility.
Christina Wu:

Perfect. Thanks so much.
Gerry Plescia:

Thank you.
Operator:

Thank you. We’ll go to Jeffrey Kessler with Imperial Capital. Please go ahead.
Jeffrey Kessler:

Thank you, and thank you for taking my call. Mark, with regard to -- if insurance replacement is soft due to let’s say less usage of automobiles out there, and if that was not going to be -- assuming that was, we’ll call it the bull work of one of your competitors because there are other two businesses you are obviously suffering the same, this is the same problems, which is best of the industry in terms of volume. If insurance replacement which was not expected to be that soft is becoming soft, do you think that this increases the likelihood? That there will be price discipline amongst the entire industry where there might not have been as much if the replacement business had remained strong? In other words if everybody’s under pressure now from every angle, does this increase the possibility that for the price increase that you’re trying to put through is going to stick better?
Mark Frissora:

I think in general, yes, in tough times it certainly historically is proven true that the pricing sticks better and after 2000 and 9/11, after 9/11 in 2001 you may recall Jeff that we led the industry and we actually pulled off almost a 10% price increase for the year in 2002, which is unheard of and that happened in 2002 in the industry pulled together and did that. So we’re hopeful that again with marketplace conditions is tough for everyone, that yes, the industry would be able to pull off an increase. But, you just don’t know and again it’s not a rational environment that we’re in and so. At the end of the day, insurance replacement business is certainly not off as much as our regular airport rental business and insurance replacement business pricing did improve for the quarter actually. I believe that I said in my remark that that was actually up about seven or eight-tenths of a point and our actual demand in the overall airport space was off modestly. So overall, but I think that your thesis is probably correct.
Jeffrey Kessler:

One other quick question and that is on residual value and the strategy going forward. If we’re getting to a point and I realized that residual value is not determined by the auto rental business although it’s a part of that residual value equation, if indeed the -- let’s just say Hertz becomes some level of stabilization in the normal, in a number of months, that cars just sitting on the lots and it stops going up and stabilizes and the defleeting actions of the industry, auto rental industry overall and I would assume that the corporate fleets as well, defleeting begins to wane later on in November into December. I know you don’t, you’re anticipating this next part of the question but do you think this can have some type of cumulative effect on residual value?
Mark Frissora:

You’re right. I think that if conditions improve in terms of both demand and/or stabilizations absolutely, residuals will improve. Yes, absolutely. I mean, credit has to loosen. That’s the big issue right now. So we, as you get in to the dealer networks and you talk to the people that are involved in the used car business, the big issue on residuals has been credit, people perhaps be a demand and that demand has slackened because of the credit issue, but we expect it to eventually loosen as money if liquidity moves into the market and that will help residuals for sure.
Jeffrey Kessler:

So ultimately, all of the defleeting by corporate fleets and by auto rental fleets, granted, it’s a small part of the residual value equation, a credit becomes, is still the bigger act here.
Mark Frissora:

Yes, but on a positive note is that the OEM decision to end leasing programs. That will overtime really help rental car residuals. Okay, so that was a positive macro if you will and would also improve. Okay?
Jeffrey Kessler:

Okay. Thank you very much.
Mark Frissora:

Thank you.
Operator:

We will go to Yoma Abibi [ph] with J.P. Morgan. Go ahead please.
Yoma Abibi:

Thank you. Good morning. Looking at the corporate debt, in 2007, it looks like corporate debt picked up in the September quarter than it tick down in December, would we expect to see the same thing this year?
Elyse Douglas:

Well, the fourth is our biggest cash flow quarter. So depending on how the -- and we are anticipating a good cash flow quarter so I would expect to see the same occur.
Yoma Abibi:

Would it mirrors kind of, I guess in the September quarter, debts picked up more than it did in last year, would we expect it to decline also more than it did last year?
Elyse Douglas:

Well, as I said, we probably had a lot more sitting in cash this quarter than we did a year ago, so on a net debt basis, I think that’s probably a better comparison to look at.
Yoma Abibi:

Okay and my final question is, in the last cycle, what was the average fleet age for your car fleet?
Elyse Douglas:

You mean age.
Yoma Abibi:

In months.
Elyse Douglas:

I think eight months versus 6.5 to the prior year.
Mark Frissora:

So 6.5 versus 8 months. You got it?
Yoma Abibi:

And this is kind of the post 2001 down cycle, right?
Mark Frissora:

The average age of our fleet a year ago as itself – the number I’m giving you is the average the age of our fleet a year ago is about 6.5 months and now this quarter it was 8 months; the average age of our fleet.
Yoma Abibi:

My question was actually and if you looked at the last down cycle in the post 9/11, how – what was the number of months for that fleet on average, that’s wrapping of that cycle.
Joe Nothwang:

This is Joe Nothwang. It was only about one month average younger if you go back and look at 2001 and early 2002 and what had materially changed is the cost of the program from the OEM today versus what they were back than which has led the whole industry to more of the risk model and if you go back in to 91 into that cycle, it was probably 4.5 to 5 months. Again, for the same reason; very attractive OEM programs then that are not available in the marketplace today.
Yoma Abibi:

Okay. Great. Thank you.
Mark Frissora:

Just to clarify that for you. If you buy, it used to be, you could buy a programmed car almost as efficiently as a risk car and then the pricing changed so that the OEMs wanted to encourage people to buy risk cars instead of having the program residual risk if they had on the program side. So because of that change in relationship that has occurred overtime, people have shifted more to a risk universe. A risk universe means your cars are older. Program cars you turn in at a much earlier lifecycle than you do risk cars in general and that’s why the fleets have aged overall is because people are buying more risk cars and selling them on a cycle that’s more or like 11 to 13 months versus 7 or 8 months which is the way they use term in on a program basis. Okay?
Yoma Abibi:

Okay. Thanks.
Operator:

Thank you. We’ll go next to Sunder Darshna [Ph] with Deutsche Bank. Please go ahead.
Sunder Darshna:

Yes, hi. I just got a couple of clarifications along this – the fleet financing availability. So just to clarify, so based on your car and fleet sizes, you said you have $2.1 billion available and of that 2.1, 700 is the cash and then 1.4 is your various fleet facilities, is that the right way to think about it?
Elyse Douglas:

Yes that’s correct.
Sunder Darshna:

And how much of that 825 that you have just did a month or so ago available as part of that 1.4, is it based on your current borrowing base is that – do you have access to that facility?
Elyse Douglas:

No, we don’t. That would only be if we were acquiring additional fleet.
Sunder Darshna:

Okay and then finally on that, in 2010, you have about $5 billion or so of maturities coming, do you how – on average, how much have you borrowed under that facility and do you have a sense for how much you will actually need to refinance based on your currently plans to defleet?
Elyse Douglas:

The 2010 maturities?
Sunder Darshna:

Yes.
Elyse Douglas:

Pretty much the bulk of that is our fleet financings both domestically and then international as well and we will have to refinance all of it.
Sunder Darshna:

Right but is that all you mean, is all of it used or I’m just kind of trying to get a sense for how much of that utilized on an average?
Elyse Douglas:

There’s $4.6 billion worth of notes that are fully outstanding and then the international facility and then there’s the revolving facility here in the U.S. that goes up and down based on the fleet size.
Sunder Darshna:

Well, of that’s 5.5 at least 4.6 is currently utilized.
Elyse Douglas:

Correct.
Sunder Darshna:

Okay, and then just on the expense side, you talked about $58 million of drag from certain expenses you have to incur relative to maintenance and defleeting and all of that, do you expect – is that more of a one time kind of expense or do we see those kind of expenses continue over the next two quarters and if so, what kind of magnitude can we expect for those activities?
Mark Frissora:

Well, if I would – let me see if I can chunk it out for you. About a half of those expenses were fleet-related and certainly those are kind of like one time because of the historic drop we saw on right sizing we had to do. The other half of them were advertising for the most part that we – it’s been a surge on in advertising in the neighborhood of about $16 million to $17 million more year-over-year in the third quarter to introduce the new gas paid the pump and the $10 million service guarantee. Those will not repeat. Those were one time as well. So I would say probably at least 80% of those expenses were more unusual one-time kinds of events, but increased maintenance cost in some cases as you age your fleet some of those cost repeat themselves and but they eventually as we get to a more normalized economy will go away so some of the maintenance charges will in fact be a little higher levels going forward but again once the economy stabilizes, those will be gone as well. Is that clear?
Sunder Darshna:

Yes, thank you.
Operator:

Next, we have Fred Taylor with MJS Asset Management. Go ahead please.
Mark Frissora:

We’re just going to take this one last question. Okay, operator?
Operator:

Alright, thank you. Go ahead, Mr. Taylor.
Fred Taylor:

Thank you. Could you give me maybe an idea of what you’re hearing from bankers or investment bankers on sort of the traditional ABS market, noting articles that I don’t think a single one was done in October whether it’s credit cards or car deals, and given that maybe diversifying your sources for fleet debt, which you have touched on throughout the call, I realized but that was my question.
Elyse Douglas:

Yes. Okay. With respect to the traditional ABS market, what we’re hearing is that the market is basically closed for the rest of the year. The bankers are telling us so that they believe the markets will open up again in 2009 and there will be a market for AAA rated tranches potentially AA rated structures so that’s what we’re hearing from the bankers at this stage. We’re looking at all different types of financing at this stage. So in addition to the traditional ABS market, we obviously we’ve passed the bank conduit market. We’re talking about leasing structures and various other hyper type structures. So we’re really looking at a variety of things.
Fred Taylor:

Okay.
Mark Frissora:

That’s the same as for 2010 third quarter. So, we are well ahead of the curve, but we feel very comfortable with our ability to refinance going in to 2010.
Fred Taylor:

Okay. Thank you very much.
Operator:

Thank you. Then please go ahead with your closing remarks. Mark Frissora Thank you, operator. Thanks everyone for attending the conference call. Good bye.
Operator:

Thank you ladies and gentlemen; that does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.

Hertz Global Holdings, Inc. Q3 2008 Earnings Call Transcript

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Hertz Global Holdings, Inc.
Q3 2008 Earnings Call Transcript