Hertz Global Holdings, Inc.
Q2 2010 Earnings Call Transcript

Published: 4 Aug 2010

[Operator:]

Thank you for standing by, and welcome to the Hertz Global Holdings Second Quarter 2010 Earnings Call. The company has asked me to remind you that certain statements made on this call, certain 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 information to reflect changed circumstance. Additional information concerning these statements are contained in the company's press release regarding the second quarter result issued yesterday and in the Risks Factors and Forward-Looking Statements section of the company's 2009 Form 10-K. Copies of this filing are available from the SEC, the Hertz website or the company's Investor Relations department. I would like to remind you today's call is being recorded by the company and is also made available for replay starting today at 12

[Leslie Hunziker:]

Good morning, and welcome to the Hertz Global Holdings 2010 Second Quarter Conference Call. You should all have our press release and associated financial information. We've also provided slides to accompany our conference call, which can be accessed on our website at www.hertz.com/investorrelations. In a minute, I'll turn the call over to Mark Frissora, Hertz's Chairman and CEO. Also speaking today is Elyse Douglas, our Chief Financial Officer; in addition, we have Scott Sider, Executive Vice President and President of Vehicle Rental and Leasing The Americas; Michel Taride, Executive Vice President and President of Hertz International; and Gerry Plescia, Executive Vice President and President of Hertz Equipment Rental. They'll all be on hand for the Q&A session. Today, we'll use non-GAAP financial measures, all of which are reconciled with GAAP numbers in our press release 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 Holdings Inc., the publicly traded company. Results for the Hertz Corporation differed only slightly as explained in our press release. Now I'll turn the call over to Mark Frissora.

[Mark Frissora:]

Good morning, everyone, and thanks for joining us. As you've seen from last night's press release, despite a changing macro and economic backdrop, we delivered very good results in the second quarter reflecting the success of our growth and efficiency strategies. The best example of this on Slide 5 is the record adjusted pretax earnings performance of our largest business, U.S. Rent-A-Car. In the 2010 second quarter, U.S. Rental Car generated $32.5 million of higher adjusted pretax income compared with the previous session's second quarter of 2007. This represents a 350-basis-point margin improvement over the 2007 period on 7% less revenues. Overall for the company, higher revenue and greater efficiencies drove an 18.1% year-over-year increase in consolidated adjusted pretax income in the latest second quarter. This is on Slide 7. The profit increase translated into a 50-basis-point margin improvement despite the negative impact on the quarter from a one-time $32 million compensation benefit that we received in last year's second quarter. Additionally, we overcame higher adjusted interest expense and $1.9 million of negative currency exchange rates. Corporate EBITDA was essentially flat also due to the one-time compensation benefit. Excluding last year's benefit, corporate EBITDA was up 13.3% year-over-year. You might recall back in April, the pace of the global recovery seemed to be accelerating, with consumer confidence climbing to its highest level since October of 2007. Since then, however, consumer confidence has weakened. While this adversely affected our Leisure business, our Commercial business has accelerated. Consequently, while the overall volume rate remained in line with our forecast, the expected mix of rental shifted more towards Commercial business. Our consolidated revenues grew 7.1% or 7.5% when you exclude currency translations as a result of improving volume trends across both of our business segments. In terms of pricing, equipment rental pricing pressures finally stabilizing with the year-over-year pace of decline gradually improving each month despite a tough year-over-year comparison. In Europe, in the second quarter, we secured 3.9% price increases from the commercial and leisure rental car markets combined. While in the U.S., Rental Car revenue per day, or RPD, was a mixed bag, where an increase in Off-Airport RPD nearly offset weakness in airport RPD. On Slide 8, total company adjusted direct operating and SG&A expenses were up 10.8% overall, but when you exclude the impact from the one-time compensation benefit last year, as well as the incremental advertising spending, adjusted direct operating expenses and SG&A expenses were up just 7.5%, reflecting cost in line with the increased revenue. Additionally, maintenance costs were higher than usual in the second quarter as we ready our equipment to service the anticipated recovery in industrial and infrastructure demand. And since April of 2009, it should be noted that we've added 27 Advantage airport locations and 298 net new Off-Airport stores to our rental network. It's important to note that while we're recognizing the cost associated with the fairly rapid expansion of these businesses, we have not yet fully realized the revenue potential given the newness of the stores. Monthly rental car depreciation per unit worldwide are down nearly 12% on lower vehicle acquisition cost and a larger portion of vehicles being sold through higher-priced lower cost, non-option channels. Turning to Slide 9, we generated permanent cost savings of $142 million in the second quarter, bringing our first half total savings to $241 million outpacing our full year goal of $300 million. Today, we believe we can capture another $140 million of savings in the second half, split about evenly between the last two quarters, which would reflect a revised goal of $380 million of cost savings for this year. Our more efficient processes led to greater productivity at Hertz. Consolidated revenue per employee was up 7.5% in the recent quarter over the same period last year. From our inception of Lean Sigma, back in '06 through the last 12 months ending June 30, revenue per employee has increased 23.6% despite $900 million less revenue. Now let's take a quick look at second quarter performance by operations starting on Slide 10. In the most recent second quarter in the U.S., total rental car revenue was up 10.1% in the quarter compared with last year. Of the growth, total airport operations contributed 45.8%. Of that, the contribution for Commercial business was 53.5%. Advantage accounted for 22.1% of the total revenue increase, and Off-Airport represented 32.1% of the increase. Inbound revenue, which is included in each business units' revenue and is a strategic advantage for us, was up 23.2% from last year on strong demand from Europe and Latin America. Commercial rentals on airport, which are made up of large corporate customers and small business account programs, delivered a 12.4% revenue increase over last year. Off-Airport revenue growth was 13.7% higher, driven by the leisure and insurance replacement markets. Increased marketing support, including the new TV campaign, also supported the top line expansion. On Slide 11, revenue per day, or RPD, which encompasses both price and mix, was down 4/10 of a percent for our Hertz classic brand. Of course as you know by now, pricing varies significantly across our mix of rental options. So you really need to break down the consolidated RPD to get a clear understanding of the trends across end markets. For example, our Off-Airport operations RPD was up 2.8% on 10.2% higher volume, driven by both the Leisure and Vehicle Replacement businesses. While Off-Airport rentals have a 28% lower rental rate per day on average, compared with airport rentals, labor and other operating costs are also significantly lower, and rental length is nearly 50% higher. So we're excited to be capturing more share in this attractive market. On the next slide, U.S. Fleet efficiency was roughly flat at 80.6% in the second quarter. We have aligned our three closely with rental demand and have been able to sustain utilization in the 80% range, despite 10.8% more fleet than last year and the comeback of the corporate traveler, which is typically only a three to four-day midweek rental. Monthly depreciation per vehicle in the U.S. was 13.5% lower than the 2009 second quarter's level driven by strategically management actions, including developing more profitable remarketing channels, optimizing portfolio mix and negotiating successfully with the OEMs. On the used car front, residual values remain stable at a normal seasonal levels. Our Net Promoter Score in the U.S. is up 17.2% over the prior year, reflecting the appeal of our newer fleet and the addition of popular new car classes. And our airport market share is increasing. According to the latest data available on the first quarter, our market share for our Hertz and Advantage brands combined increased 230 basis points over the 2009 first quarter. From what we've seen, this trend continued into second quarter. Our U.S. Rental Car adjusted pretax margin increased 70 basis points in the second quarter versus last year. But when you exclude last year's one-time compensation benefit, adjusted pretax margin was up 260 basis points. Corporate EBITDA also expanded in the quarter, benefiting from the better-than-expected Off-Airport demand, recovering corporate volumes and very disciplined cost management. Turning to our European Rental Car operations on Slide 13, the second quarter marked a significant turnaround. Revenue increased 2.3% or 9.6% when you exclude the impact of foreign currency translations driven by price increases across both the corporate and leisure markets. In fact, in the commercial market, we've had positive revenue per day growth for eight consecutive months. Volumes in Europe are also higher year-over-year despite some falloff since the European fiscal crisis took center stage in May. Airline travel interruption caused by the volcanic activity in Iceland in the second quarter was offset by an increased number of walk-up and one-way rentals, which capture a highly daily rate. Overall, revenue per day increased 3.9% over the prior period on a 4.8% improvement in transaction base. While half of the RPD increase in the second quarter was due to the higher number of one-way rentals, the underlying trend remains positive. Europe delivered a 59.4% increase in adjusted pretax profit from last year on lower monthly depreciation per unit, while keeping adjusted direct operating and SG&A expenses flat as a percent of revenues. I'll also note that the increase includes a $10 million value-added tax claim in the quarter. Now let me touch on our Equipment Rental segment on Slide 14. We saw continued improvement across all metrics from a sequential monthly perspective. Revenue was down just 4% compared with 15.2% in the first quarter. Pricing declined 6.1% versus 8% in the first three months of the year, and rental volume, which improved in the second quarter, finally turned positive year-over-year at the end of June. Utilization improved 430 basis points on a sequential quarterly basis, and corporate EBITDA margin expanded to 35.5% from 33.8% in the first quarter. Everything continues to move in the right direction, including the industrial market recovery, new infrastructure projects and national accounts expansion. BP, one of our largest national accounts, has continued to place orders for equipment to support the initial cleanup efforts of the oil spill in the Gulf. Our current monthly run rate for those orders is roughly $600,000. As I mentioned before, in the face of the downturn last year, we made a strategic decision to defer maintenance projects for underutilized fleet and to reduce work hours for the employees responsible for maintaining those assets. Now we're working to get that implement back on rent, as we reinvest to capture the expanding demand in the markets we serve. For these reasons, maintenance costs were $5 million higher than last year, despite a 4% revenue decline. These investments held equipment rentals corporate EBITDA margin under 40% for the quarter, but position us well with more fleet, rental ready going into the second half. Over the next two quarters, we expect to benefit from the seasonal peak, the continued growth of the industrial market driving higher utilization, a favorable year-over-year comp, positive revenue and volume growth and a stabilizing environment. Now that the Equipment Rental business has begun its turnaround, we expect to see double-digit, adjusted pretax earnings growth going forward. Now let me give you an update on Slide 15 on a few of our growth initiatives to further diversification of our businesses, markets and products before I turn to call over to Elyse for a detailed financial review. For the urban hourly renters, we continue to expand Connect by Hertz, adding seven universities to our car sharing program in the second quarter, bringing the total to 45 schools. our Connect membership now exceeds 18,000 subscribers worldwide. We began promoting Connect to New York City in the second quarter to build awareness of our new service and expand member utilization. Just as the campaign was launched, we've realized a 400% increase in membership. Our Advantage Spartan Leisure offering, which we acquired in April of 2009, has surpassed our expectations for market share, margin and volume. We're currently on pace to generate an annual revenue run rate of nearly $160 million over the next 12 months. Today, our Advantage business is profitable with 31 airport locations covering major U.S. Leisure destinations, including those recently opened in Las Vegas, Chicago, San Jose and Oklahoma City. We have plans to open up additional airports by year end. At a minimum, we should have at least 50 airports opened. In the $10 billion Off-Airport market, we opened 65 net new locations in just the second quarter, primarily co-locating with body shops, hotels and repair facilities to serve the needs of local market customers. This brings our net new store openings since April of 2009, as I told you previously, to now 298 new net new locations. Off-Airport rentals, which include Leisure and Local business rentals, replacement rentals and monthly or multi-month rentals are typically priced lower than the airport rentals on a per-day basis, but have a longer average length of key, which drives revenue per transaction. This associated transaction costs are leveraged across a longer rental, the cost, as a percentage of revenues are lower than the airports, are earning for some of the margins. Additionally, the overall cost structure is lower with fewer labor hours required, a more economical fleet, share facilities with no concession fees, which are considerable at the airports. Our Off-Airport demand continues to expand at a double-digit rate. Finally, total U.S. ancillary revenue, including upselling current classes and marketing additional products, like insurance coverage, roadside assistance, damaged waivers, NeverLost and refueling increased 22.8% year-over-year in the second quarter as both Airport and Off-Airport locations focused on this revitalized program. More importantly, we are investing in our employees, innovating our product offers and refreshing our fleet. As a result, our service scores are climbing. In fact, our service scores in U.S. Rental Car and Europe Rental Car are higher than they've been ever in the history of the company. We're successfully executing a growth plan, thus positioning us to deliver even more value for our customers. With that, I'll turn it over to Elyse for a more detailed financial review.

[Elyse Douglas:]

Thanks, Mark, and good morning, everyone. Let me begin on Slide 16. We are very pleased with the second quarter financial performance. On a consolidated basis, we generated $1.9 billion of revenue, a 7.1% or $125 million increase over the same period last year. A 9.3% increase in Worldwide Rental Car revenue more than offset a 4% revenue decline in Worldwide Equipment Rental. Adjusted pretax income was $95.8 million, up 18.1% over last year's second quarter, which is an improvement of 50 basis points in margin. This was achieved despite the one-time compensation benefits in 2009 that Mark spoke of. Specifically, in the second quarter last year, we took temporary wage, bonus and select benefit reductions to sustain operations through the most challenging period of the recession. These actions will reverse last September, resulting in a tough comp year-over-year for the latest second quarter. After adjusting out these one-time savings, consolidated adjusted pretax income year-over-year was up 96.3%, and margins expanded by 230 basis points. Adjusted earnings per share improved 16.7% in the quarter to $0.14 per share compared with $0.12 per share in the second quarter of 2009. The improvement was driven by higher revenue, efficiency savings and lower depreciation costs. This quarter's GAAP diluted earnings per share loss of $0.06 per share represents the 45.5% improvement over the period last year when you exclude a $48.5 million pretax gain related to the buyback of portions of our high-yield notes in 2009. The improvement in overall business conditions is also reflected in the $235.5 million improvement in cash flow from operations to $749.4 million in the second quarter versus $513.9 million in the same period in 2009. I'll talk more about cash flow in a minute. For now, let me give you some more detail on the performance trends by business segments. On Slide 17, our Worldwide Car Rental revenue for the quarter of $1.6 billion was up 9.3% year-over-year or 10%, excluding the effects of foreign currency translations. The U.S., European and other international Rent-A-Car operations each experienced approximately 9% growth in rental rate revenue. And as Mark already mentioned, revenue was a function of RPD in volume. Volume, as measured by transaction days, grew 10.1% in the U.S. and 4.8% in Europe. RPD in Europe was up 3.9%, and the U.S. was down 1.2%. As Mark mentioned, the RPD decline in the U.S. was driven by the expansion of Advantage, a shift in mix to lower RPD businesses and a tough year-over-year pricing comp in the Leisure segment. This was partially offset by a 2.8% increase in Off-Airport RPD. Worldwide Rent-A-Car generated corporate EBITDA of $197.3 million in the quarter, a 13.7% increase. The reported earnings represented $23.7 million year-over-year improvement. This improvement was driven by revenue growth, lower-per-unit depreciation per month and a realization of cost efficiencies, all of which contributed to 120 basis point adjusted pretax margin improvement during the quarter, in, spite of the one-time compensation benefits achieved in 2009. Turning to Worldwide Rental Car fleet efficiency on Slide 18, as you know, the entire rental car industry was under-fleeted last year when Leisure volumes strengthened throughout the second quarter. The supply-demand imbalance enabled us to achieve very high fleet efficiency rates last year, which consequently made for a tough comparison this year. Fleet efficiency was also negatively impacted by the volcanic ash disruptions in Europe. We had just started cleaning up for the spring and summer peaks in April when the volcanic ash cloud caused flight cancellations. We lost about 175,000 transaction days, which impacted efficiency year-over-year by roughly 170 basis points, and due to the unusually high number of one-way rentals that resulted from the flight cancellations, we had 4,000 displaced cars to be repatriated to their respective countries, since regulations in several European jurisdictions require cars to be rented only where they're licensed. With this in mind, we're pleased with the 78.7% worldwide fleet efficiency, which is down only 70 basis points year-over-year. And the effects of lower utilization on profits was more than offset by the improvement in pricing on one-way rentals. In the U.S., fleet efficiency was essentially flat with last year's strong level as increasing Advantage and Off-Airport transactions, which generally averaged about five to six days offset higher corporate travel volumes, where transaction length is typically only three to four days. Fleet efficiency is also benefiting from the expansion of our network nationally and the use of direct to dealer and direct to consumer used car sales channel, which enable us to keep the cars on rent right up until the point of sale. Now let's take a look at rental cars fleet cost on Slide 19, measured as monthly net fleet depreciation per unit. Our year-over-year worldwide fleet cost were 11.6% lower in the latest quarter. In the U.S., we reduced fleet cost on a per-unit basis by 13.5% from a year earlier. Our domestic monthly depreciation costs have been decreasing sequentially since the fourth quarter of 2008, when used car residual values were at historic lows. In the second quarter, our car costs are 2.3% below 2007 levels in the United States. The sequential quarterly improvement in fleet cost accredited to our execution of disciplined fleet sourcing strategies, improved portfolio management and leveraging alternative sales channels in the domestic used car markets. Only 61% of our U.S. car sales were executed through the auctions in the second quarter, down from 67% at year end 2009. Our goal is to further improve our remarketing returns by bringing auction sales down to just 50% of total car sales by the end of the year. Utilizing direct-to-dealer and direct-to-consumer channels, like our Rent2Buy business, allows us to capture a higher sales price, reduce our cost of sales as we forego the auction fees and increase utilization as I just mentioned. In the third quarter in the U.S., we expect monthly depreciation per car to increase slightly due to the seasonal mix of our fleet. In the summer, we carry more special equipment like SUVs, minivans and convertibles to meet the heavy seasonal demand. These are more expensive vehicles with higher depreciation rates. In Europe, monthly depreciation per car also continued to improve, falling 8.1% in the quarter from 2009 levels on a constant-dollar basis. And just like U.S. Rental Car, our purchasing terms have improved with our latest round of fleet negotiations, helping to counter the stabilizing, but still low residual values across the continent. For the full year, we now expect worldwide monthly depreciation per car to be down between 6% to 7% compared to 2009. On a worldwide basis, our fleet was 59% risk at the end of the second quarter with an average fleet age of 7.3 months, younger by almost 1.5 months versus the second quarter last year. The average age of the overall U.S. fleet is now 7.3 months compared with 9.1 months in the second quarter of 2009. At quarter end, risk cars in our U.S. fleet represented 61% of the total domestic fleet. Of the new cars we brought in during the second quarter, 33% were to rightsize our fleet to capture the recovering base demand as well as to accommodate our own expansion into the Spartan Leisure market with Advantage, the Off-Airport sector to service insurance replacement accounts better, and the car insurance segment to capture more of the urban and youth demographics. Now let's turn to the results of our Equipment Rental segment on Slide 21. In the second quarter, Hertz reported revenues of $265.8 million and corporate EBITDA of $94.3 million. March has already walked through the revenue volume and pricing results for the quarter and highlighted that volumes from positive year-over-year at the end of June. Previously, we thought revenue would become positive as we moved into the fourth quarter. But with recent trends, we are optimistic that this could happen as early as the third quarter. While pricing is still competitive, it's finally stabilizing, and we expected to be nearly flat year-over-year by the end of the fourth quarter. Pricing in a downward cycle is always challenging, but Equipment Rental has been disciplined and tactical over the last two years. Our pricing in the second quarter was down 6% year-over-year versus a decline of 7.4% last year. However, the two-year decline of 13.5% is several hundred basis points less than our peers. We expect to see a continued sequential quarterly improvement in pricing in the back half of the year. We saw a demand for industrial and earth-moving equipment beginning to pick up in the second quarter. As Mark mentioned, this required us to further increase maintenance spending by $5 million in order to get under-utilized fleet ready for rent, negatively impacting the 35.5% corporate EBITDA margin by 180 basis points. Revenue from our Industrial business was up 17.8% in the recent quarter. As you can see on Slide 22, our strategy to shift more of our equipment mix to this category is benefiting us, as facility maintenance, petrochem [petrochemical] refining, energy services and oil and natural gas exploration continued to add new projects and restart deferred projects. In the second quarter, industrial equipment represented 29.1% of our total North America revenue, up from 23% a year ago. At June 30, our worldwide equipment fleet age was 48 months, a 1.5 month increase from the 2010 first quarter. On Slide 23, you can see that our equipment rental fleet on a net book-value basis was down 15.2% year-over-year. Second quarter equipment fleet purchases was $34.2 million versus disposals on a first-cost basis of $76 million. This compares to second quarter 2009, where additions were $12.2 million and disposals were $76.8 million on a first-cost basis. And while equipment residuals continue to improve, we are selling only selectively to delete our oldest pieces. Now let's move on to Slide 24 for an update on our recent financing. It's been a busy quarter. We completed our $1.3 billion European refinancing with the June closing of the EUR 220 million revolving credit facility and the issuance of EUR 400 million secured notes, together with the July closing of the EUR 400 million ABS securitization in France and The Netherlands. And also in the second quarter, we issued $184 million in subordinated ABS notes in the U.S. at favorable rates, which gives us additional liquidity for fleet and can also be used for general corporate purposes. And finally, last month, we issued $750 million of three-, five- and seven-year U.S. asset-backed notes at fixed rates with an all-in yield that was below that of the fixed-rate notes issued in 2005. This capital will be used to top off our fleet borrowing capacity in light of greater year-over-year demand. In total, we have raised $5.5 billion in fleet debt over the past 12 months, enabling us to successfully extend and stagger our fleet debt maturities. Just as importantly, we were able to do this at attractive absolute yield level and with advanced rates at or better than we anticipated. The only remaining refinancings this year relates to Brazil and Australia. These are well underway and we expect to complete them this quarter. On the next slide, let's take a look at cash flow. I already mentioned the improvement in cash from operations in Q2 of $235 million versus the same period last year. And the second quarter's levered cash flow, which is cash available to pay down corporate debt, was $145.7 million versus a negative $154.3 million in 2009, up $300 million year-over-year improvement despite the impact of increased investment in rental car fleet. The improvement in cash flow in the quarter was due to reduced investment in working capital, as net working capital days improved by 25.7%. In addition, we executed fewer acquisitions compared with last year and had lower cash restructuring expenses. And the issuance of $184 million in subordinated ABS notes this quarter modestly improved advance rates. We expect full year 2010 advance rates to decline by five percentage points from the 72% 2009 levels to 67% this year-end, reflecting the full impact of changes in credit enhancement levels on ABS fleet debt financings. We ended the quarter with total net corporate debt of $3.6 billion total net fleet debt and $897 million of unrestricted cash on our balance sheet. Year-to-date June, we reduced corporate debt by $83.8 million. And by the end of the quarter, we had $1.7 billion of corporate liquidity available to fund our growth initiatives. Turning to Slide 26, interest expense, net of interest income, was $182.1 million in the quarter, up $19.3 million over last year, driven by higher fleet levels and a full quarter of interest on our convertible debt that was issued late in the second quarter last year. Our estimate for incremental interest expense for 2010 versus 2009 is now $75 million to $85 million, which is lower than our earlier estimate of $90 million to $110 million. The improvement is due to better-than-anticipated terms and pricing on fleet debt refinancing and lower short-term floating rates. Restructuring and restructuring-related charges in the latest quarter were $22.3 million, of which $8.6 million will be settled in cash, compared with $33.3 million in restructuring and related charges in the same period last year. These charges mainly relate to HERC facility-closing costs as we look to further consolidate underperforming branches. For the second quarter, the GAAP income tax expense was $14.2 million compared with $22.9 million last year. Cash income taxes paid in the quarter were $6.1 million, in line with the prior-year. We estimate cash taxes to be $40 million to $50 million for the full year of 2010. As a reminder, in calculating adjusted net income and EPS, we used a tax rate of 34%, which we believe reflect our more normalized rate over the long term. Now if you turn to Slide 27, you'll see that we comfortably met both of our quarterly corporate financial covenant tests. In fact, our corporate consolidated leverage ratio was 3.54x, well below the maximum 5.2x allowed; and the corporate interest coverage ratio was 3.4x, well above the minimum requirement of 2x. These ratios exclude the convertible debt issued by the Hertz Global Holdings in May since the covenants apply only to the Hertz Corporation results. And with that, I'll turn it back to Mark.

[Mark Frissora:]

Thanks, Elyse. Let's move to Slide 28. In the second quarter, we delivered strong results across our major businesses, while at the same time taking actions to enhance the long-term opportunities. We did this despite significant headwinds, including the slowdown on the economy. And as Elyse explained, we had difficult year-over-year comparables in the latest quarter due to last year's one-time compensation benefit and significant industry price increases for leisure airport rentals. This quarter, the price increases that we put in place for our U.S. rental car operation for the summer are offsetting the GAAP resulting from last year's peak leisure pricing levels. And domestic seasonal leisure demand in July and August continues to be strong, reflecting low double-digit expansion. We expect U.S. Rental Car to continue to perform at record adjusted pre-tax income levels for the rest of the year. In Europe Rental Car, high single-digit revenue growth will benefit from the price increases for both Commercial and Leisure rentals that we instituted last quarter. And beginning this quarter, HERC finally benefits from a combination of favorable year-over-year comparisons and a continued upswing in demand. For our Equipment Rental segment, we expect positive year-over-year revenue and volume growth in the third quarter, along with steadily improving utilizations. Pricing for Equipment rentals is still unpredictable, but if volume continues at its current pace, year-over-year pricing could reflect only low single-digit declines compared with last year's third quarter when pricing fell 8.6%. This trend should result in double-digit adjusted pre-tax margin for this quarter. The caveats to our forward expectations are the risk and volatility we're seeing in the global economy, illustrated on Slide 29. The slowdown in the U.S. economy in the second quarter is concerning for the rest of the year, and some economists are cutting their growth estimates for the second half based on the second quarter's GDP report. We set our current full year guidance back when the market was much more positive than it is today. The choppiness of the economic forecast make it difficult to be anything but cautious about the second half of the year, especially for the fourth quarter, where we don't have much visibility. We'll be monitoring our operations closely, but at this point, are still comfortable with our current guidance, which is outlined on Slide 30. Net-net, we're cautiously optimistic about the second half of the year and our ability to do well in spite of the uncertain economic environment. You'll see on Slide 31 that we provided a year-over-year sensitivity analysis to earnings for the back half of the year. You'll notice that 1% movement in any of the key metrics has a significant upside or downside effect. Obviously, we're hopeful that there will be more upside to downside, but it's too early to tell. As we move into the fourth quarter and visibility gets better, we'll keep you advised accordingly. Now let's go ahead and open it up for questions.

[Operator:]

[Operator Instructions] First question is from the line of Rick Kwas of Wells Fargo.

[Richard Kwas:]

Mark, on monthly depreciation per unit, the guidance implies that there's a step-up in the second half of the year, and you're not going to be able to maintain current levels on a worldwide basis. What's driving that step-up and how conservative is that estimate?

[Mark Frissora:]

Step-up and the depreciation per vehicle?

[Richard Kwas:]

Yes, I think you're calling for 6% to 7% year-over-year decline in the monthly depreciation per unit? If I have got that correct? And so, it kind of implies that second half there's an increase sequentially, you felt like you've done in the first half.

[Mark Frissora:]

Well, I think part of it is mix of vehicles. The other part of it is we bring new cars into the fourth quarter. So we're probably -- I mean, in balance, we're being conservative on this number going in. So I think there's some upside here. Again, we're baking in, as you might imagine, we're trying to bake in the fact that we are going to over-deliver on expectations. We always try to take that in by having a conservative forecast in our assumptions on depreciation per vehicle. There is a higher concentration of Prestige and SUVs that are in the mix, if you would, going into the fourth quarter. And that's basically because you ramped up, as you know, in the third quarter with special equipment to serve vacation travelers. So that higher mix does put some pressure on the depreciation per vehicle. So that's the primary driver. But I would say you're right, there's some conservatism going built into the number.

[Richard Kwas:]

And then, what are you seeing our corporate volumes here? I know you'll start to see tougher comps in the fourth quarter. Are you still seeing double-digit increases on the business travel front?

[Mark Frissora:]

Absolutely, yes. We'll see that. And that will continue in the fourth quarter, as well. So we're actually seeing -- I would tell you that business travel, sequentially, every single month has strengthened. And we haven't capped out yet. We don't think we've capped out on that yet. We're seeing numbers in the top 25 accounts, they are up 20%, roughly 20% to 25%. And it's these smaller business accounts that have been slower to increase, but they're increasing now. They were flat about a quarter ago. Now they're up 6% to 7% and that's building. Once our small business accounts start to ramp-up, again, that's just going to accelerate the year-over-year increase going into the fourth quarter.

[Richard Kwas:]

If you look at the economy and, let's just say, we're stable here and we do GDP 2.5% or thereabout for the rest of the year. If you take your incremental cost saves, the incremental better-than-expected or lower-than-expected increase in interest expense, should we think of that increase or that benefit pretty much flowing through, potentially flowing through if the economy holds in here?

[Mark Frissora:]

I think some of it will, yes. I think we could think about some of that flowing through, for sure. So when the economy holds, after what I would call 2.5% to 3.5% rate, yes. For us, we are -- part of our caution is we're pulling back on some of our longer-term growth programs to make sure that we have one tons of insurance, if you will. But if we think about the 2.5%, 3.5% growth rate, I think some of these incremental costs, the actions will drop through and we might have fleet upside as well. So we're hopeful that, I guess, once we get some visibility into September and October, we can talk about guidance with more certainty.

[Richard Kwas:]

And then, last question, equipment rental EBITDA margins, you still expect 40% plus in the second half?

[Mark Frissora:]

For the Equipment Rental business, you say?

[Richard Kwas:]

Yes.

[Mark Frissora:]

I would say that the margins should be in the 40% section. I mean, for us, certainly third quarter, we kind of feel that way. Going into the fourth quarter, we have volumes that look pretty good. I would say, heading 40% plus is a reasonable assumption going into the second half, both third and fourth quarter.

[Operator:]

Our next question is coming from Chris Agnew, MKM Partners.

[Christopher Agnew:]

I think you just maybe touched on this, but maybe if you could expand a little bit on the visibility you have today on the Car Rental business, how that's changed over time and maybe how that varies across the main sort of businesses within car rental?

[Mark Frissora:]

Our visibility on business travel used to be, Chris, probably, we get at least 2.5, three weeks notice of a reservation. Now we're getting less than a week. So we have real trouble of trying to forecast 60 days out, kind of 90 days out because of that window. Our booking windows has collapsed. Our booking window will show that our revenues and advanced reservations should be up 4% and will be up 20% because there's some business, this is business travel I'm talking about, because of the lack of reservations that we're getting in advance. So we're having, again, very low visibility. Leisure is the same, it hasn't changed much. You might imagine that on leisure, people are booking last minute more and more because they get better deals in this environment. So that booking window is very short as well. So overall visibility of the business is much less than it was a couple of years ago. And it really hasn't improved that much over the last year, maybe a little bit on leisure. But on business, as business has come back in a big way, again, that booking curve, that window, is very tight. And so that's part of the reason, as you know, that we were not willing to, if you will, forecast something higher than what we forecasted for earnings guidance going into the back half of the year.

[Christopher Agnew:]

And different topic, are you able to update us on where you're at with respect to antitrust process with respect to Dollar Thrifty?

[Mark Frissora:]

Well, I mean, in terms of -- let me see if I can couch it in the right terms here. In terms of the antitrust piece, you've seen from the press release that we were delighted to receive Canadian antitrust clearance last week ourselves. And here in the U.S., we are cooperating fully with the FTC, and we're really pleased with the pace at which the FTC's consideration of our application is proceeding. The discussion so far on our behalf with the FTC have been very cordial, constructive. And we really maintained our view that transaction will receive very timely clearance in the U.S. as well. We're still in the process of responding to the FTC's second request, and we can't really independently say when they'll be in a position to make that determination. I think we've told people that we've had a quick review, which we called a quick look, which means the time for the second review is less than what it would normally be. The second review can take a long time and a quick look or a quick review is less time. Giving you numbers on that is difficult because the FTC reserves the right to do whatever they want under due process. But we feel good that we're in good shape there.

[Operator:]

Our next question is from the line of John Healy, Northcoast.

[John Healy:]

Mark, I was hoping you could talk a little bit about the Off-Airport business. You continue to put up really good growth numbers there. You continue to increase prices there. I'm hoping to get your thoughts on how sustainable you think the levels of growth you're seeing in the Off-Airport business are and maybe what you're doing operationally to drive share in that market? Because I can imagine the business is growing, and the transactions there are double digits just on an organic basis.

[Mark Frissora:]

Right, yes. I mean, in general, it is a good business model. It's very stable and has a tendency to grow faster and has grown faster than the Airport business. So it does have better growth characteristics as a market. Having said that, you're right on the money. It's not growing as fast as we are growing. So we know that, to some extent, we are either expanding the market or growing share, and we think it's a little bit of both. Obviously, as we added 298 stores net new locations since April of last year, each one of those is like a sales store, right? So I have three to five or six people in each one of those locations, and they're out knocking on doors, selling local car dealers, local collision repair centers. They're calling on consumers. They're advertising locally, a lot of guerilla marketing, and they're generating a lot of rentals just by being in the neighborhood. And we offer from all of those locations the ability to pick up. We will pick you up from any location and deliver your cars. So it's a great service and it's a different market for us. And because on the insurance side, we continue to penetrate those accounts we've signed up, we have over 190 of the top 200 largest insurance providers in the United States, because we continue to penetrate those, that just gives us additional growth, right? So we get in the door. The first year, you make it 5% of the business. The second year, you get 10% or 15%. But you keep knocking on the doors then you keep providing really high levels of service and you grow the business accordingly. It's a very big market. It's a $10 billion market, it's the same exact size as the airport market, and we only have about 11% share there. So the fact that it's so big and yet we have such a small share and it's still controlled by one of our competitors, it provides a very good avenue for growth in the future. We believe we're going to be double-digit growth for the foreseeable future. We don't see that ending over the next three years. It's a double-digit market for us.

[John Healy:]

I wanted to ask you a little bit about the Hertz business. Very good to see that business kind of get to stable level. As we move into 2011, if we were staying in an environment where we get 3% to 4% GDP-type growth, what sort of growth rate do you think HERC could give us coming into 2011? I mean, is this a double-digit growth business next year? Is it very low single digits? I'm just trying to think about how we should feel about the trajectory of that business now that we've come off the bottom.

[Mark Frissora:]

I think it's fair to say that we believe we're pretty confident that next year will be a double-digit business. Maybe kind of mid-double-digit range, I mean, that's what we're thinking. It ties out with what everyone else is seeing. We pretty much triangulated on dodge report, coupled with our competitors and what they're saying. I mean, kind of mid-range double digit looks pretty reasonable for us next year on revenues. And so I think that answers your question.

[John Healy:]

When I look at the pricing umbrella that you gave for the Advantage brand, it was down a little bit more than I might have thought it would be. Can you maybe talk to what you saw maybe in the Spartan brand segment of the car rental space in terms of pricing? Or is the RPD in Advantage down because maybe you're entering new markets? I'm just trying to understand why the level of softness there.

[Mark Frissora:]

As you know, it's such a new brand for us. And there are so many new locations that are in the mix, that the new ones that we've opened, some of them have been pretty big markets. They're pretty big leisure markets that are very competitive. And when you go into a larger leisure market, and as the store matures, it competes for the business. I mean, when you start off in the beginning with a new store and it doesn't have any share, it starts off and you may get some just a spillover from Hertz. We can't handle it, and so it'll be a little higher RPD when it starts off. And then as the business matures and gets into the Spartan segment, the pricing gets under more pressure. It's slightly down in the new markets, obviously Fox, Payless, those guys are the bottom. And we're trying to position ourselves higher and our RPD is higher than any of them. So believe it or not, our brand is actually pulling higher RPD than what we would call the bottom of the market. But it's not, as you know, a $29-a day or $28-a day RPD. $29 is kind of where we're selling in at. That's $10 below the levels of the mid-range brands, which are at $39 to $40 a day, kind of like more like around the budget brand and other brands in that mid-tier space.

[Operator:]

Our next question is from the line of Brian Johnson, Barclays.

[Emmanuel Rosner:]

This is Emmanuel Rosner for Brian. I wanted to ask you a question about your Commercial business. Obviously, you're seeing some very strong volume growth there in the recovery. But because it's annual contracted rates, we haven't seen a benefit on the pricing front yet. When do you think that the strong demand could translate into higher pricing?

[Mark Frissora:]

Well, we're seeing pretty good improvement. If I gave you the -- I'll give you some numbers here. April are what we call our commercial pricing, this is contracted pricing, was down about 3.5%; in May, it was down 2%; in June, it was down 1.1%; weighted in the second quarter, about 1.8% down. But we're seeing this nice improvement. July is improving from these rates as well, maybe down 0.5%. So to your point, I believe we are going to get down to flat. We're hopeful sometime in the fourth quarter and start increasing prices. We have small businesses that are doing really well right now on pricing, and we expect to translate that into larger-scale contracts as we move kind of into the fourth quarter. It's anyone's guess if it's going to be positive, but based on the trending we're seeing, that's a positive sign.

[Emmanuel Rosner:]

And when I look at the outlook for the rest of the year, clearly, you've given us a lot of things that are shaping up better than what you were thinking three months or six months ago. You talked about equipment rental, volumes, turning around quicker than you thought, interest costs being lower as well as cost savings shaping up much better than you thought. Is there anything at all that's actually shaping up weaker than you saw three months ago?

[Mark Frissora:]

Certainly. I thought I'd said this, but maybe I didn't. I mean, the Leisure business did not shape up as well as we thought it would. Once we looked at where we were back in April, when we gave guidance, we thought Leisure would be probably up in the second quarter, maybe five to six points. I think our Leisure on Airport business is actually down about over a point in the quarter. Now what offset that was the business, right? But again, Leisure is typically a little higher RPD business for us. And especially in the summer season, where we make a lot of our money, so there was an impact there on the Leisure even though business and the fleet was properly sized and everything else, Leisure being down a little bit had an impact. That was the one negative, was that the Leisure business itself. We've got an Advantage brand, which again is at the -- what we call the low end of the segment, the Spartan end of the segment. And that's all growth for us. So we're really penetrating Leisure but in what we call the high end of the Leisure segment, which is where we participate the most, that end of the segment was flat to down. And we were expecting it to be up probably, I'll say, 4% to 5%, going into the summer season. So that's where there was a little bit of bad news. But again, the commercial offset it on the buying side, and Advantage and Off-Airport are growing nicely as well. But net-net, we feel pretty good, but that was the big change from when I sat and talk to you guys back in April.

[Emmanuel Rosner:]

And then I guess finally, if I may ask a question about your bid for Dollar Thrifty. The $180 million in cost synergies that you guys have publicly disclosed or you expect, would you be able to sort of break it down into the biggest buckets? I know that you have talked about 300 basis points of possible improved fleet efficiency over time, so that would probably explain, I don't know, $60 million, $70 million. Would you be able to detail, I guess, where roughly the rest would come from?

[Mark Frissora:]

Yes, it went in just roughly -- $70 million was fleet, and that's a conservative estimate. $25 million was what we call non-fleet procurement. That was $20 million in IT. And that number could be as high as $40 million, so I'll just say, $20 million to $40 million in IT. In addition to that, there's public company duplicity as you might imagine and tax treasury IRR functions. There's customer-service duplicity. There's duplicity in rental locations in some cases, where opportunity-combined management and the infrastructure of the actual operations themselves. So that all adds up to $180 million, and that's on of the low side of what we think we'll get. We have it in detail, by just a lot of granular detail on that. I'll just put it that way. So we're very confident of the $180 million. We're not in the least a bit shy of saying, we're more than confident of achieving that very quickly. Probably, my guess is, I think we've said 70% of that roughly would be in the first year. So we're going to get it quick.

[Emmanuel Rosner:]

And is the $180 million a net number of any potential negative impact on EBITDA from divestitures that would be mandated?

[Mark Frissora:]

No.

[Emmanuel Rosner:]

So this is the gross number?

[Mark Frissora:]

That's right, that's right.

[Operator:]

Our next question is from the line of Steve Kent, Goldman Sachs.

[Steven Kent:]

One, how should we be thinking about the $80 million more in cost savings that you described in your press release? Why not raise the overall profit outlook especially with your third quarter outlook? And then separately, on Commercial pricing, it sounds like you think it's softer. Why is that the case? Is it demand driven? Is it supply driven? Is it what competitors are doing? I guess, I just don't understand that part of what you're suggesting.

[Mark Frissora:]

Commercial has been under pressure for a couple of years now due to, I think, it would be clear to say that we have competitors that have been very aggressive in trying to get the corporate business, and we have not given up any market share. We keep a 99.2%, 99.3% retention rate every year. And in order to protect that share, we've had to respond in this bad economy. As you might imagine, you go into a -- it could be a General Electric, it could be an IBM, big accounts that had airport market share are right for competitors to go after, if they're trying to gain share. And we've had -- one of our competitors has been very aggressive and now even a second one is. So that's been under pressure. And since we've had probably 45%-plus share of the Fortune 500 companies, that's been share we've had to defend. Having said that, it's getting better. We've seen a lot of pricing weakness in Commercial last year, and now it's improving. I just went through the numbers, it's now down to 0.5% and moving positive probably or at least flat into the fourth quarter. But it's still there. The pressure is still there. Again, remember, that the volume in business today is still off about 15% to 20% off of '07 levels. So we aren't still back to '07 levels in Commercial. It's one of the big opportunities for us as it ramps up still. So we are up on certain elements, certain segments of business we're up on. Like our small accounts, we're up 1%, 1.5%, 2% right now. But on the large contracted accounts, that's where we have the most pressure.

[Steven Kent:]

But I guess what I'm asking, Mark, the fleet size e sounds more rational. So if I look at other travel industries, whether it's the airline industry or the hotel industry, they are already talking about being able to raise prices into the end of this year and going into next year. And I guess I'm not hearing that as much from you on the business traveler. But maybe, you could explain that a little bit more? And then, if you could also...

[Mark Frissora:]

There's no need to' explain except for an irrational competitor. That's the best way to explain it to you. If you understand the industry, there's one competitor who has always been the low-price leader. They've been very aggressive. I don't want to go into names and talk about pricing too much because there's obviously antitrust issues. But just in general, we always lead on price. We're the high price leader. We do it every week, every day, day in and day out. And our rates are the highest because we think we have the highest value to provide. We have the most cars available to rent, the nicest cars available to rent. This is something we've always claimed, that we think is true to this day. But their pricing has become more important in a tough economy. Whether or not, we get price increases next year, we will try and push it. But I'm just telling you right now, we've got some competent competitors that are continuing to price below market in order to gain share. And as long as they do that, I cannot control them. So that's the best way I can explain it to you. I cannot control competitors. So I have to respond accordingly to make sure we keep our share. Now I think net-net, things should improve. I believe, again I want to repeat to you, that I believe that pricing should start to improve certainly going into next year. We're hopeful that we'll be up year-over-year. But that's very difficult to predict when you're negotiating 200-plus contracts every single month, right? I mean, so they're all coming up here. And we do them on an annualized basis. Your first question, I think dealt with another issue. It wasn't the Commercial issue, you're asking me?

[Steven Kent:]

It was about the $80 million more in cost savings. Why not raise full year guidance given that?

[Mark Frissora:]

Yes, well again, to explain what I said a little bit earlier, you have this issue of visibility in the fourth quarter. And until we get some better visibility, a little bit more certainty, we don't want to take that to the bottom line because there maybe risks associated with it. If you look at that last page of the slide deck and you can see the kind of risks we're talking about. One point on all those factors, is $76 million of pretax. That's a big number, right? I mean, $6 million of pretax is $0.01 a share. So there are a lot of levers in our business. And to just say, "Okay, I'm going to increase it by x amount, I have to have a little more certainty around that." We just increased guidance by the way, the end of April, beginning of May. So it was three months ago, we increased guidance. And we increased guidance like three months or four months before that. So we've been increasing guidance regularly, and that was built on a better environment. We saw the environment weakening a little bit on the Leisure side because of GDP. So we were just being prudent, that's all.

[Operator:]

[Operator Instructions] Our next question is from Emily Shanks, Barclays.

[Emily Shanks:]

My first one is around the vehicle debt. Elyse, you had said, once the Australian and Brazilian facilities are done, are you 100% done for fiscal year '10 vehicle debt refinancing need?

[Elyse Douglas:]

Yes, we're much completed for '10 and then our focus then will be on the corporate credit facilities, which come due next year. That will be the next thing we'll take a look at.

[Emily Shanks:]

And then, are there any significant amounts that are rolling off for vehicle related debt in fiscal year '11?

[Elyse Douglas:]

We do have a VFN that will be renewed. And obviously, some of the financings we've done recently, the three-, five- and seven-year ABS notes that we issue will have an impact on that, in terms of whether we need to renew that full $2 billion for a lesser amount.

[Emily Shanks:]

And you said, it's $1 billion?

[Elyse Douglas:]

It's a $2 billion facility that will come up for renewal.

[Emily Shanks:]

What month is that in '11, do you know?

[Mark Frissora:]

It's the end of the year. We also have two other small programs that come due, the Canadian facility midyear and then our GE facility, late in '11.

[Emily Shanks:]

And then I want to see if you could give us some color around HERC, specifically CapEx spend expectations? Can you give us a sense of what you're looking to spend for fiscal year '10?

[Elyse Douglas:]

$550 million in total for the year.

[Emily Shanks:]

And is that total number on net of asset proceeds?

[Elyse Douglas:]

No. That's just addition.

[Mark Frissora:]

You want to know something about 2011, is that what you said?

[Emily Shanks:]

No, I was curious on '10. But if you want to give us guidance for '11, I'd take it.

[Elyse Douglas:]

It would be around $200 million for next year.

[Mark Frissora:]

Maybe $200 million for next year, assuming a growth rate of maybe 12% to 15%.

[Emily Shanks:]

And then my last question is just around, I think, Mark, you had mentioned, if I caught it correctly, negotiations with the OEM for next year vehicles? And I want to see if you could give us a preliminary view on what you think depreciation cost will be for '11?

[Mark Frissora:]

It will be down year-over-year. So we're having good negotiations so far. And we feel that pretty confident that we're going to have kind of single-digit decreases next year again in depreciation per vehicle. Part of that is driven -- I mean, the actual vehicle costs would be down a healthy amount. And then the question will be how much of our sales can come from what we call those new channels, like dealer direct and Rent2Buy. And both of those things would drive our net depreciation per vehicle down next year. So our goal is to move that number down. We know that we're going to be able to. The question is how much. We've not really finalize enough of the contracts to give you a hard number on that. But certainly, single-digit numbers, it will be down.

[Operator:]

Our next question is from the line of Fred Lowrance, Avondale Partners.

[Fred Lowrance:]

First on the Equipment Rental side, you've obviously got that business pretty lean right now, ready to leverage any sort of recovery. And I think in the past, you've stated a certain percentage of every incremental dollar revenue will flow straight through to the bottom line. Maybe you could refresh us on what that is, and maybe give us some sense for how long you think you can maintain those kind of leverage until you have to start adding people and equipment to support the growth that you're planning to see there?

[Mark Frissora:]

Gerry Plescia, who's our President of the Equipment Rental business. I'll let him answer that. Gerry?

[Gerald Plescia:]

There's a pretty good flow-through all the way through the rest of this year and certainly into next year. But depending on the pace of demand will dictate how much resource we add to it. Historically, we've been able to drop in the first two years out of a recovery, 70% to 80% of that increasing revenue to the bottom line. So there's still pretty good leverage, one to two years out from a recession. As we get back to 2007 levels and beyond, which is about $1.8 billion in revenue, then there's some more infrastructure and locations and other structural costs we would have to add. But it's a good one to two years coming out of recovery that we can drive a strong return from the revenue growth.

[Fred Lowrance:]

And just, Mark, back to you. One last question. We haven't talked about it, but your Connect by Hertz group there, you got as a growth driver. And I'm just -- I know there's a lot of competition in that industry, I'm just interested in getting your take on the way things are shaping up there, and may be where you see that business going for Hertz.

[Mark Frissora:]

Well, I mean, for us, I mean we're expanding globally, right? We've got Paris, London, Berlin, Madrid and then New York City. And the kind of revenues right now, they're growing fast but that's on a small base. We were zero about a year and a quarter ago. So revenues kind of probably at a run rate of, let's say, $5 million right now a year. We're focusing on New York City to be profitable there by this year. That's our goal. So there are a lot of people in the business that have been in the business for 10 years, and they're still not profitable. We'll be profitable, I believe, by the end of this year. And then once we have the model really nailed, we're going to expand it rapidly into other cities. So we're trying to take the model and pilot and a lot of it in New York City, changes, tweaks, et cetera. And once we get scaled there and profitability there, it will go into these other markets more rapidly.

[Fred Lowrance:]

Just on your expansion plans quickly, are you thinking that's more organic growth at this point, or you have your eye out for attractive acquisitions?

[Mark Frissora:]

I mean, we'll look at acquisitions, if it makes sense financially. We have a lot of technology that we are going to be launching in the Connect space that will enable us to leverage our network, our regular -- what we call, our regular rental car network. We think that with the technology that we're kind of transferring in some areas to the regular Rent-A-Car network, and being able to leverage the infrastructure, we have a big opportunity to grow much more rapidly. So for us, the big driver in growth will be technology enabled. And we we'll do that via both kind of realtime kiosk that we can put in places to enable people with Connect, as well as other Rent-A-Car business, as well as having more cars available for Connect in more convenient locations, with more flexible rental provisions that we'll provide. Again, technology will enable Connect to be able to leverage it into the normal rental car space, and we think that's going to be a big growth driver for Connect next year.

[Operator:]

Our next question is from the line of Rick Kwas, Wells Fargo.

[Richard Kwas:]

Mark, just a quick follow-up on the Leisure market. What's the success of the recent price increases that you've put through and the industry has seemingly followed? What are you seeing upfront? Are you concerned about pricing in the Leisure on airport market right now?

[Mark Frissora:]

We believe that actually pricing is holding up very well for us in the third quarter. So RPD for U.S. Rent-A-Car is holding up very well, and Europe Rent-A-Car is holding up exceedingly well. So we are very bullish right now on pricing in the third quarter. Bullish in terms of our expectation. It's probably actually a little bit better than we thought. We heard rumors yesterday, some people were saying it's weakening, and it's not weakening. You should know that the industry always by the third and fourth week in August and the first week of September, the RPD start coming down. That always happens every year. That doesn't mean pricing environment is weakening. That just means it's seasonality. So we are seeing a normal seasonal RPD weakening, but in terms of the relative RPD that we're getting this quarter versus where we thought it would be? I'd say, it's probably stronger than we thought both in Europe, as well as in the U.S. So we feel pretty good about pricing overall.

[Richard Kwas:]

From a competitive standpoint, there are no bad actors out there right now on Airport Leisure?

[Mark Frissora:]

Well, there's always bad actors. But in general, things are pretty decent and again, the environment is holding. We're able to hold our pricing in place right now without having too much cost for concern.

[Richard Kwas:]

That imply year-over-year increases in the second half of the year or what are you expecting to be flattish for the rest of the year?

[Mark Frissora:]

I can't, I mean, we're getting into pricing discussion that's illegal for me to partake in. But in general for us, we believe third quarter would definitely be positive.

[Operator:]

Our next question is from the line of Chris Doherty, Oppenheimer.

[Christopher Doherty:]

I just wanted to focus on HERC a little bit more in terms of, Mark, your comments that maybe HERC could be up mid-double digits next year. How much of that do you think is volume versus rates?

[Mark Frissora:]

I'd say most of it is volume, for sure.

[Christopher Doherty:]

You look at that chart that you showed that, I think, that you guys are down, call it, 13% over the last two years, and competitors are down more like 16-plus percent. I mean, now that you guys seemed to be getting in that high 60%-, 70%-type triangulation. Do you expect rates to come back soon?

[Mark Frissora:]

I mean, we're seeing them come back every single month. I mean, it's not like huge gains, right? But yes, we're seeing them happen right now. We think whatever our competitors has got, more pricing discipline with the new yield management system they have implemented. So that's been helpful. We've seen more discipline. So yes, I think, we're fairly -- we feel pretty good. I mean we're not making, how do I say this? We don't build our plans around price increases right now. They're all built around volume increases, and the hope is we get flat here, some time by the first quarter certainly. But the revenue side, continues to be very encouraging for us, just pure volume. Industrial markets for us now are 29% of our revenue, and it's growing and those industrial markets are up year-over-year. I think Gerry is here with me. Gerry, what was June up year-over-year, like mid-double digit or...

[Gerald Plescia:]

For HERC, we were up high double digits, 18% basically.

[Mark Frissora:]

We were up 18% in the Industrial segment year-over-year.

[Gerald Plescia:]

Rental industry is up about 4%.

[Mark Frissora:]

And the industry is up about 4%. But our 29% segment of our overall business is up 18%, and it was up 18%. And we've seen that actually kind of get better. So we feel pretty good about being positive, and that's different than our competitors. So every competitor has a different mix. We got a lot of new Industrial business that we worked on for two years, and that segment is growing more rapidly for us.

[Christopher Doherty:]

And talking about mix and fleet growth, you said this year probably $150 million addition, next year maybe $200 million. If you look at the mix right now, your comment that HERC is trending well and also Industrial. The other categories, are you reducing those in terms of fleet or you're just maintaining it?

[Gerald Plescia:]

Essentially, we're maintaining most of those categories net-net. There are some specialty categories like generators, pumps and things like that. Those are increasing because of the specialty nature. But the governmental business, the air compressors, the other fleet categories are essentially very slow single-digit growth and maintaining or slightly positive.

[Christopher Doherty:]

One specific is aerial, can you talk a little bit about aerial?

[Gerald Plescia:]

There's still in excess of supply aerial in the marketplace, and that's one of the reasons we don't expect pricing to be a big part of our revenue growth next year. It seems that there will be about a nine to 12-month period when supply completely adjust to demand within that segment. So there's still is excess supply as that starts to mitigate and balance, that's where we'll start to get some better pricing metrics on that part of the industry. And I think that will happen as we get into the second quarter and beyond next year.

[Operator:]

At this time, we have time for one additional question and then any closing remarks the speakers may have. That question is from Michael Schlembach, JPMorgan.

[Michael Schlembach:]

I just wanted to talk about the balance sheet a little bit, I mean given the environment and the debt market, are you thinking opportunistically as to some of your higher coupon debt? And with regards to overall credit ratings, maybe you've spoken with the rating agencies and you think that you might be able to feel for their pace in reacting to business results, with or without a dollar addition? I mean, you guys have made a lot of comments about focusing on credit ratings, which as investors, we definitely appreciate. Anymore commentary on that going forward?

[Elyse Douglas:]

Sure. With respect to the rating agencies, I think we were poised to get an upgrade from S&P. They put us on positive outlook and I think it's really the uncertainty around Dollar Thrifty that's holding them back. So we do envision that we're going to see some positive ratings trend. In terms of looking at the balance sheet, we are looking at the capital structure. The high yield notes, the call premium does start to come down next year, so we are looking at a number of different alternative in terms of how we can improve the overall profile.

[Michael Schlembach:]

If I go sort of up a level or down a level, depending on how you think about it from a cap structure. When you're looking at your fleet size and your structure relative to the growth of the business, do you have an idea of where you want to get to from a total fleet size? How much that would be risk cars? I'm most interested in what sort of LTVs you're seeing in the securitization market? It looks like it was 75% through the sub-ABS. I mean, how does that compare historically for you guys?

[Elyse Douglas:]

What we are looking at for the end of the year is about a 5% deterioration in the advanced rate.

[Michael Schlembach:]

And total fleet size? I mean, as you look to next year, are you going to be net adding to total fleet size? And what kind of size do you anticipate?

[Mark Frissora:]

We build fleet to demand. So we really don't build fleet to build a field of dreams and hope they come at all. We actually always fleet below demand, the demand that we get typically. I would say that we typically probably fleet, maybe 3% to 4% at least below what actual demand is, so we have the ability to yield up. So you'll see us -- it's like predicting what our sales are going to be, trying to predict what our fleet is going to be, right? I can't give you that number. Know that we're going to be investment grade as quickly as possible. We have a line of sight on that. We think that certainly in the '12, '13 time frame. We'll have statistics that look like investment grade. And then it will take the agencies, six months to a year to figure that out. Not figure it out, I mean, they'll figure it out but they need to see the numbers consistently hit. They're not just -- if I hit the statistic, one quarter, they're not going to want to just say, okay, they're all of a sudden investment grade. They're going to want to see two or three quarters at least of consistent performance at those ratio levels. But we think we can hit some of those ratio levels starting in '12 and moving into '13 and are hopeful that we can get that investment grade rating.

[Michael Schlembach:]

I guess as a follow-up, do you think you're going to use as a means of fleet liquidity, do you think they're going to use additional sub-ABS facilities? Or do you think that, that was kind of a -- it was a sort of a relatively new way of financing it and probably because the haircuts that you had to deal and the credit in the '07 and '08 were a little different? Do you think you'll be using more sub facilities going forward, or do you think advance rates recover on a senior basis, where you don't have to kind of trench it out even further?

[Elyse Douglas:]

It's really hard to predict. Our view was that market provided favorable rates. We were able to on a relatively attractive rate.

[Michael Schlembach:]

What was the incremental cost there?

[Mark Frissora:]

We have to cut this off, we can go offline. If you want to call Elyse up right after this call. Okay, operator, I think we're through with the call. So I want to thank everyone for attending this conference call and look forward to talking about more good news about Hertz in the future. So with that, I'll end the call.

[Operator:]

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