Hertz Global Holdings, Inc.
Q2 2011 Earnings Call Transcript

Published: 3 Aug 2011

[Operator:]

Welcome to Hertz Global Holdings’ 2011 Second Quarter Conference Call. 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 second quarter results issued yesterday and in the risk factors and forward-looking statements section of the company's 2010 Form 10-K and quarterly reports. Copies of these filings are available from the SEC, the Hertz website or the company's Investor Relations department. I would like to remind you that today's call is being recorded by the company and is also being made available for replay starting today at 12

[Leslie Hunziker:]

Good morning. 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 at www.hertz.com/investorrelations. Today, we'll use certain non-GAAP financial measures, all of which are reconciled with GAAP numbers in our press release and at the back of the slide presentation, both of which are posted on our website. We believe that our profitability and performance is better demonstrated using these non-GAAP metrics. Our call today focuses on Hertz Global Holding, Inc., a publicly traded company. Results for the Hertz Corporation differed only slightly as explained in our press release. With regard to our IR calendar, we'll be hosting our annual financial modeling workshop and Investor Day on September 12 and 13 in New York City. We'll also be presenting at the Citi Global Industrial Conference in Boston on September 21 and the Deutsche Bank Leveraged Finance Conference in Phoenix on October 13. So hopefully, we'll see some of you at those events. This morning, in addition to Mark Frissora, Hertz Chairman and CEO; and Elyse Douglas, our Chief Financial Officer, on the call we have Scott Sider, Executive Vice President and President of Vehicle Renting and Leasing in the Americas; Michel Taride, Executive Vice President and President of Hertz International; and Lois Boyd, Executive Vice President and President of Hertz Equipment Rental Corporation. They'll be on hand for the Q&A session. Now, I'll turn the call over to Mark.

[Mark Frissora:]

Thanks, Leslie, and good morning, everyone. Thanks for joining us. Let's start if we can on Slide 6. As you've seen from last night's press release, despite an ever-changing macro environment backdrop, we delivered superior results in the second quarter. Consolidated adjusted pretax income was up 92.5% year-over-year, reflecting a 380 basis point margin improvement. Cost efficiencies, in particular lower rental car depreciation, and a continued rebound in equipment rental drove the profit improvement and more than offset tough year-over-year pricing comps in worldwide Rent-A-Car and significant investments, about $16 million worth, in our strategic initiatives. Some of those investments included the Off-Airport expansion as we opened up our 2,000th store, the continued rollout of our Advantage brand, emerging market penetration, employee training and development initiatives, facility upgrades and the launch of a national advertising campaign. As you can see on Slide 7, for U.S. Rent-A-Car, lower depreciation is one of the key profit drivers in the second quarter. Strong used car values, coupled with strategic fleet processes, drove U.S. monthly depreciation down nearly 26% year-over-year to $220 per unit in the second quarter. Of the $76 per unit decline, 2/3 was related to improved fleet procurement and planning processes, sales process improvements and a broader use of alternative sales channels, as well as the overall stronger used car market. If you'd now turn to Slide 8, you'll see that the domestic used car market for the 1- and 2-year-old car category has always been strong, liquid and very resilient. On average, over time, we've enjoyed base residual values of 73% to 75% of original vehicle cost on an age-adjusted basis. On top of that, this year, the market is benefiting from a lack of supply of off-lease vehicles in our aged category of used cars. We expect to continue to see the sales price benefits of this tight supply through 2013 when the 2010 leases expire. Incremental gains on sales are also coming from the structural changes to our remarketing strategy that include a higher risk fleet and an increase in sales through non-option channels, which generated much higher return. And in the second quarter, there was an even more favorable impact on used cars values due to the new car supply chain disruption following Japan's mid-March tsunami. Now I know a lot of investors are concerned about an inevitable drop in residual values as Japanese new car production comes back online and new vehicle leases begin to refill the used car pipeline probably sometime in 2013. But on the bottom of Slide 9, what you have to remember is that today, Hertz' remarketing channel shift is only in the very early stages of development. We're building our dealer relationships. We're getting license in additional states to sell vehicles to consumers and planning a national campaign in the fourth quarter to raise awareness and promote sales through our Rent2Buy website. So as market residuals eventually return to more normalized level, we'll continue to accelerate our returns through ongoing expansion of alternative sales channels. Today, we're about halfway through the work that needs to be done to achieve a 90% non-option sales mix. Additionally, there's a significant opportunity ahead to penetrate direct-to-consumer channels much more broadly. Compared to our pre-recession peak performance in U.S. Rental Car, the second quarter 2011 adjusted pretax income is 105% higher on 2.9% less revenues, compared to the 2010 second quarter, adjusted pretax income increased 46.8%, primarily due to the lower fleet carrying costs and 4.3% revenue growth. The second quarter revenue growth in U.S. Rent-A-Car was driven by 8.3% higher volume, with transaction days up across all businesses

[Elyse Douglas:]

Thanks, Mark. Good morning, everyone. Let me begin on Slide 18. As you would expect, we're very pleased with our second quarter financial performance on both a GAAP and an adjusted basis. Our GAAP pretax income significantly improved in the quarter, with a reported $94.6 million profit over last year's second quarter loss of $6.2 million. Cost efficiencies, including lower rental car depreciation, continued improvements in equipment rental and lower interest expense more than offset tough year-over-year pricing comps in Worldwide Rental Car. This drove a consolidated corporate EBITDA margin of 17.5%, which was 250 basis points better than the same period last year. It was also our best second quarter corporate EBITDA margin in the last 5 years, which includes our peak revenue year of 2007. Before discussing net income, let me review our cost performance. Slide 19 breaks out the major components of direct operating expenses. Our ability to control wage costs and achieve continued improvement in labor productivity is evidenced in personnel-related expenses growing at half the rate of revenue. In fact, revenue per employee in the quarter improved 5.5% from the prior-year period. And higher gasoline prices and the prior year VAT refund had a negative impact on reported direct operating expenses as a percent of revenue. Excluding these expenses, the direct operating cost ratio to revenues declined 60 basis points year-over-year. So for the second quarter, we delivered $55 million in GAAP net income. Diluted shares outstanding totaled 451.8 million. GAAP diluted EPS, therefore, was $0.12 per share compared with the prior year loss of $0.06 per share. Adjusted EPS in the second quarter was $0.26 per share, an 85.7% increase over the prior year. Now, let me give you some more detail on the performance trends by business unit, starting with Worldwide Rent-A-Car on Slides 20 and 21. Worldwide Rental Car generated 9.8% more revenue than last year despite the vehicle sourcing uncertainty in the U.S. and economic volatility in Europe. Revenue in Worldwide Rental Car was made up of 36% Airport Leisure business, 25% commercial business and 29% Off-Airport rentals. The balance comes from other international revenue. Worldwide Rental Car adjusted pretax income increased 38.5% year-over-year despite an increase in advertising expense related to our new campaign, no value-added tax refund this year compared to 2010 and higher gasoline expense as I previously mentioned. Our Worldwide Rental Car fleet was 65% risked at the end of the second quarter compared with 59% risked in the second quarter of 2010. Now let's turn to the results of our equipment rental business on Slides 22 and 23. With the industrial segment continuing to lead the recovery, we are pleased to see our industrial mix approaching 30% of North American Hertz revenue, driven by the expansion of existing accounts, as well as new business acquired through our ongoing roll-up strategy. We believe our revenue from the industrial markets we serve in the U.S. increased 14.6%, which continues to outpace the overall industrial market's estimated growth of 12.9%. This demand, supported by growth in our specialty pump and power division, along with growth in entertainment, government and railroad projects, helped drive time utilization 620 basis points higher to 60.7% and increased dollar utilization 320 basis points over last year to 33%. As a cautionary note, I point out that utilization is another metric that competitors in the industry compute in different ways. We reduced Hertz adjusted direct operating and SG&A expenses as a percent of revenue by 240 basis points over last year as a result of improved employee productivity, better operating leverage as volume increased and stabilizing maintenance costs. The improvement in pricing and volume led to a corporate EBITDA margin improvement of 190 basis points year-over-year. For the full year, we're on track to deliver a 42% corporate EBITDA margin in North America. However, with a weaker-than-expected European economy and currency volatility, our worldwide margin will probably be a bit lower than previously forecasted. On the next slide, second quarter equipment growth fleet purchases were $143.2 million and disposals were $122.9 million on a first-cost basis. We continue to expect Hertz net CapEx per fleet to be between $300 million and $400 million for the full year. The average fleet age in our portfolio was consistent with the first quarter, and we expect to reduce the average fleet age by about 2 months by year end. Moving to Slide 24, for the second quarter 2011, interest expense was $165.8 million, a decrease from 2010 of $23.1 million, reflecting the impact of our refinancing activities. Cash interest was down slightly as lower rates associated with our refinancing were offset by the impact of the lost benefit of the ABS interest rate swap which expired in November and slightly higher EURIBOR rates. For the full year, we've improved our forecast for net cash interest expense to flat to $5 million higher than in 2010 from our previous estimate of an increase of $15 million to $25 million. The revision is due to the favorable absolute rates we achieved on our fleet financing this quarter and lower U.S. floating rates than previously forecast. Restructuring and restructuring-related charges in the latest quarter were $36.5 million compared with the prior year's $22.3 million. These charges reflect the closure of 12 underperforming Hertz locations and a rationalization of our global workforce. For the full year, these expenses are expected to be between $60 million to $70 million. Moving to Slide 25 and 26, we generated $376.2 million less corporate cash flow in the second quarter compared with the same period in 2010. Approximately 50% of the variance is due to one-time impacts, primarily the timing of new high yield interest payments, investments in acquisition activity and a benefit in 2010 from improved payable term. The balance is split almost equally between growth in the businesses as evidenced by increased Hertz and insurance replacement receivables and higher non-fleet capital expenditures and fleet investments. Net working capital day trends continued to improve to negative 60.5 days in the second quarter of 2011, which represents a 26% improvement over 2007. On the next slide, we continued our financing activities in the second quarter, completing 2 transactions to support fleet growth in the U.S. and Europe. In the U.S., we issued $598 million of 3- and 5-year term ABS notes at a weighted average yield of 2.88% and achieved a 76% advance rate, almost a full point higher than our previous-term ABS transaction. In Europe, we executed a EUR 100 million seasonal facility to support our peak summer fleet requirements there. At the end of the quarter, we had $1.6 billion of corporate liquidity available to fund growth initiatives as outlined on Slide 28. With that, I'll turn it back to Mark.

[Mark Frissora:]

Thanks, Elyse. Now let's move to Slide 30. As everyone knows, the economic slowdown is causing widespread uncertainty across industries, markets and regions worldwide. For Hertz, however, our 2011 GDP forecast was already well below the consensus and this modicum of caution has proved appropriate for us. Despite the macro volatility, we've raised our full year earnings guidance by roughly 7%, incorporating our strong second quarter performance and accounting for additional upside to our cost savings projection. This is on Slides 31 and 32. From where we sit today, we think this is a prudent increase. Although if the GDP can reverse its recent trend, there certainly could be additional top line benefits. On Slide 33, we've updated our year-over-year earnings sensitivity analysis. I'll remind you that a 1% movement in any of the key metrics has significant upside or downside effect on pretax income. Net-net, we're cautiously optimistic about the second half of the year, and our ability to do well, as cost efficiencies, favorable equipment rental pricing and a sustainable depreciation improvement should more than offset the risk of weaker rental car rates this summer. Let me give you a little more insight into the pricing environment. As you know, this spring brought a lot of uncertainty for U.S. rental car companies. There was little visibility to summer demand and significant concerns over the automakers' ability to fill summer fleet orders. So as I mentioned, the industry held fleet that would have otherwise sold to ensure summer capacity. When the fleet picture became clear in early May, industry found itself with more fleet than anticipated as the majority of OEM commitments were satisfied. Since the industry wasn't able to begin adjusting fleets until late in the second quarter, the excess capacity has bled into the summer season, causing continued pricing pressure. As a result, our efforts to institute a sequential national price increase for reservations beginning June 1, failed. Another price increase was attempted for July 1 rentals and we were optimistic as we saw some peers following certain markets. But ultimately, that was not sustainable either. The reality is that with spread values at their widest second quarter margin since 2004, a substantial decline in depreciation per day provides some leeway in pricing, while still allowing for healthy profits. And with the residual values at historic peak levels, we can sell down the assets at very favorable returns while tightening the fleet. Finally, I'd like to point out that between 2008 and 2010, weekly Leisure airport pricing was up 13%. So, a little bit of pressure on historically high prices makes some sense. Before we open up for Q&A, I want to highlight the fact that in mid-July, we introduced our strategy to redefine the car sharing experience and grow this business by lowering costs, enhancing member benefits, adding new vehicles and locations and deploying the latest in-car and customer support technology. You may have noticed that we renamed this service Hertz On Demand, reflecting increased customer control over the car sharing experience by utilizing industry-leading technology. We're excited to offer this option to existing rental car customers and for the opportunity to attract a new customer base with hourly rentals. Finally, let me say that as far as Dollar Thrifty acquisition goes, as we have previously stated, our next milestone is to obtain FTC approval. We remain focused on that process but unfortunately for legal reasons, we can't say anything further on this topic. With that, let's go ahead and open up the call for questions. Operator?

[Operator:]

[Operator Instructions] And first, we'll go to the line of Brian Johnson with Barclays Capital.

[Brian Johnson:]

Wanted to drill down into the North American airport business. Kind of 2 related questions. Can you break out the pricing mix between, on the airport side, between Leisure and corporate? You’ve done that in prior quarters. And second, can you give us a sense of utilization? That was a very strong metric for you in 1Q, but I don't see any mention of it in the slides there.

[Elyse Douglas:]

I'll take the utilization question. Our utilization was actually down slightly in the first quarter and by less than 1%, it was down by about 80 basis points. But that was primarily driven by the U.S. and as Mark mentioned, that was a function of the fact that people were holding fleet in anticipation of shortages in the summer.

[Mark Frissora:]

Yes, if regards to like a mix on the pricing, we give you a lot of visibility on that in the slides, and the reality is we don't want to give any more than we're giving right now for competitive reasons. We've found out that our competitors use our conference calls to hurt us. So unfortunately, Brian, I'd like to answer that but I'm not -- what you see on the slide is a lot of information and we're just kind of sticking to the slides right now.

[Brian Johnson:]

Okay. And just to clarify what you've given us new on pricing, what you're trying to do in the 2.4% on Slide 10, is if you'd kept mix constant, here is where pricing would have been or...

[Mark Frissora:]

Brian, that's exactly right. If we’d have the same mix of business that we had a year ago. That's where pricing would have been, down 2.4%.

[Operator:]

Next, we'll go to the line of Chris Agnew with MKM Partners.

[Christopher Agnew:]

You highlighted that you assume macroeconomic conditions remain unsettled in the second half and I -- just wondering if you could give us a little more color in relation to maybe a couple of areas. One, the amount of visibility, your sort of the visibility window and whether that's changed at all and, two, corporate travel, what are your corporate accounts telling you and what are they thinking about their spending intentions maybe in the second half? And then just finally, inbound travel, which is an important growth area for you. What are you seeing in terms of booking trends there?

[Mark Frissora:]

Yes. Overall environment in terms of advanced reservations as we look out into September look pretty strong. I mean, I say relatively strong, high single-digit kind of numbers, double-digit numbers. It floats week-to-week. But in general, we feel pretty good about overall demand moving into the rest of the year. It's actually picked up over the last couple weeks. In terms of commercial travel, I think it's fair to say that single-digit growth in commercial, kind of mid-single digit. And remember, we've had big bounce-backs over the last couple of years in commercial. So we start getting tough year-over-year comps as we move into our third quarter and fourth quarter, unlike some of our competitors who didn't experience that rebound as quickly as we did. And then the other piece is just in terms of just looking at Leisure. You didn't ask for that, but I mean, Leisure's looking stronger for us, probably even than commercial. So in Off-Airport, obviously, is also looking stronger as well, and Off-Airport, as you know, is 26% of our revenues. So again, we feel pretty good about inbound in the second half as well. Second half, maybe double-digit, 8% to 10%. It's hard for me to predict, but we feel it's going to be strong, high single-digits on inbound in the second half based on what we're seeing today. So in general, pretty good. We're kind of above the nature. I know there's been a lot of panic, it seems like in the market about consumer confidence and maybe about even our business model. We're kind of like of the opinion, don't worry, be happy, because we're not seeing it, we're a good indicator of what's happening in a general economy and we're feeling pretty decent about our ability to do well in the second half of the year.

[Operator:]

Next, we'll go to the line of Emily Shanks with Barclays Capital.

[Unknown Analyst -:]

This is actually Casey Overlander [ph] on behalf of Emily. I was just wondering what is driving the decrease in car rental rate in the U.S. and international separately and how do you characterize your competitors' pricing rationality both domestically and abroad during the quarter?

[Mark Frissora:]

You're really weak on our call right now. It's hard for me to hear you. Would you mind repeating the questions? I didn't hear all of it.

[Unknown Analyst -:]

Sure. I was just wondering what is driving the decrease in car rental rate in the U.S. and international, separately? And then also, how do you characterize your competitors' pricing rationality both domestically and abroad during the quarter?

[Mark Frissora:]

Yes, well, I mean, the #1 issue is excess fleet, right? So fleets are tightening now though and I think our competitors, my guess is, when they talk on their call next couple of days, you'll hear them say that their fleets are tight now. I mean things have gotten a lot tighter in the month of July, towards the last 2 weeks. So we're hopeful that there's still opportunity for improvement in pricing. But again, you cannot predict that in this industry. Everyone's tied to yield management systems that are based on demand and fleet levels, but in general, the problem on this entire issue was what I talked about in my call, in the early stages of my narrative that I gave you was the fact that everyone came into the summer holding some fleet because they thought they weren't going to get orders from the OEMs due to the Japanese tsunami, and everyone thought the same way and it created an over-fleeting situation. And that's kind of what caused the pricing. In Europe, we had the volcano a year ago, and it's really important to note that, that drove our RPD up like 7% or 8%, if I remember right. That 7% or 8%, that's a tough comp year-over-year, and it was all driven on one-way rates, people wanting to go home from the airports and they rented one way and we get very high rates on that. So that's really what drove probably 60% of the deterioration, was just the volcano ash cloud issue last year. So the other piece in Europe is the Advantage. Advantage is a much lower Spartan brand in Europe, and it's priced at the low end. So that was the other piece that drove the Europe pricing down. So Europe's pricing was really a one-timer. It shouldn't repeat itself. You shouldn't see that kind of pressure that we saw in this quarter. Although pricing's not strong there right now, it's just not as weak as you thought it might be based on the performance in the second quarter, and we wanted to explain to you those one-offs.

[Operator:]

Next, we'll go to the line of Rich Kwas with Wells Fargo.

[Richard Kwas:]

Mark, on the unsettled economic environment, does that imply that the second half U.S. grows 1% or something like that similar to the first half?

[Mark Frissora:]

I don't want to predict the GDP. I have no idea. I mean, I don't know what the growth rate is going to go. We had planned, as I told you, for 1.7%, then we upped it to 2%. Obviously, that's too aggressive for the U.S. economy right now. Where's the second half going to go? I mean I'm just looking at the data that I gave you on my prediction, [indiscernible] based on advance reservations of high single digit. That's just based on what we see on our advance reservation. We didn't put an assumption on GDP. We kind of now -- GDP is so volatile right now, and it fluctuates so much month-to-month that we're just kind of using our advance reservation system, our internal data to predict kind of where we're going. So I'd hate to give you a number because were not tying out to anything right now in GDP that has been forecasted or has in fact happened from a reality standpoint.

[Richard Kwas:]

Okay, and then on just on price, do you think the situation gets settled here by the end of Q3? You're going to go into the seasonal weak period as you enter Q4. Do you think fleets for the industry are going to be pretty much right-sized by September, October?

[Mark Frissora:]

Well, okay, so just a little bit on the seasonality of the business. The overall business model for Rent-A-Car has you going into selling fleet right after the summer peak. So summer peak kind of ends after the first couple weeks in September. It's fully over and now everyone's de-fleeting. And as you de-fleet, it puts pressure oftentimes on residual prices. But that's all part of the plan, right? I mean, that's the way it is every single year. So in terms of pricing, again, how people de-fleet and how they plan for volume in the fourth quarter, very difficult for me to predict. Again, pricing for us, I need to say this out loud. It's not a concern. I mean, everyone in the industry is obsessed about this, and it's about where we would thought it would be given what the over-fleeting situation was leading into the summer season. And so because the spread values are so wide for the industry, it allows people to have a little more flexibility on pricing and still maintain healthy profit margins for the industry. And that's what I think the analysts and the investors needs to understand. This is not a cause to panic. We have this as widespread, so pricing is under more pressure, and we have a 13% price increase over the last 2 years in the Leisure airport segment. It's important to note that, that people -- that we have an unusually high pricing structure in place because the recession hit all rental car companies and everyone tightened their fleets and allowed the opportunity to raise a little bit of price. So pricing's off -- it's not that far off of historical levels at all. So we're still on a pretty good pricing environment. People are making really good money on today's pricing environment.

[Richard Kwas:]

Okay, and then just quick last one for me, are you still on track to close Donlen by the end of August? And I assume that, that's not in the guidance, correct?

[Mark Frissora:]

Right. No, we have nothing in Donlen. Obviously, we'll be talking about Donlen after we close officially, and our hope is to finish by the end of August, absolutely.

[Operator:]

Next, we'll go to the line of John Healy with Northcoast Research.

[John Healy:]

Mark, I wanted to focus a little bit on the equipment rental business, really impressive results there despite the second quarter still had uncertainty in it. I wanted to get your thoughts on how you're thinking about that business over, say, the next 12 months. I know on previous calls, you had a pretty bullish view of what that business could do over the next 12 to 18 months and wanted to see if you still felt as strong about the business today as you did maybe a few months ago. And also, with Lois now at the helm of the equipment rental business, just curious to get any observations that she might have regarding how the business should be run or areas of focus or changes in philosophy.

[Mark Frissora:]

We feel good about the business and how it's performing in general. We have a lot of robust processes we've put in place there for growing the business that allow us to grow it with higher flow-through rates. I guess, I think what's new would be that we've really mapped out some significant growth programs. There are several new product lines we're going to be launching and then reemphasizing and reinvigorating existing product lines that we haven't grown as fast as we would have liked. Pump & Power being one of those. Lois, you want to talk about couple other of the platforms?

[Lois Boyd:]

Yes, there are segments in the industrial phase where we're going to broaden our portfolio there to take advantage of that market and continue to grow in that segment and also on a global basis, revitalizing footprints, so there’s a number of initiatives that will help us going forward. In addition, just looking at the profits today and we'll make them more efficient and more effective so we continue to drive bottom line and the top line at the same time.

[Mark Frissora:]

There are some plans to increase the sales force. We've already started doing that. About 80 people, it's pretty significant for us. I mean that's a big increase. We've reduced the spans of control for some of our managers, so we have more managers involved in managing the sales force. And so again, you'll see -- I think what competitors will see and/or even the market will see, is a much more aggressive tone in our selling efforts because we'll have more feet on the street to sell, and we're also bringing in quite a bit of fleet. We later to bring in fleet versus our competitors. It's clear. I mean you can see it in the numbers, but and we still have a lot of fleet coming and so one of the things you need to note is that our numbers don't include a lot of new fleet like our competitors have. We get the new fleet in, our maintenance costs improve, our growth improves. Our growth rate will improve, and we're later to the cycle because of the non-res construction component of our mix, which is the highest of the publicly traded competitors. So we feel pretty good about our position right now.

[John Healy:]

Great, sounds encouraging. And one housekeeping question, Mark. You mentioned the -- you broke out some color on fleet costs and how much was from remarketing efforts and how much was from just the used car market. Can you just re-explain that again? I might have missed a part of it.

[Mark Frissora:]

Yes. I mean, 2/3 of kind of what we called the depreciations gain [ph] , which was like $76, about 2/3 of that was driven by a combination of a lot of factors. I guess the 3 big ones, right? One is we bought better this year on our fleet. Second one is we're selling in channels that are more profitable. And the third one is just a generally stronger market. So that abet [ph] 2/3 of our improvement is built around kind of factors that probably 1/3, 1/3, 1/3 in those areas if I were to chunk it out. I can give you rough math, right? So we feel pretty good that we're not mature in a couple of those. So we're going to continue to make progress on, we believe, and be able -- now, remember that the second quarter had a spike because of the Japanese tsunami. So I don't want expectation to be that we're going to continue to drive net depreciation per vehicle down the rest of the year, but it's going to be strong. It's going to be at historically low levels for the rest of the year.

[Operator:]

[Operator Instructions] Next, we'll go to the line of Fred Lowrance with Avondale Partners.

[Fred Lowrance:]

A couple brief questions here. Just first of all, maybe, Elyse, can you tell us the realized gains that you had from sale of vehicles during the quarter?

[Elyse Douglas:]

No. It's going to be reported in the Q. I want to say it's about $60 million. Now you've got to keep in mind that it depends on how you depreciate the cars, what the gain is. So you really can't compare across the board company-by-company. But I think what we'll report in the Q is about $60 million in Rent-A-Car.

[Fred Lowrance:]

Okay. And sort of along those lines, Mark, I've heard you say the past, unit depreciation, you're expecting that to be down again year-over-year in 2012. Is that still the case with sort of the unique situation we've had here in the second quarter? Or sort of how should we think about that next year?

[Mark Frissora:]

I think you know it's too early to tell right now. I mean I think what I'd like to do is see how the year pans out and determine where 2012 is going to go. It may be lower but I don't want to promise at this point, given how strong residuals have been with the tsunami. And the tsunami had a fairly big impact and so we got to kind of work through the math on our new car buy. And after our new car buy's finished, we should be done with most of it in the U.S. probably by September, October, and we'll have a better feel for that. Okay?

[Fred Lowrance:]

All right. And then just the last one if I could. Obviously with the rental car business model and what drives profitability, you'd much rather have price over volume. But you sort of take whatever you can get with the volume that seems to be coming in the door and the revenues that you're driving from that volume, it seems like your ancillary services, those -- that roadside assistance, insurance, all of that is showing some real strength and being higher margin maybe giving a little support to margins that wouldn't otherwise be there, considering most of your top line growth is volume. So can you just talk about sort of trends you're seeing with your up-sell activity and other ancillary services? And then along those lines, anything that you're doing new? Any sort of new ancillary revenue streams that you're pursuing? That’d be great.

[Mark Frissora:]

We continue to focus on ancillary revenues. You know, one of the things that's important to note is where the opportunity for Hertz is, is that we book a lot of things online and figuring out to get us RPD upgrades off an online, is something we've worked on and we think we have an opportunity on going forward. The other piece is as we book any rates that we have through our kiosk, we now have introduced these, what we call, virtual kiosks, which allow you to interface directly with a customer service person in a face-to-face video screen. That's going to give us upside on SRPD, the ancillary revenue. So we have 2 things that we're working on that we think will give us upside on SRPD. SRPD performance in U.S. Rent-A-Car in the quarter wasn't great. It was due to a couple issues. Part of it was the way we booked the rentals. Another part of it was we had a little tougher year-over-year comps, but we think there's a big opportunity moving forward. Scott?

[Scott Sider:]

We were up year-over-year in SRP in the second quarter. Last year, the comps were tough. The mix of business has changed, is really what's made it tougher on a year-over-year basis. But with that said, we're still up. The days are up 8% and the days are what really drive ancillary revenue. So again, the overall revenue, SRPD is strong, and we are starting to offer some new products as well around the country.

[Operator:]

Next, we'll go to the line of Neil Portus with Goldman Sachs.

[Neil Portus:]

Could you update us on your Rent-A-Car re-franchising strategy in the EU and U.S., where that stands and how that's baked into numbers for this year?

[Mark Frissora:]

We continue to make progress on that. I have a number of franchise agreements that are pending right now. We weren't able to announce them this quarter. We will next quarter. But they're fairly big. These are fairly large agreements for swaths of geographies. So in terms of what we plan, I'm trying to remember what we announced to investors. What did we tell them in terms of revenues this year that we would do in franchising? About $100 million? Yes, so we have no issues. In fact, we'll exceed that goal in terms of the amount of revenues that we'll franchise this year that were internally or corporate stores, if you know what I mean. So we'll easily exceed that. And again, it's helpful to the P&L as you know, in terms of it, it ends up generating incremental pretax and then reduces the fixed asset base as well and the requirement for cars. I will point out also, I just want to say something to all the analysts at large, I don't think people should try to model in changes in EPS based on Donlen. I think I've seen some of that going on. I mean Donlen, while let's say they say they have at a point in time a higher pretax, let's say, they’re in the airport, doesn't mean that incremental would actually add right on to our EPS. Donlen is a different business model altogether, and we're going to be investing in growing that business model, which means in some cases, we may take a business, fleet business that has a higher ROI but lower pretax. And because of that, it may not, let's just say, be perfectly accretive on a pretax basis. So I just want to make sure everyone understands the Donlen business model. After we close on the deal, we'll explain it more fully. But there are transaction costs that will be associated with Donlen as well, and so again, modeling incremental pretax into a year, I think, is the wrong thing to do. I'll just state that on this call so people don't make that mistake. Is it going to hurt us? No, it's not going to hurt us. We've included all of that in our guidance. So we feel comfortable with our guidance. But in general, as we understand the Donlen model better, we'll be able to lay out for you the implications of that next year into our guidance. Okay? In Q4, it's more or less a rounding error so…

[Operator:]

Next, we'll go to the line of Bryan Mortenson with R.H. Bluestein & Company.

[Bryan Mortenson:]

Two longer-term outlook questions here. The first, Hertz On Demand, how do you see that market size playing out? And any idea what that business will be in terms of a bottom line contributor? And then looking abroad, can you talk a little bit about your Asia-Pacific, x-Japan, initiatives and how do you see that market shaping up?

[Mark Frissora:]

Yes. On Hertz On Demand, that's a really important strategic segment for us, and we're looking to expand that significantly over the next couple years. Our biggest issue is getting the technology into more cars. As we've been ramping up on the technology, I mean, our plan is actually to put that same technology in all of our fleet. And so we've had to work with suppliers that can scale up and scale down as we need to. And so Hertz On Demand itself is not constrained other than the fact that own internal constraint, which is to have suppliers with the new version of the technology we're going to install in all cars. So I feel -- I tell you that the revenue from that will be all profitable as we're going to be able to turn each car on or off as a regular rental or a hourly rental. And so Hertz On Demand will get a big benefit on fleet costs by only being allocated the fleet costs when it's turned on in hourly rental in densely populated areas. So we'll be instantaneously profitable as we implement this into all cars just because of the allocation of fleet costs. We're already at breakeven pretty much in New York City. We're making money in New York City actually, and we usually make money in New York City on that model into the third quarter where we have high demand. And we'll actually probably at least come to a breakeven or our make money this year in New York City, quite a bit of money in New York City. Now having said that, it'll be even better as we roll it out to all cars, and we have the car accounting set up so that once you become hourly, you only get that percent of the fleet allocated, fleet depreciation costs into Hertz On Demand. Members are up right now 145% and global year-to-date, our revenues are up 115%, and it continues to grow. It's on a small base but it's growing dramatically for us. And we're rolling it out in Boston right now as we speak, a number of locations now in Boston. So again, you'll see that. It will a global rollout, and it will be across the U.S. into all vehicles, where eventually we'll have all 330,000 of our cars that we have in the normal Rent-A-Car fleet will have the technology in it. And we just want to provide really a kind of a new business model allows you to rent cars anywhere, any place, anytime, by the hour, by the month, by the day or if you want, now with Donlen, we can lease. And that's a 4- or 5-year proposition.

[Operator:]

And next, we'll go to the line of Bastian Wagner with Old Mutual Asset Management (sic) [Old Mutual Asset Managers].

[Bastian Wagner:]

Just short question on your volume development in especially in Europe. Can you give us a bit more color on what you see in the different countries you're operating in?

[Mark Frissora:]

In Europe?

[Bastian Wagner:]

Yes, I'm particularly interested in the place of [ph].

[Elyse Douglas:]

In the what?

[Mark Frissora:]

Particularly interested in what?

[Bastian Wagner:]

Like in the countries like Spain, Italy and also compared to that, Germany, the U.K.

[Mark Frissora:]

Yes. Well, I'm going to let Michel Taride, but before he takes over, just kind of talk about in general, we have growth in Europe everywhere. The growth is not as high as we'd like it. So it's not that we're not growing. We're just not growing as rapidly as we normally would given the European economic situation and the issue with the banks and sovereign crises that you're seeing on debt levels in different countries, like Spain, like Italy, like Greece. But in general, pretty much in Spain, as well as in Italy, we're showing some growth but it's just not the double-digit growth that we were hopeful to get and it’s driven on weakness. Northern Europe's also a little weaker than it was in the first part of the year. Michel, you want to add any color to that?

[Michel Taride:]

Yes, sure, Mark. I mean, I guess the most challenging country right now, it's Spain indeed. Even though we're getting some significant share there, held by Advantage by the way, but also on Hertz Classic. Actually, Italy is quite the opposite right now. It was a bit softer the beginning of the year, and now we're having a really good season. In fact, we have to add fleet in Italy and buy hundreds of units, which for the size of that country is significant. Germany is still growing nicely, softening a little bit but I would say high single-digits. Part of the U.K. business are suffering where, as Mark said, we are growing everywhere. So I don't think there is any country where we are growing more than double-digits right now, but it's all between, say 3%, 4% and 9%, 10% of revenue. On average, our growth right now in Europe is about 6%. Again, Spain being on the low end, Italy and Germany being on the high end, France get a little bit better. The pricing environment on the commercial segment is actually quite good and remains positive for the third year in a row. It is getting a bit more under pressure as you have seen from the numbers on the Leisure side. But again, the second quarter was really special. 90% was explained by both the volcano and Advantage and also the fact that our business mix is changing while taking a lot of long-term rentals, which lower RPD. So for the [indiscernible] per transactions part we're actually flat to positive there. I hope I've answered the question.

[Bastian Wagner:]

For Europe, I mean, we had a couple of profit warnings from the large travel operators over here in Europe, and they were giving a quite miserable outlook. So the legislature must think there must be some pressure going forward?

[Michel Taride:]

Yes, that's correct. I mean the commercial business remains very robust. The Leisure segment is the one which is suffering the most. I have to say the U.K. is a big source market to the other countries, and the U.K. economy right now and all the spending cuts and tax rises doesn't help. But you see, compared to a travel operator, we're so much diversified. We should remember, just one number in Europe, more than 50% of our business is Off-Airport. So it's absolutely non-travel related. Here, we're renting commercial vehicles. Those are not travel-related. So really what's travel related, I mean, particularly leisure travel is probably less than 1/3 of our total business. 2/3 are really commercial travel or non-travel related, and that helps us a lot, of course.

[Operator:]

And there are no more questions in queue. If you have any closing remarks?

[Mark Frissora:]

Well thanks, everyone for attending our conference. We appreciate the support, and we'll talk to you next time.

[Operator:]

Ladies and gentlemen, this conference will be made available for replay after 12