Hertz Global Holdings Inc. Q1 2009 Earnings Call Transcript

Apr.29.09 | About: Hertz Global (HTZ)

Hertz Global Holdings Inc. (NYSE:HTZ)

Q1 2009 Earnings Call

April 29, 2009 10:00 am ET

Executives

Leslie Hunziker – Staff Vice President, Investor Relations

Mark Frissora – Chairman and Chief Executive Officer

Elyse Douglas – Executive Vice President and Chief Financial Officer

Gerry Plescia – Executive Vice President Hertz Equipment Rental Corporation and Hertz Corporation

Joe Nothwang – Executive Vice President and President, Vehicle Rental and Leasing, The Americas and Pacific

Michel Taride – Executive Vice President and President Hertz Europe Limited

Analysts

Emily Shanks – Barclays Capital

Christina Woo – Soleil Securities – Streetscape Research

Brian Johnson – Barclays Capital

Sundar Varadarajan – Deutsche Bank

Richard Kwas – Wachovia Capital Markets

Jordan Hymowitz – Philadelphia Financial

Jonathan Chen – Private Management Group

Michael Millman – Soleil Securities

Chris Doherty – Oppenheimer

Adam Silver – Babson Capital Management

[Sam Apibonya] – Columbia Management

Operator

Welcome to the Hertz Global Holdings 2009 first quarter conference call. The company has asked me to remind you that certain statements made on this call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are not guarantees of performance and by their nature are subject to inherent uncertainties. Actual results may differ materially. Any forward-looking information relayed on this call speaks only as of this date and the company undertakes no obligation to update that information to reflect changed circumstances.

Additional information concerning these statements is contained in the company's press release regarding its first quarter results issued yesterday and in the risk factors in forward-looking statements section of the company's 2008 Form 10-K.

Copies of these filings are available from the SEC, the Hertz website or the company's investor relations department. I would like to remind you that today's call is being recorded by the company and is also being made available for replay starting today at 12:30 pm ET and running through May 15, 2009. I would now like to turn the call over to our host, Leslie Hunziker. Please go ahead.

Leslie Hunziker

Good morning and welcome to Hertz Global Holdings 2009 first quarter conference call. You should all have our press release and associated financial information which was distributed last night. 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 call over to Mark Frissora, Hertz's Chairman and CEO. Also speaking today is Elyse Douglas, our Chief Financial Officer. In addition we have Joe Nothwang, Executive Vice President and President of Vehicle Rental and Leasing, The Americas and Pacific, Michel Taride, Executive Vice President and President Hertz Europe Limited and Gerry Plescia, Executive Vice President and President of HERC.

They're here today to help answer any questions you may have. Today we'll use certain non-GAAP financial measures all of which are reconciled with GAAP numbers in our press release and at the back of the slide presentation, both of which are posted on our website.

We believe that our profitability and performance is better demonstrated using these non-GAAP metrics. Our call today focuses on Hertz Global Holdings Inc., a publicly traded company. Results for the Hertz Corporation differ only slightly as explained in our press release. Now I'll go ahead and turn it over to Mark Frissora.

Mark Frissora

Let's get started on slide number five. In our last call I told you that in this economy our focus would be on improving profit retention and increasing cash flow. I'm pleased to report that in the first quarter we delivered on those objectives in spite of a difficult operating environment, and we remain committed to operating the company on this basis going forward.

Before I get into the specifics of our performance, let me give you some color on what we're seeing in the economy and in our own industry. If you turn to slide six, according to economic and industry reports, consumer confidence and spending held steady during the first quarter, but continued to suppress global travel demand. Our U.S. rental car operating performance reflects this stabilization.

When you adjust out the impact from Easter shifting to the second quarter and the leap year effect, the pace of decline in this segment has leveled off since year end. Getting especially hard hit however is the on-airport business travel segment. Buy-in from contracted accounts is falling much faster than leisure travel as corporations are keeping tight controls on expenses.

According to data from GDS, Global Distribution Systems, for the first quarter year-over-year business travel reservations declined 20% for the industry while leisure travel was off 14%. Business accounts make up roughly 45% of our total U.S. rental car sales. Moreover discounted rentals from third party online travel sites made up more of the mix year-over-year.

On the leisure side of the business we led an industry-wide price increase in the U.S. in the first quarter after right-sizing our own fleets and seeing indications that competitors were following suit. While macro environment has changed very little, we've made huge strides in the first quarter toward our goals to drive fleet and labor efficiencies and deliver strong cash flow metrics. And we were willing to sacrifice volume to achieve these objectives and capture higher quality revenue.

On slide seven you can see that our operating strategies were focused on capturing on longer length transactions to reduce vehicle turn-over and associated maintenance and customer service costs. Additionally, we are consolidating certain off-airport locations, reducing fleet and staffing levels, minimizing our exposure to weaker OEMs and thereby improving profit retention and generating higher fleet utilization. We made great progress on each of these strategies in the first quarter.

On slide eight are just some of the highlights from our U.S. car rental operations. Most importantly we generated positive adjusted pre-tax income in the first quarter. Secondly, the length of rental was up 5% over last year, driven primarily by the increased mix of leisure transactions, including our focus on multi-month rentals. Revenue per transaction, a measure of pricing and length mix, increased 2% from the 2008 first quarter due to increased length and was 5% higher sequentially due to both improved pricing and rental length.

We cut our average U.S. car rental fleet in the first quarter by 15% or 44,500 cars compared with last year and by 6% or 16,000 cars versus the 2008 fourth quarter, taking advantage of the improving used car market to delete some of our higher mileage models.

U.S. transaction days were down 13.4% versus our 15% reduced fleet, exhibiting how tight we ran the fleet. This tighter fleet helped drive fleet efficiency up 105 basis points from a year earlier and 75 basis points from the 2008 fourth quarter level.

Net depreciation per vehicle came down 4% sequentially as residual values improved. Total transactions were down 18% from a year earlier, but operating labor costs were reduced by 20%, evidence of our improved labor efficiency. And we reduced our exposure to General Motors by deleting cars and collecting on program cars receivables. As you probably know we have little to no exposure on Chrysler.

On the next slide in addition to improving operating efficiencies, we continue to take global actions to reduce direct operating and SG&A expenses through pricing optimization, sales effectiveness and better product management.

In the first quarter we generated $125 million from total cost savings initiatives across the company. Profit retention was 72% as adjusted pre-tax income declined by $133.7 million from the year ago period on $474.3 million reduction in revenue. This is a dramatic increase over the 2008 fourth quarter where we had a 27% profit retention and the 2008 third quarter where profit retention was negative.

We expect our profit retention rate to continue to improve each quarter throughout 2009. We've increased our previous cost savings target of $350 million to $500 million for this year after identifying additional actions to help counter the impact of recessionary effects on earnings.

In addition to profit retention a continually improving liquidity position is extremely important as we work to pay down debt and grow our business. This is on slide 10. In the first quarter as we reduced fleet size from historical levels, we generated $760.7 million in total net cash flow which is represented by the change in net debt excluding the effects of currency.

This compares favorably to the year earlier period when we reported a total net cash outflow of $95.5 million. All of this cash was used to reduce borrowings under the fleet facilities, bringing total debt down $1.3 billion or 12% from December 31, 2008.

Total restricted and unrestricted cash and equivalents were $880.5 million which brought total net debt down 9% from the end of last year to $8.8 billion and down 18% from March 2008. Since our acquisition by private equity in December 2005, we've paid down $2.6 billion of total net debt, of which nearly $1 billion was net corporate debt.

For the 12 months ending March 31, 2009, we produced an effective total net cash flow yield of approximately 60% based on $1 billion $449.3 million of total net cash flow. This yield is substantially better than the 12% yield we delivered on the last 12 month basis in March of 2008, indicating that there remains tremendous value in our equity. For the year ended December 31, 2008, our cash flow yield was 19%.

Now on slide 11 let's talk a little bit about the equipment rental business. As previously mentioned, we continue to drive this business for profit retention and cash. I'm pleased to report that our equipment rental business delivered positive adjusted pre-tax income in the first quarter. However, in contrast to the rental car segment, the equipment rental industry has experienced continued volume deterioration since the close of 2008.

Furthermore, pricing has become more competitive due to what we believe is irrational behavior by a few key competitors. Worldwide equipment rental pricing declined 4% year-over-year, comparatively in the 2008 fourth quarter we experienced a 2% pricing decrease year-over-year. The aggressive competitive actions we're seeing on the equipment side are primarily driven by the accelerating decline in industry volumes.

Worldwide volumes in our equipment rental business were down nearly 26% year-over-year in the first quarter as customer demand in the commercial construction segment dwindled further and as the pace of decline in the industrial markets increased. Sequentially the volume decline accelerated since the fourth quarter when demand was down 16% year-over-year.

In the recent first quarter we reduced our worldwide equipment rental fleet by roughly15% compared with a year earlier and by about 5% sequentially from the 2008 fourth quarter on a first cost basis. By increasing our equipment fleet sales at auction where pricing is stable, we continued our effort to close the gap on falling demand.

Unfortunately as I just mentioned, the gap expanded when volumes fell even faster in the first quarter from year-end. Total worldwide equipment rental revenues was down 32%, or 28% when you exclude unfavorable currency effects on a same store basis, excluding currency adjustments, revenue declined 24%.

Despite this, cost savings actions like consolidating locations, merging back office operations, and reducing headcount and wages supported a 40% corporate EBITDA margin, a level we expect to maintain or even improve throughout the year. In the first quarter we closed a net 5% of our equipment rental facilities to reduce fixed costs and brought our staffing levels down commensurate with shrinking equipment rental demand.

It goes without saying that operational cost reductions alone are not sufficient in today's business climate to achieve profit objectives. At Hertz on slide 12 we're taking a balanced approach that includes actions to improve pricing, generate new sales growth and elevate customer satisfaction.

We've told you about our new car sharing program, Connect by Hertz, which was launched in December. We've increased membership significantly since then by building awareness through urban consumers through low cost marketing initiatives. We're also continuing to sign academic and corporate accounts to the program, like Marriott Hotels' Maryland headquarters, and we've just agreed to pilot a car sharing program with IBM in Germany.

Another concept that's getting traction is multi-month and monthly leasing programs which are particularly timely in this environment. Consumers who are coming off an OEM lease who are looking for a more flexible arrangement with no material cash payment and without a multi-year contract are finding our monthly leasing program the most economic alternative. Monthly and multi-month rentals comprised 10% of our first quarter 2009 worldwide car rental volume.

Our pre-paid discount rental program is providing an attractive option for value conscious consumers. The pre-paid program generated more than $10 million in revenue in the first quarter and is being expanded from the top 30 markets currently in all U.S. airports by year end. So we're going to go from the top 30 to all U.S. airports by year end.

We won a net addition of almost 60 new car rental accounts during the first quarter on a global basis and in the off-airport segment, we are a recognized supplier at 84 insurance companies and a preferred supplier at 101 insurance companies. Combined we are a recognized or preferred supplier at 185 of the 209 largest auto insurance companies in the United States. These accounts are supported by our continued growth in the domestic off airport locations which now represents 24% of our total U.S. Rent-a-car revenue.

In both the car and equipment rental operations, we put together the custom rental programs for our contracted customers that address their specific needs in the current environment. We're offering them new ways to gain efficiencies in the rental programs while securing our relationships and retaining accounts as the competition becomes more aggressive on pricing for corporate customers.

On the equipment side specifically, in addition to a substantial number of incremental smaller accounts, our HERC business took three new sizable accounts from competition in the first quarter; one a Fortune 150 company and one of the biggest oil refiners in the world which we expect will be among our top five national accounts this year.

Finally our global footprint continues to pay off in this recessionary environment. For example, in Brazil our car rental revenues increased 6% in the first quarter, driven by a stronger rental environment as their economy held up longer than most. And at a time when major infrastructure projects are being delayed around the world, China has pledged to spend an estimated $600 billion over the next two years to rebuild communities destroyed by an earthquake last May and to construct new railways, subways and airports.

Our equipment business is capitalizing on China's stimulus program by expanding our penetration in the region. We currently have one location open today and are preparing to open two additional facilities this year. And later this spring we're opening up wholly owned car rental locations in both Shanghai and Beijing, capitalizing on the strong Hertz brand for cross-selling opportunities.

The new business awards in both the car rental and equipment rental segments are indicative of the organic growth we believe we can generate just by challenging macro-trends. Additionally we're capitalizing our recession-driven opportunities to increase the value of our franchise through small strategic acquisitions. Not every company can turn a recession to its advantage, but Hertz is a leader in the industry with strong brands and ample liquidity.

Acquiring a quality asset that has been significantly discounted and filled a product, geographic or customer gap is only prudent. For example, the purchase of Advantage Rent-a-car earlier this month offered all of those benefits and more. I'll lay them out for you a little bit later on the call.

There's no doubt we have faced another tough quarter. Our plans are in place to manage through several more quarters before we assume any type of recovery. Hertz employees are staying the course with the strategies and tactics that are driving profit retention and cash flow and I want to thank them for their outstanding effort.

With that I'll turn it over to Elyse to review the financial details of the quarter starting on slide 13.

Elyse Douglas

Let me start by summarizing the consolidated results for the quarter. We generated total revenue of $1.6 billion in the first quarter, 23% lower year-over-year but only 15% lower after adjusting for foreign exchange and the calendar effect of Easter and leap year. On slide 14 you can see that the decline reflects the impact of reduced demand in both the car and equipment rental businesses. Pricing also negatively affected revenues with equipment rental pricing under competitive pressure and the car rental revenue per day decline, driven largely by mix.

The good news is the pace of decline in demand has leveled off since the fourth quarter. Adjusted pre-tax was a loss of $116.6 million in the first quarter compared with the profit of $17.1 million in the same period last year. Consolidated corporate EBITDA was $91.9 million in the first quarter as compared to $235 million in the prior year. Profits were negatively impacted by the decline in volume and priced across all businesses. In addition we experienced higher costs associated with further fleet reductions in HERC and higher year-over-year car costs in Rent-a-car.

Adjusted direct operating costs in the quarter were down 20% and adjusted SG&A expenses were 16% lower due to lower rental volume and the achievement of $125 million in cost savings in the quarter. This lessened the impact of negative revenue trends on profits, resulting in higher profit retention of 72% improved from the fourth quarter level of 27%.

We've also taken significant actions over the past few months to assure further improvement in profit retention trends going forward, including company-wide wage and benefit reductions, closing unprofitable locations in both rental car and equipment rental and reducing headcount by de-layering in U.S. Rent-a-car, restructuring our international Rent-a-car operations and realigning the equipment rental regional structure.

Adjusted diluted loss per share was $0.25 in the first quarter versus earnings of $0.02 per share a year earlier. On a GAAP basis the fourth quarter loss was $0.51 per share.

Now let's turn to slide 15, where I'll walk you through some operating metrics for our car rental business. U.S. car rental rate revenue was lower by 16% for the first quarter year-over-year, or 13% when you calendar adjust for Easter and leap year. Pricing in the U.S. as measured by revenue per day or RPD, was 3% lower, with on-airport pricing down 2% and off-airport pricing down 3%. This represents an improvement over the 5% year-over-year pricing decline seen in the fourth quarter of 2008.

While prices in the quarter for discretionary rentals improved over last year, this was more than offset by the impact of changes in mix. The mix factors include a higher percentage of off-airport business, where volumes measured by transactions declined by 8% versus a 20% decline in transactions in the higher RPD Airport business. And while rental length increased within the airport segment, longer length of keep rentals have lower RPD characteristics.

So, while revenue per day declined, revenue per transaction was up almost 2% year-over-year on improved length and was up 7% sequentially due to improved pricing and length.

Domestic volume, as measured by transactions, declined 18% which was offset by a 5% increase in transaction length resulting in transaction days being down 13% in the last three months.

The next slide shows our international car rental rate revenue declined 31% or 11% when you exclude the impacts of currency, Easter, and leap year. Revenue per day for international car rental in the first quarter was 4% lower due to pricing pressures across all our overseas markets. Similarly, we saw transaction days decline in the major geographies where we operate with the exception of Brazil and Australia, where we continue to see volume growth.

Europe represents 80% of international rental rate revenue and Europe's economy is experiencing an 8.5% unemployment rate, all time low business and consumer confidence, and a negative 3.4% GDP forecast for 2009. Europe rental rate revenue was down 12% excluding the impact of foreign exchange and adjusting for leap year and Easter.

European transactions declined 12% and revenue per day dropped 3% of which half of a percentage point was due to pricing and the rest was impacted by mix and length of keep.

Transaction days for airport and off-airport combined were 13% lower year-over-year with airport down 17% and off-airport down 11%. In Europe 62% of our transaction days are generated off-airport, which helps mitigate the decline in business and leisure travel.

In October 2008, we instituted a 10% price increase for all our non-contracted rates across Europe, which was generally followed by our competitors. We saw signs of price increases sticking as our average first quarter leisure pricing per day for both on and off- airport was up 3% year-over-year.

While there are currently no indications of a bottom in the recession and any recovery in the regions' economy is expected to lag the U.S. by several months, we have improved profit retention in our European operations by reducing staffing levels 14% in the quarter over last year in closing 42 locations within our network this quarter.

On slide 17 you can see our monthly car rental fleet depreciation per vehicle was lower by 3.5% in the first quarter 2009 versus fourth quarter 2008. Additionally, in the U.S. the monthly depreciation per vehicle improved by 4% for the same period.

While there are improvements in the used car market and we have been able to negotiate lower car cost for the new model year, it may take a few quarters before we see the full benefits of lower depreciation per car as it takes time to rotate in these new vehicles, especially as we continue to hold and age our existing fleet.

Our worldwide rental fleet efficiency, which is defined as the percentage of days the vehicle is rented compared with the average number of vehicles available to rent, improved in the first quarter by 41 basis points year-over-year and 43 basis points from the 2008 fourth quarter.

In the U.S., fleet efficiency was up 105 basis points over last year and 75 basis points sequentially. The improvements were driven by the impact of lower fleets, higher leisure mix and process changes to drive better fleet efficiencies.

If you turn to the next slide, in the U.S. we reduced our end of period car rental fleet by 16% in the first quarter while transactions were down 13% from last year. On a worldwide basis, our car rental fleet's down about 12%. As we've said before, we are maintaining a tighter fleet today with the flexibility to fleet up as demand levels warrant.

At March 31, risk cars in our U.S. fleet represented 75% of the total fleet, and the average age of cars operated was 10 months compared with roughly eight months in the first quarter of 2008. The average age of risk cars sold was about 20 months compared with 14 months a year earlier.

As we have mentioned, the U.S. car market has improved since year-end. The Manheim Index showed an 8.3% increase on wholesale used car prices from December to March. Moreover, the Index has shown sequentially monthly improvements since year-end. The residual value experienced on our car sales in the U.S. for the quarter increased 8.7 percentage points on an age-adjusted basis from year-end, better than the Index.

Now, let me discuss our exposure to Chrysler and General Motors. Today less than 1% of our fleet is made up of Chrysler vehicles, so no real exposure there. We disclosed in our 2008 Form 10-K in detail the potential impact that GM bankruptcy would have on our liquidity and operations, and you should refer to it for a complete description.

Much of the risk occurs if GM does not immediately affirm its obligations on the program or buyback arrangements. We feel this is unlikely as we represent one of the largest private sector customers.

However, if GM filed for bankruptcy protection in the United States today and does not immediately affirm these obligations, then our exposure would include fleet receivables outstanding under our GM vehicle repurchase program of approximately $20 million and approximately $170 million in estimated exposure regarding the revaluing of GM program cars as risk cars.

And additional enhancement requirements under certain of our ABS credit facilities, although we think it's unlikely a GM bankruptcy could result in a further reduction in GM residual values. As a sensitivity benchmark, a 5% decline across all our GM risk and program cars would be about $50 million.

Please note that as we reduce the number of GM cars in our fleet we expect that these exposures will continue to decrease, and we have adequate liquidity today to cover the ultimate impact if such an event were to occur.

Now let me discuss the results of our equipment rental business, which we refer to as HERC. As you can see on slide 19, HERC continues to be impacted by the weak demand in all market segments due to the economic slump.

As Mark mentioned, our worldwide revenue was down 28% currency adjusted year-over-year and 24% on a same-store basis. This decline was driven by a 26% year-over-year drop in volume on declining construction activities worsened by the tight credit markets. Pricing was down in the quarter due to competitive pressure as the industry remained over-fleeted.

In response to the current decline in demand we've continued to sell our equipment through auctions, where there is still strong demand for used equipment. These de-fleeting actions, which are contributing significantly to our free cash flow and helping to reduce fleet in our low utilization categories, resulted in higher auction fees due to the greater amounts of equipment sold this year. Higher auction fees and lower residual values adversely impacted our adjusted pre-tax profits.

For the first quarter net CapEx for HERC was a reduction of $85 million, excluding the foreign exchange impact, representing a cash flow improvement of $83 million for the quarter. Equipment sales on a first cost basis totaled $201 million for the quarter, which is twice the level sold in last year's first quarter. These sales generated $122 million of less investment in fleet growth over the period.

HERC's quarterly fleet efficiency metric, calculated by taking total HERC revenue less equipment sales and other revenue, and dividing that by the average fleet acquisition cost, was 8 percentage points below the prior year as our accelerated fleet reductions weren't able to keep pace with the steep decline in rental demand. I want to point out that this calculation understates efficiency due to the impact of the decline in pricing on revenue.

At March 31, 2009, our worldwide equipment fleet age was 38 months, a two-month increase compared with fleet age at the end of 2008. We still believe that our fleet is one of the youngest relative to industry peers. In addition, due to a more favorable mix of equipment type, we feel comfortable aging the fleet into the mid 40s range without deterioration in the customer experience.

Now let me review our financial strength on slide 20. As of March 31, we had $5.4 billion of total equity up sequentially from 4.8 billion in the fourth quarter. The improvement is due to reduced borrowing under our fleet financing facilities as a result of lower fleet levels, which are in-line with lower demand. Based on the $3.6 billion of unused fleet financing capacity there is more than enough liquidity to cover our 2009 debt maturities which almost all are related to fleet debt.

Given our strong liquidity position in April we opportunistically delevered by buying back roughly $150 million face value of our high yield notes in the secondary market. By making this decision we carefully balanced the benefits of capitalizing on depressed bond prices against our cash flow outlook and liquidity needs.

We continue to explore various strategies to meet our future refinancing needs, a large portion of which comes due in the second half of 2010. If you turn to the slide 22 you can see that these strategies include extending the maturity on several existing credit facilities, leasing structures with the finance subsidiaries of stronger OEMs, as well as with traditional fleet lessors.

Potential TALF issuance as car rental asset-backed paper has been approved as eligible collateral under the Fed's TALF program. We feel this program will help stabilize the ABS market and provide a liquidity backstop for the company.

And finally, in spite of what we anticipate will be higher revenue in 2010, we feel it's likely that we'll be operating a smaller fleet due to improved fleet efficiencies which will reduce the amount of debt needed to be refinanced as it comes due. Through these types of initiatives we believe we will be able to successfully refinance our 2010 debt.

As Mark mentioned we generated $760.7 million in total cash flow compared to a negative $95.9 million in the same period a year earlier. This improvement shown on slide 23 demonstrates the cash generating capability of our business model even during economic downturns. The resiliency of the used rental car and equipment markets enables us to sell assets and generate cash to reduce our debt levels quickly.

Now let's look at levered after tax cash flow after fleet growth or levered cash flow which measures cash flow available to reduce net corporate debt. Net corporate debt is used in calculating leverage which is one of the financial covenant calculations in our debt agreement. Levered cash flow in the first quarter was an outflow of $36.7 million, which is a $196 million improvement over last year's first quarter. On a trailing 12 month basis levered cash flow was a positive $363.7 million.

Slide 24 highlights the two quarterly financial covenants that we are required to meet under our corporate credit facilities. As of March 31, our consolidated leverage ratio was 4.11 times sufficiently below the maximum five times allowed. The interest coverage ratio was 2.64 times, well above the minimum requirement of 2.25 times. The covenant provides for additional flexibility in the second and third quarters where the leverage test increases to 5.5 times and our interest coverage test drops to two times.

Finally, based on our current forecast and company-wide cost and debt reduction actions we expect to maintain sufficient cushion through 2010 between reported ratios and the covenant limits established in our credit agreements.

Now moving to taxes, for the first quarter the GAAP effective income tax rate was 23.6%. Cash income taxes paid in the quarter was $7.8 million. The effective income tax rate is lower than the statutory tax rate primarily due to losses in certain jurisdictions for which no tax benefit is realized. We expect the full year effective tax rate to be 30.5%. We ended 2008 with approximately $814 million of tax net operating losses in the U.S. and $515 million of tax losses in non U.S. jurisdictions. It is likely those losses will increase in 2009. At this time none of the net operating losses are projected to expire prior to utilization.

With that I'll turn it back to Mark.

Mark Frissora

Thanks, Elyse. In the second quarter the headwinds of the ongoing economic crisis continued to impact the global car rental market. Industry prospects are volatile and visibility is limited as consumers are being very cautious about advanced booking. Pricing on corporate accounts is still competitive and it's hard to predict with any confidence how the summer travel season will really play out. Yet while the uncertainly remains we can see some upside as we look ahead. With both rental car and equipment volume stabilizing sequentially we could be nearing a bottom.

On the Rent-a-car side residual values have improved to near normal levels; still lower year-over-year but in the range of normalcy. Rental car pricing continues to improve, especially in the leisure market, and we believe the year-over-year decline in corporate pricing will moderate as comps become easier in the second half. Additionally, cost actions deliver increasing profit retention and therefore we believe our operating performance will improve even without an economic recovery.

On the equipment rental side, in April we've seen a slight improvement from March's depressed volume levels and we're hopeful that this will continue although pricing pressure hasn't dissipated. Additionally, our strategic investments and business growth are generating encouraging results and our three recent acquisitions should begin providing some incremental benefits as the year progresses.

The Hertz employees are very excited about these acquisitions for which we paid less than $60 million in total for what we believe offer multiples more in value. We penetrated the value price leisure segment with the purchase of Advantage Rent-A-Car gaining a significant market share in nearly all the top leisure destinations.

In addition to the 20 primary locations and the strong brand the growth potential for this business is enormous. We'll look to expand into additional airport locations and leisure markets that prefer low priced no frills rental contracts. At this point we look at 40 markets preliminary that we would penetrate. We'll also capitalize on synergies with our core brand like reservation systems, administrative processes, supply chain, procurement, fleet capacity and advanced technologies.

Next, we brought our former car sharing technology provider Eileo. The Eileo system provides patented state of the art user friendly technology for the global car sharing industry. This innovative system offers intelligent access control which allows entry and engine start only for member books at the time.

Smart cars that use radio frequency identification to replace car keys, optimal security through a patented immobilizer technology, this technology gives mileage and trip reports generated automatically, hands-free GPS mobile phone navigation services over built-in Bluetooth, real time GPS tracking of the entire vehicle fleet and a whole lot of other advanced technologies.

In additional to creating competitive advantages for Connect by Hertz, we plan to adapt the technology to create advantages in our traditional car and equipment rental businesses.

Finally we purchased a small power generator equipment rental business in Spain called Rent One. The addition of Rent One supports our strategy of end user diversification. Moreover, in a recession we know that industrial and generator equipment rentals have performed much better than construction equipment rentals, so we're very focused on this segment.

Our plan for 2009 is to continue to invest in our future and optimize our cash and liquidity positions all the while reducing our fixed cost base.

Let's go ahead and open it up for questions operator.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Emily Shanks – Barclays Capital.

Emily Shanks – Barclays Capital

Nice job in a tough environment. I had a couple of follow-up questions. As we look at what the year-over-year decline in EBITDA is can you give us a sense of how much was attributable simply to the year over year decline in the used car market?

Mark Frissora

We have not calculated that exactly, so

Emily Shanks – Barclays Capital

Okay.

Mark Frissora

We'll try to calculate some rough directions here for you or follow up with another call.

Emily Shanks – Barclays Capital

Okay. Okay, that's fine.

Mark Frissora

I guess when we look at overall profit impact of residuals the used car market for us in November and December obviously was probably around the residual values dropped to around 51%. And they've improved about 61% in the first quarter. However, if you age adjust that it's actually up to about 71% and 74 is where it was a year ago.

So, those are just a set of numbers for you that could help calculate back it into it, but obviously in the first quarter the residuals improved a lot. So it was probably 300 to 400 basis points on an age-adjusted fleet basis that had the impact on profitability. It's significant enough, I mean depreciation per car I believe in the first quarter, the number was up how much, Elyse?

Elyse Douglas

Depreciation per car in the U.S. was, hang on.

Mark Frissora

How much was it up? Does anyone know? Net depreciation per car in the first quarter was up approximately how much, because that's where the residual value calculates, 2.6%. So, 2.6% on the value of the fleet, most of that was due to the residual value issue.

Elyse Douglas

I have another data point here. We did take car losses in the first quarter of last year, so actually on car sales, on just the car rental business actually down year-over-year, $30 million in prior year, $15 million this year.

Emily Shanks – Barclays Capital

And then if I could, around the open market repurchases that you executed on the high yield notes, can you give us a breakout of what the repurchases were between senior and sub notes?

Elyse Douglas

About 55% was the senior subs, about a third was the senior notes and the balance was the euro notes. And the average price was about $67.

Emily Shanks – Barclays Capital

And do you plan on further reducing corporate debt as we look out through the rest of this year?

Elyse Douglas

Obviously we're going to continue to evaluate and then based on our cash flow and liquidity needs, we'll consider doing more. But right now we have no plans.

Emily Shanks – Barclays Capital

And then if I could, just one last one around the actual fleet debt that is coming due in 2010. I was having a little bit difficulty reconciling some of the numbers that were on slides 20 through 22. I just want to make sure, maybe just to jump to slide 22 for 2010 that $5 billion number that you have up there, is that your corporate plus fleet plus like the conduit? I was just trying to reconcile that with what's on slide 21. It shows $4.3 billion.

Elyse Douglas

Let me start with slide 21, Emily, slide 21 really reflects our outstandings as of this March 2009. Obviously our fleet is seasonal and will have higher outstandings in the second and third quarter. So the $5 billion really just kind of reflects what we anticipate the number to be in terms of the total refinancing needs to basically compensate for that seasonality.

Emily Shanks – Barclays Capital

And then around the $1.75 billion that's extending maturities, is that you guys simply going to your ABS holders and asking them roll into a longer piece of paper?

Elyse Douglas

There's actually a number of facilities that we could approach. They're basically the revolving fleet financing facilities where we have a limited number of investors.

Mark Frissora

So it's amending and extending those, that's right.

Elyse Douglas

There's some in Europe, there's some VSNs under the U.S. It's a number of different facilities that would make that up.

Emily Shanks – Barclays Capital

And then the $1.2 billion that's TALF. Would that be $1.2 billion that you would fund all in the AAA rated collateral pools or is that $1.2 billion a portion you'd fund with that and then maybe have somebody else take down the subordinated piece or the mezzanine piece of that?

Elyse Douglas

The latter.

Emily Shanks – Barclays Capital

The latter. And then just a final one, the billion bucket of other, I apologize, I missed what the description was on that.

Elyse Douglas

Well that's going to be a number of different things, basically it's going to be a combination of, it could be [ABL] facilities, we could be upsizing some of the existing facilities. It's really a guess. It could be further issuance at TALF, it could be a number of different things.

Emily Shanks – Barclays Capital

And actually I'm sorry I said that was my last one, this is really my final one, but on that TALF one have you already started investigating potential interest for that sub piece?

Elyse Douglas

What we're really doing right now, Emily, is that we're more focused on working with the rating agencies to really understand what the credit enhancement and rating requirement would be.

Operator

(Operator Instructions) Your next question comes from Christina Woo – Soleil Securities.

Christina Woo – Soleil Securities – Streetscape Research

I was wondering the $125 million of first quarter savings, that was a great result and I wanted to just clarify whether that included the $38 million of restructuring or excluded that restructuring charge?

Elyse Douglas

It excludes the restructuring charge.

Christina Woo – Soleil Securities – Streetscape Research

Do you have any expectation for how much restructuring we should expect through the rest of 2009?

Mark Frissora

It will moderate. We will have some restructuring but it will be less than we had in the first quarter certainly.

Christina Woo – Soleil Securities – Streetscape Research

I also wanted to ask about the level of enhancement requirement on the purchase of new vehicles. I have heard that some of the enhancement level which had previously been at the 20% to 30% level are up to nearly double that. And I'm wondering if you're seeing that magnitude of change?

Elyse Douglas

What we're looking at now is – you're correct, Christina that historically it was 27%. When we did our deal in September, it was 37% and we're looking kind of in the ballpark of 55% to 60% today based on the current market. That's for AAA which is required for TALF.

Christina Woo – Soleil Securities – Streetscape Research

And then just shifting gears to the HERC side of the business. It sounds like your de-fleeting and changing maybe the mix of your HERC fleet. Are you finding that your competitors aren't just de-fleeting and that's what's causing some of the pricing irrationality?

Mark Frissora

We believe that part of the pricing irrationality is the fact that people haven't de-fleeted as aggressively as we did in the first quarter. I mean obviously we doubled our de-fleeting needs. And we think when our competitors announce that it will be clear that we probably sold more fleet than they did in the first quarter in order to try to right-size the business.

But it's really a couple of competitors were completely irrational during the quarter. And why they were, part of it may be chasing volume. We obviously think it's the wrong answer because it just creates an obvious lower market for everyone because no one wants to give up any share of volume. So we think that's a bad tactic for any of our competitors to use. Gerry, do you want to add something to that?

Gerry Plescia

We sold more fleet also in the third and fourth quarter versus our competitors as we've discussed. I think we're seeing our competitors sell more fleet now as the demand continues to deteriorate. But that pace of demand is causing the imbalance of the fleet level in the industry to the demand level. So that is exacerbating the problem.

Christina Woo – Soleil Securities – Streetscape Research

That was helpful and just one follow-up question to that and then I'll end. Your equipment depreciation levels were a little bit greater in the first quarter than I was anticipating especially with your aggressive de-fleeting efforts.

I'm wondering if you could attribute some of that to a mix shift as you're bringing in new equipment at maybe higher costs, or if we should really think about that depreciation level rising as a result of residual values of the equipment coming down?

Gerry Plescia

I think the biggest impact in the quarter on our depreciation was a gain on sale of equipment. It was a $25 million lower profit than prior years. So we had a loss on sale that was lower than last year's small gain by $25 million. That's factored into the depreciation line. And that's the single biggest piece versus any of the mix change you're referring to.

Operator

(Operator Instructions) Your next question comes from Brian Johnson – Barclays Capital.

Brian Johnson – Barclays Capital

Want to focus a bit on some follow-up questions around the equipment rental business. First, you talk on the last slide about some stabilization. Could you give some color around that? It that in utilization rate pricing, how does that play out geographically and in terms of aerial versus say earth-moving and so forth?

Mark Frissora

I guess when we look at the volume levels in the first quarter, February and March were tough months, actually probably a higher rate of decline than 26%, probably in the neighborhood of 30% in those months, 30% to 31%.

And then what we've seen in April, and what we were talking about during the discussion that we had in the script here, was that the last three weeks we've seen volumes stabilizing around minus 28% which is better than what it was in February and in March.

And because of that we feel like there may be some stabilization there. We may be seeing the bottom. Of course it's an extremely volatile market and that minus 28% includes the pricing issue. Pricing hasn't gotten any worse so we don't see it getting worse right now.

But it's worse than it was certainly in the fourth quarter and so that's, again, we see a little light at the end of the tunnel in terms of the last three and a half weeks being relatively stable at a rate of decline in the neighborhood of 28%. Gerry, you want to add some color on that?"

Gerry Plescia

No, no Mark as you said, we had an acceleration of that decline throughout the quarter but we're not seeing that in April and so the decline is slowed fairly significantly to closer to flat and then again versus prior year we had a – the decline started around April, May of last year so the comps are a little bit easier. So we're not seeing any incremental growth but the pace of decline is definitely slower and the pricing environment does remain competitive. There's no real improvement on the pricing side at this moment.

Brian Johnson – Barclays Capital

Okay. But in terms of sequential volume seasonally adjusted, it sounds flattish March to April?

Gerry Plescia

Yes, correct.

Brian Johnson – Barclays Capital

Give an easier comp. Second is what is going on on pricing? It's easy obviously on the rental side to break that out, but how on the equipment rental can we get underneath price versus volume in the revenue numbers?

Mark Frissora

Well, we talked about 2% decline in the fourth quarter, it's dropped to a 4% decline in the first quarter. We saw that sequentially get progressively worse as the months of the quarter went on. This is reflective of what we've stated as some rational/irrational behavior by some competitors. Where there's less selective pricing offered to certain customers as opposed to more broad-based discounting based on the excess supply versus demand.

So, the environment is less healthy than it was in the fourth quarter and that's what we're dealing with essentially. We're able to combat that somewhat in that we have long-term relationships with a large national account base and that relationship allows us to look for other cost savings for those customers and be more selective in what we discount and how much we participate. So, that's how Hertz combats it but we are seeing a difficult competitive environment right now.

Brian Johnson – Barclays Capital

And in terms of the resale value, we've got Manheim again on the retail side. What indices do you track and how do those look on the equipment side?

Gerry Plescia

There's a company called Rouse that does a pretty good survey of the equipment rental companies and the auctions and at the end of '08 they reported about an 18% decline in year-over-year residuals at the end of December versus the end of December '07. We don't have full numbers out for the first quarter but we've seen the auction prices essentially fairly stable from the end of December through the first quarter but we're selling into February and March auctions.

We're pretty similar to the fourth quarter pricing, so we suspect there's some stability there as well. And liquidity's very good; we're able to sell whatever we need to at those auctions, but about 18% year-over-year decline in residuals, net-net.

Operator

Your next question comes from Sundar Varadarajan – Deutsche Bank.

Sundar Varadarajan – Deutsche Bank

Just a couple of follow-ups, first, on the debt buyback, could you go over what kind of restrictions you may have under your credit facility in terms of how much of senior notes and sub notes you can buy back?

Elyse Douglas

There are restrictions and it's captured under a restricted payments basket, so the dollar amount [Scott], do you remember the calculation on it? It's also limited by our

[Scott Sider]

About $400 million

Elyse Douglas

About 400 million is what's available.

Sundar Varadarajan – Deutsche Bank

That's 400 million of actual cash that's out the door right? Not fiscal amount?

Elyse Douglas

Are you talking about what's available?

Sundar Varadarajan – Deutsche Bank

Yes. How much more could you buyback?

Elyse Douglas

How much more could we do?

Sundar Varadarajan – Deutsche Bank

Yes

Elyse Douglas

The basket limit's about $400 million.

[Scott Sider]

About 350 more on the high yield notes.

Mark Frissora

Did you hear that? About $350 more on the high yield notes

Sundar Varadarajan – Deutsche Bank

Oh okay, got it. And on the fleet debt side, what's the debt as well as your overall fleet, do you think that you kind of reach the bottom in terms of your total fleet size and correspondingly in terms of fleet debt outstanding, is this kind of the bottom level and as you go into the seasonal strength over the next couple of quarters, we start some re-fleeting?

Mark Frissora

I would say that – when you say the bottom of the fleet, let's be clear, right? So, on a year-over-year basis on comparisons we'll still be down on fleet.

Sundar Varadarajan – Deutsche Bank

No, I'm just talking sequentially from going forward in terms of absolute cars.

Elyse Douglas

The fleet debt will increase in Q2 and Q3.

Mark Frissora

Exactly. So it will increase the next couple quarters for sure.

Sundar Varadarajan – Deutsche Bank

And then as you think about the refinancing requirement next year, based on the information available right now, on a kind of average basis, how do you think the advance rates on that $5 billion that come due next year will defer from what you have right now and also kind of the borrowing cost, how do you see that impacting, in terms of additional borrowing costs next year versus the average borrowing costs that you have on the $5 billion now?

Mark Frissora

Yes, so I guess, couple things, first of all we're confident that we're going to refinance all the debt coming due next year. And it's not a matter of whether or not we're going to get it done; it's going to be what the cost is right? Which means, and one of the things we think it will be anywhere from $3.5 to $4 billion, so $4 billion at the most, not $5 billion, in that range, 3.5 to 4.

The question is also how much it's going to cost us when we refinance. We know it's going to be more than our existing deals, and our liquidity will – basically, much of our liquidity will actually use up the cost to refinance, so right now we estimate the cost roughly at $100 million to $150 million more per year in interest expense, in that range, between $100 and $150 million.

But remember, we're anticipating generating $500 million in cost savings this year alone and if things improve, it could cost us a lot less than it would today. That's our estimate today based on all the knowns we have in the door today.

Sundar Varadarajan – Deutsche Bank

You talked about the interest cost, but what about the liquidity impact of higher advance rates?

Elyse Douglas

Yes. No, as Mark said, we have $1.7 billion of corporate liquidity today and based on what we're seeing in terms of the market for enhancement level, what we're talking about, the 55 to 60 for a AAA rated level. It would be about $700 million of corporate liquidity would be required to fund that.

Operator

Your next question comes from Richard Kwas – Wachovia Capital Markets.

Richard Kwas – Wachovia Capital Markets

Mark, on SG&A how should we think about the fixed versus variable component of SG&A? You did a nice job where it was down significantly year-over-year. Going forward, how should we think about that split in terms of numbers?

Mark Frissora

In general for us, 65% of it's variable and35% of it's fixed in general. That's just rough, but we have a lot more coming out that has not come out yet. In all three operations, we're delayering and whichever operation you want to talk to, we're delayering the organization going forward, so not customer facing positions but just efficiency around how we're layered and also efficiency in back room operations, so every SG&A center is being looked at really hard.

We've got solid plans in place through the end of the year. So what you're going to see is SG&A going forward, going down year-over-year and as a percent of sales and as a reduction year-over-year, it should improve through the year, throughout the year. So while it was down 16%, it will be down more than that as we move through the year.

Richard Kwas – Wachovia Capital Markets

That's helpful, thanks. And Elyse, on the liquidity on slide 20, I see the note where it says $1.4 billion of borrowing base available at 331, and then $600 million of cash, how does that – so do we assume that it's $2 billion total liquidity under all the borrowing base calculations for the company?

Elyse Douglas

For the corporate liquidity, yes.

Richard Kwas – Wachovia Capital Markets

Okay, so that's for the corporate only? Okay, great. And then Mark or Gerry, could you comment on the infrastructure of the stimulus package and how you're positioning the company to try to take advantage of that. I understand most of that probably won't come online until next year at some point, but how are you thinking about that and how are you thinking about the opportunity?

Gerry Plescia

We have information that shows us a listing of projects, dollars, and dollars allocated by state, by MSA within the states and there's quite a substantial number of projects. It's a matter of the timing of kickoff of each of those, so we don't anticipate, and we're not anticipating in our estimates that will have a material impact on the business, but as those projects come to fruition it will start to impact some volume levels.

We really think this is going to be well into the back half of the year, third or fourth quarter of this year. So there's enough detail out there, it's exactly when administratively, the monies are, our lead contracts are awarded, and they start infiltrating the business, but we're not anticipating anything in the next four to six months that's material at this point.

Mark Frissora

But we have identified every single opportunity, the number of shovels in the ground, how many do you have? And do you have some statistics around that are impacting us? Gerry?

Gerry Plescia

There's 80,000 or so different specific projects that are listed and you can see those. So we have sales people involved in where those potential projects will start up. So we're prepared. It's a matter of when the kickoffs are.

We also have a connection through U.S. Communities. It's an entity that deals with municipalities and state governments were we are a preferred vendor of that entity. And as state municipalities start to kick off local projects we should have some positive impact from that as well. So we're attacking from two different ways but we're not anticipating anything very material until the very end of this year.

Richard Kwas – Wachovia Capital Markets

If you take a longer term view, I mean, is there any broad kind of number we should be thinking about as terms of the dollar opportunity if you look out over the next 24 months?

Gerry Plescia

You know, it's tough to say but we're looking a real rough range of $20 million to $30 million of potential revenues and that's a real rough estimate on those next 18 months or so.

Richard Kwas – Wachovia Capital Markets

All right. And then Gerry, last question on HERC, what's the mix of the portfolio right now in terms of assets? How much have you cut the earth moving equipment down to and what's industrial and aerial?

Gerry Plescia

Sure. Right now between aerial and material handling, so it's aerial scissor lift booms and material handling forklifts, that represents combined about 45% of our fleet at the end of the quarter. Aerial 27%, material handling 18%, so its 45% in those two categories, that's more dedicated towards industrial though there's construction application there.

And earth moving is down to 23.5% at the end of the first quarter. So that's substantial reduction over prior year. So we continue to reduce that earth moving mix against the aerial industrial application.

Richard Kwas – Wachovia Capital Markets

And does that have room to go lower, the 23.5?

Gerry Plescia

A little bit lower. I think we're getting close to the right number, 20% to 21% but there's room. As the demand levels are still not great from a commercial construction side, we'll continue to sell in those categories and don't have plans to buy much fleet in that area. So it will trickle down a little bit from here.

Operator

Your next question comes from Jordan Hymowitz – Philadelphia Financial

Jordan Hymowitz – Philadelphia Financial

Two things. On page 24 where you calculate the leverage and interest coverage ratio, I assume these are done on a trailing 4 quarters basis?

Elyse Douglas

Yes, that's correct.

Jordan Hymowitz – Philadelphia Financial

Okay. And can we just say what numbers we're using for the numerator and the denominator for both ratios?

Elyse Douglas

Sure, give me one second. For March for the leverage covenant, the EBITDA is 943, $943 million and the consolidated indebtedness is $3.873 billion.

Jordan Hymowitz – Philadelphia Financial

Okay. And for the interest coverage?

Elyse Douglas

The interest coverage, obviously the EBITDAs the same. Interest is 357.

Jordan Hymowitz – Philadelphia Financial

Okay. Next question. Is the impact of GM and Ford, you said it was detailed the effects of it where? I'm sorry.

Elyse Douglas

In our 10-K.

Jordan Hymowitz – Philadelphia Financial

And this 5% sensitivity for $50 million, is that for a full year?

Elyse Douglas

Yes. That assumes that given the GM cars in the fleet today, if the residuals fell by 5% it would be $50 million. That would be recognized over the remaining life of the car.

Jordan Hymowitz – Philadelphia Financial

So that's, well I guess because it's a ten month average fleet it's probably all one year anyway.

Elyse Douglas

Right.

Jordan Hymowitz – Philadelphia Financial

Okay. And I think that's it. Thank you very much and appreciate. Oh, one more question, I apologize. Is your – can you give a status on your pension funding at this point?

Elyse Douglas

Yes. We have an underfunded pension today. And we anticipate that we will make some pension contributions this year in the range of about $40 million.

Jordan Hymowitz – Philadelphia Financial

$40 million. And what's the net underfunded at this point?

Elyse Douglas

It's about $200 million.

Jordan Hymowitz – Philadelphia Financial

And is that calculated into the assumptions at this point on capital needs?

Elyse Douglas

Yes it is.

Jordan Hymowitz – Philadelphia Financial

Thank you very much.

Operator

Your next question comes from Jonathan Chen – Private Management Group.

Jonathan Chen – Private Management Group

Good morning. I was wondering if you guys could talk a little bit about the spot market as far as pricing demand availability on both the rental car and the equipment rental side?

Mark Frissora

Spot market? What do you mean by that, I'm not sure I get that?

Jonathan Chen – Private Management Group

Like if someone were to, you know, walk into one of your rental facilities without a reservation, what the availability is like and what the current pricing or demand is like?

Mark Frissora

Are you talking about current availability on walk ups? Is that what you are saying?

Jonathan Chen – Private Management Group

Correct.

Mark Frissora

Joe you want to respond to that? Joe Nothwang will talk. Move the mike over to Joe.

Joe Nothwang

The first thing to consider, I believe particularly for Hertz and for the rest of the industry, is that we have inventory levels matched very efficiently with the current outlook for demand. Now that said, we do allow some flexibility at the point-of-sale and a controlled environment to negotiate a price for the walk-up customer.

That represents less than 10% of our total business and in today's environment it's in the 4% to 6% range. But it is reasonably very representative of the types of rates that you would see displayed on Travelocity or any of the other online channels. So the discounting at point-of-sale is very minimal.

Mark Frissora

And obviously on the weekends, we have more fleet available and you would get more walk ups there. Midweek, if you were to come in on a Tuesday or Wednesday at a major airport, you probably wouldn't be able to walk up and get that kind of demand because we are very fleet optimized. During anywhere from let's say Tuesday through Thursday and Friday. Okay?

Jonathan Chen – Private Management Group

Very good.

Mark Frissora

Now you asked that on both the equipment rental and the rental car side, right?

Jonathan Chen – Private Management Group

Correct.

Mark Frissora

So Gerry?

Gerry Plescia

Yeah. The seasonality, this season availability is good. Obviously we talked about the imbalance is still the slowing demand against a higher fleet level for the industry and for HERC as well. So the availability is good and except for the industrial and some larger equipment where we're moving to some bigger projects right now. But mostly the earth moving and other small aerial products are available and accessible by customers, which is what we talked about as far as putting pressure on pricing at this point.

Operator

Your next question comes from Michael Millman – Millman Research Associates

Michael Millman – Millman Research Associates

Thank you. Could you talk a little bit more about your expectations for your fleeting, for rack in particular? I think you said you expected the fleet to be down next year with demand up? Maybe you can give us some more color on that and to what extent you're seeing the other industry participants matching your fleet levels?

Mark Frissora

Go ahead Joe.

Joe Nothwang

I think the key here is to recall we've said that the fleet is down 15%. This is the U.S. fleet. When our transaction days, the best metric to compare the efficiency of the fleet. So that 1.5 point efficiency level we want to continue that or better as we proceed into 2010.

Mark Frissora

So and just in terms of the future though, we see obviously with the limited visibility that we have that volume levels will improve, so demand as you know, seasonality wise improves as well. So we're going to have to fleet up sequentially in order to handle third quarter demand and second quarter demand that we're seeing.

One of the things on the call that I mentioned was that our visibility so far in the second quarter says there's some upside off of what was a steady state demand level in the first quarter. Second quarter demand seems to be stronger than first quarter demand and as we look at the summer season we've talked a lot with the airlines and looked at our own internal study and we have a suspicion that third quarter demand will be better also than what was in the first quarter.

So that means that we will be rotating more fleet in, new fleet, buying new cars at a little higher rate than what we originally anticipated in the first quarter of the year. That's about as much as I can say, Michael.

Michael Millman – Millman Research Associates

And when you say that you expect a stronger year, do you mean stronger relative to usual seasonal?

Mark Frissora

Stronger relative to first quarter. So instead of having transaction days, you know, right now they're minus 13.4 maybe they'll be, we don't know. We don't know what's going to be but that could be three to four points better than that as you move into the third quarter.

Michael Millman – Millman Research Associates

I see. So you're talking about it relative to year-over-year, not absolute.

Mark Frissora

Relative to year-over-year, that's correct. But I said it was sequential. So let me say it again. First quarter transaction days were down 13.4% in the U.S. And, in the U.S., we expect that to improve, going into second and third quarter. It could improve, you know, in the neighborhood of three points, 3 to 4 points.

We're not, again, not a lot of visibility right now, but on the limited visibility we have, there could be some upside over the demand rate that we saw year-over-year decline in the first quarter. So, that year-over decline becomes less, moving into second and third quarter. Okay?

Michael Millman – Soleil Securities

And, to what extent your prices on your Res book, limited as it may be, showing to what extent?

Mark Frissora

Advanced reservations, Michael, are just absolutely worthless, I would tell you, because we don't whenever they tell us, it's wrong. And that's what's been going on for the last four months. So, we used to have a very stable way of looking at our business in the future, and now the booking curve is so close in, people are not reserving cars in advance the way they used to, and there's no stability in that.

If you use that data to gauge yourself, it's wrong more times than it's right. So advance reservations isn't looking really, for us anyways, any more positive, until it gets very close in, and then it starts to improve. So where we used to have maybe six weeks visibility, seven weeks visibility, now, we're lucky to get two weeks visibility.

Michael Millman – Soleil Securities

Can you give us some measure of the percentage of cars that you've been sending into the opaque channels, year-over-year, quarter-over-quarter?

Mark Frissora

We use the opaque channel when we have extra cars and on weekends, for example and opaque channel, we expect probably will be less and less used, as we go forward, because we're seeing improved demand and improved fleet utilization.

Michael Millman – Soleil Securities

Can you quantify that, at all?

Mark Frissora

No, we don't quantify how much of our revenues go through channels like opaque.

Michael Millman – Soleil Securities

Can you give us a -

Mark Frissora

Joe, you want to give any color on that?

Joe Nothwang

I think key to it is it's a safety valve that you can turn on and turn off, based upon your relative price level.

Michael Millman – Soleil Securities

I'm trying to get some ballpark. Is it 10% of the fleet, or is it 25% of the fleet?

Joe Nothwang

No, we have not disclosed that kind of detail. As I said, it's a safety valve. If we do have excess fleet, market by market, we turn it on. Ideally, in the kind of environment we're looking forward, there'll be less and less use of it.

Michael Millman – Soleil Securities

And, regarding Advantage, what's that mean for Simply Wheelz?

Mark Frissora

It means that we will fold Simply Wheelz probably into Advantage brand. So we're likely to take the current Simply Wheelz locations and, over a period of time, make that an Advantage counter. Okay?

Michael Millman – Soleil Securities

And, will this produce significant savings, not significant savings?

Joe Nothwang

The synergies between dealing in the leisure, the lower-end leisure market, with the Advantage brand you know provides significant synergies, particularly on the back-end administrative, financial activity. Yes, so there will be significant savings.

Mark Frissora

And, I mean, you know, the Advantage brand made, last year, revenues in the places we were at were, revenues were around $146 million. And pre-tax margins were actually about 7%.

Joe Nothwang

Seven point five percent.

Mark Frissora

Seven point five percent, so I know that some analysts have indicated they couldn't see how we could make 10% EBITDA margins. But, if you do the math, last year at 7.6%, that means we would have higher than 10% EBITDA margins.

So the existing business was generating that higher than 10% EBITDA margins. And we know that we buy the fleet better, and we know that our back room operations costs are better. So, again, we think this is a very good business for us to expand off of.

And as I mentioned on the call, we have 20 airport locations, but we're also negotiating at airports all over, all the time, for new space. And our expectation is very quickly to expand this to at least 40 markets.

Operator

Your next question comes from Chris Doherty – Oppenheimer.

Chris Doherty – Oppenheimer

I just wanted to ask a little bit about the rental, the revenue per transaction day. I think you said in the statement that it was down 3%. But, can you also give some color on ancillary revenue and what's happening there? That looks like it might have been down a little bit more.

Mark Frissora

Yes, I think that you're right, that ancillary revenue was down. We were disappointed with our results. We kind of knew why it happened, though. There were two things going on. One is, we reduced some of our compensation from ancillary revenues, and we re-launched a program, because we're in the middle of transitioning from one program to another.

That transition caused a lapse in the month of March. We were surprised at that, how much it was tied to compensation. That was one of the issues. And in terms of – also, another issue for us is business travelers, as you might imagine, are cutting some of those ancillary, like NeverLost, for example.

Instead of electing to have NeverLost that some of them are electing not to have NeverLost, and it was in their profile. So, we've come up with a new strategy on that, as well, with our corporate customers, giving them additional incentives to use NeverLost. Joe, you want to give a comment on ancillary net revenues?

Joe Nothwang

Yes. Gasoline is the other issue. Very lucrative opportunity for us on the revenue side, with gasoline purchases at the Hertz facility. The dominant customer in that segment is the commercial,

customer. And, with commercial travel down, that has been a drag on our ancillary revenues.

Mark Frissora

But we think there's upside there going forward, based on – if you look at first quarter's performance, we don't expect to repeat that, so.

Chris Doherty – Oppenheimer

Yes. And, Mark, can you talk a little bit more about the synergies? I think in the presentation, there's $125 million that was realized in Q1, and then you say that's going to increase the year expectation of $500 million. Does that mean you basically hit the run rate for this year?

Mark Frissora

Well, I mean no, it doesn't mean we just upped the number. Obviously you're right. The first quarter demonstrates that those cost actions already have traction, right? But, we also have incremental ones to be announced.

And, as you may or may not know, I mean based on our track record, we try over-deliver on cost savings. And so whatever number we give you, we're more than confident hitting that number, and then some

So I think some of those cost savings become buying related, and but based on the current trajectory, and the way we see the business those cost savings are real. And we should deliver on that number and then some. It's the best way to answer it, I guess.

Chris Doherty – Oppenheimer

Yes. And, then, Elyse, just a little quick housekeeping, can you tell us what the A/R and AP balances were at the end of the quarter?

Elyse Douglas

A/R and AP balances – do you want, if I have that handy, for the consolidated company?

Chris Doherty – Oppenheimer

Yes.

Elyse Douglas

Yes, hang on one second. I think I have it. At the end of the quarter, accounts receivables – and this is just corporate account, this does not include fleet – was about $700 million, just a little over $700 million. And accounts payable was about $525 million, ballpark.

Chris Doherty – Oppenheimer

What was the fleet? That's what I'm actually trying to get to, is to understand that.

Elyse Douglas

The fleet receivables?

Chris Doherty – Oppenheimer

Yes.

Elyse Douglas

The fleet receivables, at the end of March, were about $365 million, and the fleet payables were about 405 million.

Operator

Your next question comes from Adam Silver – Babson Capital Management.

Adam Silver – Babson Capital Management

Yes, good morning. I just had a couple questions around your year-over-year cost on '09 model year cars. What's been the cost change from '09 versus '08? And can you break that our on a program versus non-program basis?

Elyse Douglas

Yes. On the car costs it's a function of the car sales losses, and it's a function of the mix of the fleet, year-over-year. So we obviously adjusted the depreciation rates in 2008, and some of that gets reflected in 2009. And until we can circulate out the model year '08 cars into the new model year '09 cars, that multi-depreciation is going to be up, year over year.

So in the quarter, it was up around 10%, 10% to 12%. The bulk of that was in Europe, where there were heavy de-fleeting activities in the first quarter, as their model year cars began, at the beginning of the year. So they're a little bit delayed versus the U.S. In the U.S., the car costs were only up about 2.7%. And again, these will mitigate, as the year goes on.

Adam Silver – Babson Capital Management

Okay. And then have you guys started doing negotiations with OEMs for model year, I guess, 2010 yet?

Elyse Douglas

Preliminarily. We're just in the early stages.

Adam Silver – Babson Capital Management

You haven't heard any color on how that's going to expect costs to continue to go on, as we enter that model year?

Mark Frissora

Yes. That's about the best I can give you as an answer.

Adam Silver – Babson Capital Management

And then, my last question is what's your risk-to-program mix that you're planning on for 2010? Is it still around 50/50, or is that going to change a little bit with -

Mark Frissora

That's been around 70/30 for a while now.

Elyse Douglas

Yes, 75 or so.

Mark Frissora

So, I expect it to be, you know, 70/30, 75/25.

Operator

Okay. [Sam Apibonya] – Columbia Management. Please go ahead.

[Sam Apibonya] – Columbia Management

Good morning. I think most of my questions have been answered. I just want to follow-up on a housekeeping item. You mentioned the repurchase of the high yield notes. Can you give me the breakdown again and confirm, for the last time, sort of what the availability is for '10?

Elyse Douglas

The breakdown is we bought about $150 million of par value. Fifty-five percent of that was the senior sub. About a third of it was the senior notes, and the balance was the euro notes. And, in terms of our available basket for a debt buyback, it's about $350 million.

[Sam Apibonya] – Columbia Management

Remaining?

Elyse Douglas

Correct.

[Sam Apibonya] – Columbia Management

Okay, thank you.

Mark Frissora

We're not saying that we're going to do that.

Elyse Douglas

We're not – right.

Mark Frissora

We aren't saying we're going to do that -

[Sam Apibonya] – Columbia Management

No, I understand. I understand.

Mark Frissora

That's how much is available right.

Operator

And back to you, speakers.

Mark Frissora

Okay. Thanks very much, operator. Thanks, everyone, for being on the call. We'll look forward to talking to you next time.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation, and for using AT&T Executive Teleconference. You may now disconnect.

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