Executives
H. Clifford Buster III - Chief Financial Officer
Scott L. Thompson – President and Chief Executive Officer
Todd D. Dallenbach - Executive Director, Investor Relations
Analysts
Christopher Agnew - Goldman Sachs
Michael Gallo - C.L. King & Associates, Inc.
John Healy – FTN Securities
Michael Millman – Soleil Securities
Emily Shanks – Barclays Capital
Christina Wu - Soleil-Securities
Connor Ryan – Deutsche Bank
Dollar Thrifty Automotive Group Inc. (DTG) Q3 2008 Earnings Call November 5, 2008 11:00 AM ET
Operator
Welcome to the Dollar Thrifty Automotive Group third quarter earnings call. At this time all participants are in a listen only mode. After the presentation we will conduct a question and answer session. (Operator Instructions)
I would now like to introduce your host, Mr. Todd D. Dallenbach, Executive Director of Investor Relations. Mr. Dallenbach, you may begin.
Todd D. Dallenbach
Thank you, Julie. Good morning everyone and welcome to the Dollar Thrifty Automotive Group third quarter 2008 earnings release conference call. Your hosts for today’s call are Scott Thompson, President and Chief Executive Officer and Cliff Buster, Chief Financial Officer.
Some of the comments contained in this conference call may constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed in forward looking statements due to many factors. These factors include among others matters we have denoted in our latest earnings release and filings with the SEC. Dollar Thrifty Automotive Groups undertakes no obligation to update or revise forward looking statements.
Today we will use certain non-GAAP financial measures; all of which are reconciled with GAAP numbers and can be found in our press release or posted to our website under the investor update tab. Listeners are advised that an audio replay of this conference call will be available via the corporate website www.DTAG.com for one year.
Now I’d like to turn the call over to Scott Thompson.
Scott L. Thompson
I would like to update you on some of the changes since the last time we spoke in early August. First, the change in senior management; as we announced on October 13, Gary Paxton stepped down from his position of President and Chief Executive Officer and has become a senior advisor of the company through December 31 when he will retire from the company and the Board of Directors.
On behalf of the Board of Directors and the employees, I’d like to take this opportunity to thank Gary for his leadership and service to this company over nearly four decades. He has handed off a terrific culture of dedicated employees. All of us at Dollar Thrifty would like to wish him a happy and healthy retirement.
In addition to Gary’s retirement, there were other changes in management structure. Scott Anderson, a long time senior EVP of the company, has greatly expanded his leadership role in the company and will be focused on driving revenues and operations. Cliff Buster, a seasoned financial professional, joined the company as Chief Financial Officer. I’ve known and worked with Cliff in the past and I know you’ll find him to be a very valuable resource.
These two EVP’s joined three other EVP’s Vicki Vanniman; Legal, Rick Morris; Information Systems and Jim Duffy; Operations to round out our executive team. The executive management team has over 95 years automotive experience and are key to the company’s future. I want to assure you we are all fully engaged and addressing the issues facing Dollar Thrifty.
We’ve taken some painful, but appropriate actions in our business. During October we completed a workforce reduction to adjust our cost structure. We reduced overall workforce by approximately 6% including 30% reduction in officers, a 15% reduction in headquarter staff and a 5% reduction in the field staff.
While we will incur a fourth quarter charge of approximately $4 million relating to these actions, they should generate $15 million in annual savings beginning in 2009. In addition to workforce reductions, we have also taken other steps as we reduced employee related benefits, reduced net capital spending and discretionary expenses.
As important as these steps are, as you know, fleet costs is one of our largest expense items. We must control it to be successful. It is in this area that has been difficult for us in the last 12 months. As the management changes, fleet now reports directly to me and will be one of my top priorities.
As we previously announced September 23, third quarter was a challenge for Dollar Thrifty. Our challenges included waning revenue per day in demand, an unexpected bankruptcy of a large tour operator, weak pricing and liquidity at the auctions and increased DVO expenses.
Vehicle depreciation expense stabilized this quarter, benefiting from extending the fleet holding period and strong manufacturer incentives as we settle from outstanding incentive issues with an OEM.
On a non-GAAP basis, we earned $0.89 per share compared to a profit of $1.01 last year’s third quarter. Corporate adjusted EBITDA during the quarter was a positive $43.4 million and on our trailing four quarters was $35 million.
Now I’d like to have Cliff review the details of the quarter with you.
H. Clifford Buster III
I will now walk you through the financial details for the third quarter beginning on Table 1 in the press release. Total revenues for the third quarter 2008 were $506 million, down 4.1% as compared to last year’s third quarter. Vehicle rental revenue decreased 4.8% due primarily due to a 2.2% decrease in revenue per day combined with a decrease of 2.7% in the number of rental days. Fleet utilization during the third quarter was up 80 basis points to 85.2% while average rental fleet decreased 3.7%.
I will now turn to the expense side of the income statement. Direct vehicle and operating expense or DVO was $249.1 million up $3.3 million or 135 basis points from the same period last year. During the quarter, DVO increased primarily as a result of higher fuel costs in addition to a bad debt expense of $3.5 million recorded related to the bankruptcy of a tour operator.
These expenses were partially offset by reduced personnel related expenses as a result of lower transaction levels as well as lower concession fees and vehicle damage expense incurred during the quarter.
Vehicle depreciation expense was $137.4 million, down approximately $5.6 million or 3.9% in the 2007 third quarter. This was driven by a lower monthly average depreciation cost per car of $324, a decrease of 1.2%. As Scott previously mentioned, depreciation expense in the quarter benefited from the settlement of certain incentive issues with an OEM as well as longer fleet holding periods.
Gains realized on the re-marketing of our low risk vehicles totaled $1.3 million in the current quarter compared to $7.3 million for the same period last year. De-fleeting has been difficult from both a price and volume standpoint due to current market conditions.
SG&A expenses represented 10.3% of revenue for the quarter, down from 11.4% in the prior year period. Excluding the impact of changes in the market value of assets and certain benefit and retirement plans, which I will explain momentarily, SG&A expenses declined approximately $9.3 million or 15% on a year over year basis, primarily as a result of certain non-recurring expenses and stock based compensation expense incurred during the third quarter of 2007.
As we have discussed in prior periods, the change in market value of assets in the deferred compensation retirement plans impact the SG&A lines with an offset in other revenue. While there is no resulting impact to the company’s pre-tax income, SG&A will fluctuate from period to period with changes to the value of investments.
Change in the market value of these investments were benefits where decreases in SG&A of $1.4 million and $2.9 million for the third quarters of 2008 and 2007 respectively. Our interest expense during the third quarter totaled $31 million, down from $35.8 m for the same period last year, primarily as a result of lower average borrowings during the quarter. As of September 30, the weighted averages interest rate for vehicle debt outstanding was 4.8% and the weighted average interest rate on our non-vehicle corporate debt was 5.9%.
Now, we’ll turn to Table 3 of the press release. GAAP earnings per share for the third quarter of 2008 was a profit of $0.87 versus $0.48 per share in the same period last year. Results for the third quarter of 2007 were negatively impacted by approximately $0.54 per share as a result of a significant decrease in the fair value of our interest rate swap arrangements. Non-GAAP earnings per diluted share for the third quarter of 2008 was a profit of $0.89 compared to a profit of $1.01 per share for the same period last year. Non-GAAP earnings per share do not include the change in fair value of the company’s interest rate swap.
Now moving on to key balance sheet items on Table 2 of the press release, you’ll see that revenue earning vehicles net of depreciation totaled $2.6 billion down 3.8% in the same period last year as we extended the fleet holding periods and operated fewer program vehicles. Vehicle related debt declined significantly to $2.4 billion reflecting our current fleeting strategy. Non-vehicle corporate debt declined $61 million to $188 million as a result of a prepayment made in the second quarter to reduce the company’s non-vehicle debt.
At September 30 about 57% of the total debt outstanding was at fixed rates continuing our past practice of hedging majority of our debt against fluctuations and short term interest rates. During the third quarter of 2008, we spent approximately $7 million on non-vehicle capital investments. We have significantly reduced our 2008 capital budget and now expect our net capital spend total approximately $25 million for all of 2008.
We ended the quarter with unrestricted cash and cash equivalents of $209 million and tangible net worth of $273 million or approximately $13 per share. Our debt book to capitalization ratio at quarter end was approximately 38%. We compute debt to book capitalization excluding secured vehicle financing.
With that, I will now turn the call back over to Scott.
Scott L. Thompson
Turning to liquidity at quarter end, as Cliff mentioned, unrestricted cash and cash equivalents were $209 million, up $129 million from the end of the second quarter primarily due to a dividend of $100 million from our vehicle finance subsidiary to our holding company. These funds relate to excess cash enhancement in our vehicle financing program.
As of September 30, 2008 we had an additional $64 million of excess enhancement of our vehicle financing and based on our current fleet plan we expect to be able to dividend approximately another $100 million from our vehicle finance subsidiary to our holding company. These funds will increase our balance of unrestricted cash at year end and will mitigate the impact of expected fourth quarter cash losses. Restricted cash and investments for the third quarter totaled $252 million, approximately the same as last quarter. As you know, these funds are primarily restricted to acquire vehicles. At the end of the quarter, we had $188 million outstanding under our non-vehicle financing, which is the debt amount used in computing our leverage ratio before certain working capital credits.
As we reported on September 30, we amended our senior secured credit facility to modify the level of permissible leverage during the period beginning September 30, 2008 and continuing through November 20, 2008. Compliance with the leverage ratio test under the amendment at any time during the period will be based on the corporate adjusted EBITDA for the trailing four quarters ended June 30, 2008 rather than the most recently completed trailing four quarters. We have included a spot in our latest investor update on our website to help walk you through the leverage ratio calculation.
Following the 60 day amendment period, the leverage ratio test will again be based on corporate adjusted EBITDA for the trailing four quarters most recently completed prior to the relevant test date. That means it will be based on the trailing four quarters ending September 30, 2008. We requested this amendment not only to ensure our continued compliance with the leverage ratio test, but also to give our lenders and ourselves time to discuss the terms of our senior secured debt agreement in light of the current operating environment. We felt it important to have these discussions to ensure all stake holders are fairly treated.
Subject to the discussion with our lenders, we plan to pay down approximately $16 million of our term debt facility before the end of November. This will ensure a near term compliance with the leverage ratio test under our senior secured credit facility. I want to be clear on this point; with a $16 million debt payment, we will be in full compliance with a leverage ratio even after the 60 day amendment expires. With $209 million of unrestricted cash. the payment is not a significant drain on our liquidity.
Based on our unrestricted cash availability at September 30 and the current operating forecast, we believe we have sufficient liquidity to reduce our term debt as needed to ensure continued compliance with the leverage ratio test under our senior secured credit facility.
Now turning to outlook, when we spoke to you last, we had just closed our books for July and we had an early read on August. Both months operating performance was satisfactory. Conditions in September post Labor Day deteriorated significantly and more than would be normal seasonality. Demand and pricing fell off dramatically.
As you know, September is traditionally a transition period for the industry as we de-fleet beginning with the end of the summer travel season. Weak demand in retail customers as they dealt with the current economic conditions combined with poor sales volumes and weak pricing at the automobile auction has resulted in a very unfavorable environment beginning in September and continuing.
Looking at the balance of 2008, we expect the operating environment to remain very challenging for the foreseeable future. Due to the uncertainty regarding the strength f the economy, domestic auto and airline industries and the use vehicle and financial markets, vehicle rental revenues are estimated to be down 4% to 5% for the full year 2008 as compared to last year. The company estimates that vehicle depreciation cost on a per vehicle basis will be approximately 15% higher for the full year 2008 compared to 2007.
These factors and their impact on rate per day transaction volume and residual vehicle values are expected to result in the company reporting a non-GAAP pre-tax loss significantly in excess of prior year’s fourth quarter and will lead to a non-GAAP pre-tax loss for the year ended 12/31/08.
We are focused on cash flow and liquidity. We have taken appropriate actions in consideration of the current operating environment. We will continue to monitor the situation making adjustments to our plan as new facts and circumstances evolve.
That concludes our prepared remarks and Operator please open the call for questions.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Chris Agnew with Goldman Sachs.
Christopher Agnew - Goldman Sachs
Really question around fleet and I guess there’s many moving parts, so it’s a little bit multifaceted. In the second quarter your fleet net book value was down significantly on a year-over-year basis. It wasn’t in the end of the third quarter. If you can give us some background as to why that was, and then looking forward, can you talk a little bit about your plans for cutting fleet for lower volume or maybe expected volume and demand in fourth quarter and next year?
Scott L. Thompson
Let me talk about fleet and see if I get your questions answered appropriately. First of all, as you know, we’ve begun to extend our fleet and we’re probably moving closer to more like a 20 or 21 month expected holding period. When I look at our fleet, we have 3,700 cars that are the ’07s, 79,000 ‘08s, and about 20,000 ‘09s. We’re going to run those cars longer than we have traditionally. We’re not going to be buying as many cars in the first quarter as we’ve done historically.
I think that probably answers why the average is down, but when you talk about what our fleet size is going to be in the future, that’s going to be demand dependent. I would expect because of the market we will probably not bring as many cars into the fleet for the busy summer months, kind of cut off the peak, so we reduce the risk of de-fleeting next year. As Cliff mentioned in this prepared remarks, the de-fleeting this year was much more difficult than in prior years.
We were fortunate that we had a large number of GDP cars that we were able to deliver to the auction and in fact there are about 30,000 of our GDP cars at the auction now. Last year that number was about 11,000. That gives you some indication of how backed up the auctions are. Additionally, we had a difficult time selling risk vehicles during the third quarter. I think last year we sold about 19,000 risk vehicles during the quarter. This year we sold about 5,000.
So you can see the issues there. So it will change our strategy going into the summer. All of that has to do with liquidity in the marketplace for consumers and what’s going on the retail franchise side which are primarily the buyers of our fleet.
Christopher Agnew - Goldman Sachs
Just a follow up on that, can you quantify, when you say 20 or 21 month holding period, is that the average age of the fleet, and can you compare to what that was before and any chance of quantifying... How does that impact the net book value and therefore your fleet financing needs?
Scott L. Thompson
As the fleet gets older, and first off we’re just talking about risk cars. GDP are going to be 6 to 7 months, so we’re only talking about risk when I say a 20 month hold. As we hold the car longer, that car depreciates and so it’s got a lower net book value which reduces our finance requirement and our enhancement requirement and frees up cash. I think probably more important than maybe the age of the vehicle, how long we keep it, is really mileage and we’ve been looking very closely at the average miles that we have on vehicles. Right now the core part of our fleet, the model ’08, they have just over 20,000 miles on them and so we think they’ve got quite a bit more room on them and we can run them quite a bit longer. Does that help?
Christopher Agnew - Goldman Sachs
Is there any way you can quantify the number or is that difficult given the moving parts?
Scott L. Thompson
Well last year we had a target of hold of 10 to 12 months, so we’re moving from 10 to 12 months to 20 to 21 months. I don’t know mathematically what that does. We could probably figure out what that does to the average cost per car but I would guess it probably decreases it probably 20% or 30%. That’s off the top of my head.
Christopher Agnew - Goldman Sachs
So then thinking about that reducing that book value, I guess if we weight it for the risk mix within your fleet, that reduces the net book value along those lines.
Scott L. Thompson
Correct.
Operator
Your next question comes from Michael Gallo with C.L. King.
Michael Gallo - C.L. King & Associates, Inc.
The question I have is on de-fleeting. I was wondering as you de-fleet, obviously it looks like fourth quarter you’re going to be bringing the number of vehicles way down and I would assume that will be the case in ’09 as well, but are there any issues that you run into with like kind exchange and some of the previous tax refunds that were recaptured in prior years? In other words, do you start to turn around some of the bonus depreciation or how much cushion do you have on that?
Scott L. Thompson
First off, very insightful question. I’m going to fine tune the first part of the question because I think the fleet will come down some, but significantly is probably too strong a word. But you’re exactly right on the mechanics. As the fleet comes down it does raise some issues of deferred taxes turning. We’ve looked at those issues. They’re not significant for ’09. We could run into that issue in 2010. Don’t forget that we also have a $400 million to $500 million NOL carry forward so to the extent we trigger some taxable income, we do have that unutilized NOL to mitigate any cash issues from the taxes. But we’ve looked at it, we think it’s manageable. I’ll also tell you that we’re looking at like kind exchange and we may choose to get off like kind exchange for a little while. That may have some attributes that we’re interested in to free up some restricted cash, and that’s something that we’re also closely looking at.
Michael Gallo - C.L. King & Associates, Inc.
Second question, Scott, short time on the job, have you been able to determine what to do with Canada, was Canada profitable in the third quarter, I think historically that was the one quarter it was making money. Any way to lessen the losses there as you head into 2009?
Scott L. Thompson
Canada has been an issue for this company for a long time. Canada’s operation from a pre-tax standpoint was profitable during the third quarter and was just slightly better than last year. What we have done in Canada, I would tone is kind of de-risk the business model. We’re running a much smaller fleet, I want to say maybe 20% to 25% smaller fleet in Canada so that we don’t have the upside but we don’t have the downside.
I would expect their loss for the year ’08 to be, we’ll call that 20% less than last year but still a loss and it’s something that we continue to work on as we try to mitigate the negative effect of Canada, and that team up there is very engaged and are looking at new ways of running their fleet to get us to where we want to be in Canada.
Operator
Your next question comes from John Healy with FTN Midwest Securities.
John Healy – FTN Securities
Kind of a big picture question, I know in the last economic downturn some of your franchisees had a difficult time. I was hoping you could comment on the comments, the mood, you’re getting from your franchisees, if you’ve seen any franchisees not be able to survive this environment, and maybe what you’re doing to help support them in an environment that obviously is more difficult.
Scott L. Thompson
There’s no question that our franchisees are dealing with the same economic factors that we are. We’ve got a very strong franchisee base. We haven’t had any credit issues or receivable issues that were significant to date. We have not done anything out of the ordinary course of business to support franchisees, nor do we have any of those issues on the table. But there’s certainly a group of partners that we’ll continue to work with and monitor. Most of them have fairly reasonable financial capacity. As we’ve consolidated quite a few of the franchisees over the last few years, but it’s a very insightful question, and we continue to talk to them routinely. But there’s nothing unusual that we’re seeing at this point.
John Healy – FTN Securities
Okay, great, then when you look at the fourth quarter, it looks like you’re kind of looking at revenues being down a ballpark around 10% or so, any thoughts on how we should think about the mix between that, how much on a rental [inaudible] and how much maybe on a pricing aspect and [inaudible] trends for 2009?
Scott L. Thompson
Give me just a second. Where we’re seeing the biggest pressure near term is in rate per day. I think that’s a reflection of over fleeting. While demand is down low single digits, rate per day is off high single digits to low double digits, if that helps you.
John Healy – FTN Securities
So rate per day down high single digits, low double digits?
Scott L. Thompson
Yes.
Operator
Your next question comes from Michael Millman with Soleil Securities.
Michael Millman – Soleil Securities
On that last question, we were talking about, what you’re seeing for the fourth quarter or what you’re seeing in October?
Scott L. Thompson
What we’re seeing in October and I don’t see any reason to believe that I wouldn’t see it for most of fourth quarter. The way I’m looking at it, correctly or incorrectly, is until the auctions free up, that my friends at the other company are going to be dealing with over fleeing issues and it’s going to be difficult for them to de=fleet and all that’s going to be bought out in rate per day.
Michael Millman – Soleil Securities
You said you expected your days to be down low single digits?
Scott L. Thompson
That’s what we’re seeing right now is low single digits.
Michael Millman – Soleil Securities
Jumping to some other questions, Chrysler, can you talk about what the alternatives may be, what the contract may talk about if Chrysler is bankrupt or if Chrysler and GM combine, what that means? Also, when you talk about the difficult used car market, is that more so Chrysler than other brands and regarding Chrysler, can you talk about what that incentive was in the third quarter. I guess also regarding --
Scott L. Thompson
Hold on. I’ll let you take another bite at the apple but I’m running out of ink writing your questions down and I’m going to forget them. So let me hit the ones you’ve got on the table right now.
First of all the used car market, I do not think that’s a Chrysler issue. It wouldn’t matter what the car was. Trying to get cars through the auction right now is very difficult no matter what the brand is, no matter if it’s luxury, no matter if it’s heavy metal or light metal. Auction closing rates would normally be 50% to 55% and the numbers I’m hearing from the auction are more like high single digits to maybe 12% and that’s in all brands, so that’s a overall liquidity issue in the marketplace.
Michael Millman – Soleil Securities
You say closing, that’s the ones that are actually sold?
Scott L. Thompson
Yes, those are the ones you run through the line and actually close, and there’s just not enough buyers there because those buyers are basically retail car dealers and they have their own problems and they’re dealing with their own liquidity issues and so you just don’t’ have enough buyers. It’s not a pricing issue. You could lower the price, they aren’t selling. It’s a liquidity issue in the auctions and that’s affected all brands. That’s not a Chrysler issue.
Relative to incentive, from Chrysler we receive millions of dollars and recognize millions of dollars in incentives every quarter as it relates to Chrysler. I think as you know we have a confidentiality agreement with them so I can’t give you a lot of details but directionally if I look at the aggregate incentives that we realize from Chrysler in the third quarter of this year and compared it to the third quarter of last year, the incentives are slightly down. Slightly. If I look at the incentives we realized from Chrysler in the third quarter this year compared to the first quarter and second quarter of this year, then the incentives are up.
Some of that is settling. The 2006 model year which is normal for us. We settle usually a model year in the third quarter, and then we’ve made some adjustments to our incentives in the ’07 model year based on some new information. So directionally, I’ve given you some information there, but I have to work within the confidentiality agreement.
Additionally we’ve given you the perspective that we expect our overall average cost per month to be up 15% for the year which is the same guidance we gave you in the second quarter, and we’re holding firm to that number at 15%, that’s still what we’re targeting for the year.
Michael Millman – Soleil Securities
The press release suggested there was something special about the incentive in the third quarter.
Scott L. Thompson
I consider any incentive I get special, but I wouldn’t call it other than the fact that we settled the 2006 which would be normal. We would normally settle one year for the 2007 adjustment I would say was probably... I would characterize that as special, or one-time, as we learned more about our 2007 incentive program and reconciled some open issues.
H. Clifford Buster III
I cut you off on questions so I want to give you a chance if you had a couple more.
Michael Millman – Soleil Securities
The ones on the Chrysler –
Scott L. Thompson
You asked me about Chrysler and what could happen in the future. I don’t know how to have that conversation because that’s a hypothetical. It depends on what happens to Chrysler. Then we can go down that road, but from what we’ve seen from our dealings with them, from being up there and talking to them, we have great confidence in Chrysler management and we feel very lucky and fortunate to have them as a strategic partner.
Michael Millman – Soleil Securities
I guess my question was really contractually, if there’s some change, are they still required to give you the cars and are you still required to take the cars if –
Scott L. Thompson
As I understand it and I’m not a lawyer, if they merge, that contract would go with the entity. If they do something else, I’m not able to comment on those particular issues. With that, we probably need to move on to the next call. Thank you.
Operator
Your next question comes from Emily Shanks with Barclays Capital.
Emily Shanks – Barclays Capital
I wanted to just ask you a couple more follow up questions around the over fleeting. The data you’ve given us has been quite helpful, but as we look at the reference in the press release around the over fleeting really driving the price decline, am I correct in summarizing of your comments that was largely due to over fleeting in the month of September?
H. Clifford Buster III
Yes. I think the industry was in pretty good shape during the peak season, but had a lot of trouble post Labor Day.
Emily Shanks – Barclays Capital
Okay, and was that across the board or did you see that there were certain car types where it was especially pronounced?
Scott L. Thompson
From my perspective it was across the board and continuing.
Emily Shanks – Barclays Capital
Okay, so is it currently today, is it just as bad as it was in the month of September? You haven’t seen any correction?
Scott L. Thompson
The statistics I can give you is last year we had about 11,000 GDP cars that were at the auction waiting to be sold. This year there’s 30,000 and that gives you some indication that the OEMs are having trouble getting cars through the auction. Then the other statistic I can give you is when I talk to our folks that work the auctions, the closing rate as I mentioned is down fro, 50% or 55% to call it 9% to 10%. That’s for all brands, all makes, all auctions. It is a very tough auction to sell vehicles through right now.
Emily Shanks – Barclays Capital
The reason for the question is I’m just trying to understand a bit more how you were still able to would appear to be sufficiently de-fleet to a certain degree though allow the one-time dividend out of [vehicles financing sub into ink]. Did you just simply undergo severe residual pressure in those?
Scott L. Thompson
We were able to de-fleet primarily because we had some GDP, quite a few GDP. I’ll also tell you that we are not totally satisfied with where our fleet is. We are a tad long and tad means about 3,000 to4,000 cars long. But we’re able to de-fleet and that certainly created some additional enhancement.
Emily Shanks – Barclays Capital
As I think about the de-fleeting that you did to provide enhancement, when you quote this 50% to 55% and down to high single digits to 10%, is that the type of residual value pressure that you saw?
Scott L. Thompson
First of all, let me say it wasn’t a one-time dividend. We were expecting another $100 million at the end of fourth quarter. We have not seen a significant decline in the residual values in the last couple of months. The residual values that we get from ALG, what we have seen is poor liquidity at the auction so you can’t get the car bought. It’s a little bit different. We were experiencing poor residual values in the first half of the year as the ALG curves fell. This market is really more just the buyers aren’t there. It’s not a pricing issue. If that makes... It’s a little bit different.
Emily Shanks – Barclays Capital
That’s helpful. That clears it up.
Scott L. Thompson
With that, we probably need to move on to another caller to allocate our time.
Operator
Your next question comes from Christina Wu with Soleil Securities.
Christina Wu - Soleil Securities
You have been able to maintain some strong utilization rates, which is great. I was wondering if you could speak to any change in the average rental length? My hypothesis being that with the economic uncertainty are people taking shorter vacations? Also, how successful is your shift in trying to win smaller business customers?
Scott L. Thompson
It’s longer and we’re looking at the length, how much it’s changed.
H. Clifford Buster III
It’s up roughly 3.5%.
Scott L. Thompson
What we’re seeing is a longer hold as opposed to shorter and I think we’ve seen that throughout the year. Yes, throughout the year we’ve continued to see a longer hold, not a shorter one. Now that may be our customer. We’ve got quite a bit of tour business from overseas and tour certainly impacts that number quite a bit.
Christina Wu - Soleil Securities
Have you been making some inroads on winning the smaller business customers? I know you’ve spoken about that during past quarters.
Scott L. Thompson
Yes, we’ve made some good inroads and have had some significant growth there but it’s not really material to the total at this point, but we’re certainly very happy with the penetration and the success we’ve had in that area.
Christina Wu - Soleil Securities
That’s great. I was surprised to read in today’s press release that you expect the fourth quarter to be down on a year-over-year basis given that last year’s fourth quarter included a number of one-time costs. I’m wondering if we should expect any one-time costs in the fourth quarter of ’08 aside from the $4 million of severance that you’ve announced.
Scott L. Thompson
It’s possible. We will certainly be looking at quite a few things. It’s possible that we may evaluate some of our software investments in some to her things but we’re not through that process yet.
Christina Wu - Soleil Securities
One last question. I’m wondering if you have seen any evidence of pricing increases from your competitors given some of the press releases that they have put out.
Scott L. Thompson
We’re certainly thrilled to see one of the leaders in the industry have a press release talking about raising prices 10%. We’ll certainly follow them aggressively, but we haven’t seen a significant impact in the market near term as it relates to pricing but we certainly applaud leaders in the industry taking those steps and we’ll follow them up. To the extent they’re over fleeted and they tried to participate in the leisure sector, we of course will aggressively protect our market share through pricing.
With that we probably need to move on to the next few questions.
Operator
Your next question comes from Connor Ryan with Deutsche Bank.
Connor Ryan – Deutsche Bank
My question actually relates to your vehicle debt. I know that you recently announced that you upstreamed some cash from as it relates to the vehicle facilities and what not, and I was wondering what if the actual functional way in which that cash is upstreamed, is there a covenant and can you come into conflict with the covenant down the road?
Scott L. Thompson
The agreements are very complicated so I’m just pausing to make sure I say this right. Certainly we don’t dividend any money up from the securitization until we have gone through all of the calculations, all of the covenants related to the securitization to make sure we’ve crossed all our T’s and dotted all our I’s, and once we do that, that computation is what we call excess enhancement, and once we have that, we are allowed to dividend that money up subject to the Board of Directors’ approval and we dividend it up in the normal course of business. So to answer your question, I don’t think we can run into any issues and we take those covenants very seriously and look at that every month.
Connor Ryan – Deutsche Bank
I understand there may be different issues with different facilities, but I’m just trying to understand. Is it primarily related to an LTD issue? Is it a maintenance test or just something that restricts your ability until you get to what [inaudible] excess?
Scott L. Thompson
What we need to do is we probably need to do that offline because literally there are quite a few tests that are very complicated but they have to do with fair value, they have to do with several things, and we just go through all the tests at the end of each month. The reason we’re generating cash is because the fleet is declining and that frees up the enhancement or the equity that we have in the cars as we have a smaller fleet and as we have a lower net book value because the older fleet, that frees up enhancement, and that’s what’s freeing up the cash to go upstream.
Connor Ryan – Deutsche Bank
So should I just follow up with you guys --
Scott L. Thompson
Pam Peck, our Treasurer, is the expert in that area. If you’ll ask for her, extension 2395.
Operator
Your last question comes from Chris Agnew with Goldman Sachs.
Christopher Agnew - Goldman Sachs
Can you discuss what your plan is for your mix of risk vehicles going into 2009 and also is there any significant differentiation geographically with volume and pricing because I know you’re stronger in certain parts of the country.
Scott L. Thompson
Great question. As I mentioned to you earlier, we aggressively used GDP to de-fleet this year. Of course the other side of that would mean that we must not have as much GDP left as we might have had in prior years. Currently we are running close to 75% risk so that gives you an idea of what we looked like going into 2009 and I’m looking for a sheet on pricing. You asked about pricing on location or different what we might be seeing in the marketplace.
I think as you probably know, pricing is very much a local business. When I look at October, there are some cities that are very soft and very soft would be 15% to 20% off on RPD. A city like Vegas is very difficult from an RPD standpoint. Then there are other cities that are up double digits like Orlando. We’re seeing good RPD performance in the Orlando market. So yes, it is very geographic, but I don’t think I can make any general assumption. It’s really market by market.
Operator
You have no further questions.
Scott L. Thompson
Thank you. In closing I want to stress that our employees are doing a remarkable job. I believe they are up to the current challenge. The company’s management team and Board of Directors are confident in them and the ability to successfully execute our plan. Thank you again for your continued support as we navigate these unsettled times.
Operator
Thank you for your participation. You may disconnect at this time.
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