Dollar Thrifty Automotive Group Inc. Q1 2009 Earnings Call Transcript

Dollar Thrifty Automotive Group, Inc. (DTG)

Q1 2009 Earnings Call

May 6, 2009 11:00 am ET

Executives

Vicki Vaniman – General Counsel and Corporate Secretary

Scott L. Thompson – President and Chief Executive Officer

Clifford Buster – Chief Financial Officer

Analysts

John Healy – North Coast Research

Jordan Hymowitz – Philadelphia Office

Christina Woo – Soleil Securities

Michael Millman – Millman Research Associates

Conor Ryan – Deutsche Bank

[Ken Hamilton – HBB]

[Gentry Klein – Seedis Capital]

John Brecker – Longacre Management

Presentation

Operator

Welcome and thank you for joining the Dollar Thrifty Automotive Group first quarter financial results call. (Operator Instructions) I would now like to turn the meeting over to your speaker, Ms. Vicki Vaniman, General Counsel and Corporate Secretary

Vicki Vaniman

Good morning and welcome to the Dollar Thrifty Automotive Group, Inc. first quarter 2009 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 and 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 that Dollar Thrifty has noted in its latest earnings release and filings with the SEC. Dollar Thrifty Automotive Group, Inc., undertakes no obligation to update or revise forward-looking statements.

Today, the company will use certain non-GAAP financial measures, all of which are reconciled with GAAP numbers, and can be found in today’s press release or posted to the company website under the Investor Update tab. Listeners are advised that an audio replay of this conference call will be available on our corporate website, www.dtag.com, for one year.

Now, I would like to turn the call over to Scott.

Scott L. Thompson

Good morning, and thank you for your time and attention this morning. Before we cover the first quarter financial results in detail, I’d like to give you a few thoughts on a medley of topics. During the first quarter, the new management team continued to focus on our top priorities, enhancing liquidity and returning the company to cash flow positive. I would like to update you on the progress we’ve made in those areas.

First in the area of returning the company to positive cash flow: In a much more difficult operating environment, we improved our operating cash performance compared to the first quarter last year, reducing our corporate adjusted EBITDA loss to $2.4 million from a loss of $4.9 million. Although there were clearly still areas of improvement, this quarter does represent a step forward.

Turning briefly to liquidity highlights, please note that we reduced our investment in fleet by approximately 43% or over $1.1 billion from March 31, 2008, allowing us to significantly reduce our net debt and enhance our liquidity to help deal with this uncertain world. Additionally, we have successfully completed our long-term amendment of our senior secured credit facility on terms that we believe are equitable. Our lending group was very professional and supportive.

With the credit facilities now amended through their maturity of 2013, we have eliminated the uncertainty that was associated with short-term amendments we’ve been operating under since September 2008. We’re now able to focus all of our efforts on improving operations and cash flow. Consistent with this focus, we have closed 24 locations in the first quarter of 2009 and anticipate closing up to an additional 50 locations in 2009. These 74 locations combined with the 39 locations closed in the fourth quarter of 2008 with complete actions planned as a result of our location profitability review. The total impact of all planned location closings, 113, accounted for about 5% of revenue in 2008. These actions impacted our first quarter revenues by approximately 1.5%.

In another step designed to improve operating cash flow, we’ve analyzed the profitability of certain rental transactions and have strategically implemented excess mileage charges on select vehicles and in select locations to cover the higher cost of miles that some drivers drive.

Now turning to OEM issues, given the uncertainty surrounding automobile manufacturing industry, we’ve taken aggressive actions over the last 6 months to reduce our credit exposure to OEMs and in particular Chrysler. Through these actions, we have significantly reduced our credit exposure to Chrysler from approximately $215 million at December 31, 2008, to approximately $39 million as of today. Our current credit exposure is comprised of approximately $11 million in trade receivables as well as $28 million related to residual value guarantees primarily attributable to program vehicles scheduled to be returned in the second half of 2009, as well as a limited number of program vehicles returned to auction but not yet sold.

The Chrysler bankruptcy proceeding is of course in its preliminary stage, and we cannot predict how our GDP program will be treated. That said, we are hopeful that Chrysler will honor those programs as part of its plan. Based on what we know today, we are comfortable with our current position. Chrysler has been an excellent business partner for this company over the years and since 2002 we’ve purchased almost 1 million vehicles from Chrysler. We’re optimistic that the outcome of the pending proceedings will allow them to be successful in executing a turnaround. In fact, we’re hopeful to be part of the Chrysler solution.

Now turning to the first quarter results, although as anticipated the operating environment in the first quarter was difficult, we began to see some positive signs for the industry. We experienced increase in rate per day that we believe reflects not only our own recent revenue management initiatives, but also expected outcome of industry-wide efforts to achieve the right balance in terms of fleet supply and demand. Rental revenue for the quarter declined 8.6% driven by a 12.2% decrease in rental days, which was partially offset by a 4.1% increase in revenue per day. Our average fleet level was down 10% compared to prior year period. Our ending fleet for March is down 15% compared to last year, and we currently have fewer orders in process from the same time last year.

Fleet cost continues to be one of our most challenging areas as we move forward in 2009. This is the new management team’s first full quarter of operation, and fleet issues take more than a quarter to cycle through the system. Lowering our fleet cost continues to be a top priority in our turnaround plan and will be dependent upon stability in the used vehicle market, our steps to mitigate excess mileage issues, and more prudent transaction with our manufacturing partners. Although market conditions remain uncertain and risky, we believe that fleet costs over time should continue to decline from the historically high rate per vehicle incurred in the fourth quarter of 2008.

From an operating expense standpoint, we realized the benefit of the painful cost reduction actions undertaken in late 2008, along with the benefits of our ongoing cost control. On a year over year basis, we realized significant declines in direct vehicle operating expenses as well as SG&A, both in total dollar amount and as a percentage of revenue. On a non-GAAP basis, the loss for the quarter was $0.55 per share compared to a non-GAAP loss of $0.77 per share in the first quarter of 2008. As I mentioned earlier, corporate adjusted EBITDA during the quarter was a negative $2.4 million, compared to a negative $4.9 million in the prior year. I should also point out that the first quarter is a seasonally weak period in the rental car industry.

Now, I’d like to have Cliff review the details of the quarter with you.

Clifford Buster III

Please turn to table 1 in the press release. Revenues for the first quarter of 2009 were $362.4 million, down 8.6% as compared to last year’s first quarter. Our vehicle rental revenue decreased 8.6% due primarily to a 12.2% decrease in the number of rental base partially offset by a 4.1% increase in revenue per day. Note that year over year comparisons are negatively impacted due to the fact that Easter fell in the first quarter of 2008 versus the second quarter in 2009 and February 2008 had one additional day due to leap year. In addition, revenues were slightly impacted as a result of location closures Scott mentioned earlier.

Fleet utilization for the first quarter of 2009 declined 1% to 82.1%, which is still high by industry standards and well within our targeted range. We’re focused on maintaining pricing discipline at the expense of high utilization.

Turning to expenses, direct vehicle and operating expense or DVO was $185 million, down $30.3 million or 14.1% from the same period last year. As a percentage of revenue, DVO declined to 51% from 54.3% in the prior year period as we realized the benefits from our cost reduction initiatives implemented in the fourth quarter of 2008 along with ongoing aggressive expense control. The primary drivers of the decrease in DVO were reduced personnel related expenses as a result of lower transaction levels, efficiencies in staffing levels, as well as lower gasoline expense, vehicle damage and concession fees and incurred during the quarter.

Vehicle depreciation expense was $120 million, down $2.7 million, or 2.2% from the 2008 first quarter primarily driven by a decrease in the average fleet size. Although first quarter 2009 monthly average depreciation expense per vehicle of $392 was a decrease of approximately 3.5% from the fourth quarter of 2008, it was an increase of 7.1% from the first quarter of last year. Depreciation cost per vehicle was our most significant problem area for the first quarter.

SG&A expenses represented 12.9% of revenue for the quarter, down from 13.5% in the prior year period. I would point out that SG&A in 2008 was favorably impacted by a $1.8 million benefit reported related to certain deferred compensation plans that I will discuss momentarily. Normalizing for the market value of deferred compensation plans, SG&A in total was down $8.6 million from the first quarter of prior year, reflecting the ongoing benefits of the cost-cutting measures taken in late 2008.

As we’ve discussed in prior periods, the change in market value of assets and the deferred compensation and retirement plans impact the SG&A line with an offset in other revenue. While there’s no resulting impact to the company’s pre-tax income, SG&A will fluctuate from period to period with changes in the value of the investments. Changes in the market value of these investments resulted in expense of $100,000 in the first quarter of 2009 compared to a benefit or reduction in SG&A expense of $1.8 million for the first quarter of 2008. I would point out that the company’s contributions to its employee retirement plans are fully discretionary and as such we have no ongoing unfulfilled retirement funding obligations.

Interest expense, net, during the quarter totaled $26.1 million, up from $22.1 million for the same period last year. Although debt has declined by approximately $650 million on a year over year basis, the reduction in interest expense resulted from lower debt levels was more than offset by the one-time write-off of certain deferred financing costs related to capacity reductions and debt amendments during the quarter in addition to a significant reduction in manufacturer interest reimbursements received due to reduced new vehicle purchasing activity compared to the prior year period. As of March 31^st, the weighted average interest rate for vehicle debt outstanding was 5.0%, and the weighted average interest rate on our non-vehicle corporate debt was 3.0%.

Now turning to table 3 of the press release, GAAP earnings per share for the first quarter of 2009 was a loss of $0.42 per share, compared to a loss of $14.07 per share in the same period last year. Results for the first quarter of 2009 were impacted by an increase in the fair value of interest rate swaps, representing $0.14 per share compared a decrease of $0.78 per share in last year’s first quarter. In addition, in the 2008 first quarter, non-cash charges related goodwill and other long life asset impairments totaled $12.52 per share. Excluding these items, non-GAAP EPS for the first quarter of 2009 was a loss of $0.55 per share compared to a loss of $0.77 in the prior year. Note that the company has no remaining goodwill on its balance sheet as all amounts were written off in 2008.

Moving on to key balance sheet items on table 2 of the press release, as Scott highlighted, revenue earning vehicles net of depreciation totaled $1.5 billion, approximately $1.1 billion or more than 40% from the first quarter of prior year. This decrease reflects the planned reduction in our overall fleet size as well as the impact of extended fleet holding periods and operated significantly fewer higher cost program vehicles.

In addition to addressing current demand levels, the fleet actions taken reflect our focus on maximizing our liquidity to address future fleet financing maturities in 2010 given the uncertainties that persist in the financing markets. As a result of the actions taken, even after paying down $490 million of fleet debt prior to its maturity, as of March 31^st, we had $574 million of restricted cash on hand available to retire fleet debt upon maturity. This is consistent with our objective of maintaining flexibility in uncertain times.

Vehicle-related debt was $1.7 billion at quarter end, down approximately $650 million from the same period last year and down approximately $600 million from year end 2008. Additionally non-vehicle corporate debt declined $20 million from year end 2008 to $158 million. The company’s next scheduled debt maturity does not occur until January 2010 when $400 million of fleet financing debt begins amortizing over a 6-month period.

We ended the quarter with tangible net worth of $178.9 million, or $8.24 per share, and a debt to book capitalization ratio of approximately 43%. Debt-to-book capitalization is computed excluding the secured vehicle financing.

Now, turning to liquidity at quarter end, we had cash and cash equivalents of $193 million of which $60 million is pledged as security for the repayment of debt under our senior secured credit facilities as required under the terms of the February amendment for those facilities. This compares to $230 million of cash and cash equivalents at year end 2008. The reduction in cash was primarily due to a $20 million prepayment of our tem debt and approximately $4 million in fees paid in conjunction with the amendment to the senior secured credit facilities and certain vehicle financing facilities during the first quarter.

As of March 31^st, we were in compliance with the terms of our financing facilities. We have evaluated the potential impact on our covenant compliance of a potential write-off of our existing Chrysler receivables as well as the additional depreciation that will be required over the remaining useful lives of our remaining program vehicles to offset the potential losses under Chrysler’s residual value guarantees. Based on the information available today, we do not expect that an adverse resolution of our current exposures would result in a covenant violation in future periods.

We currently have approximately 84,000 Chrysler, Jeep, and Dodge vehicles in our fleet of risk vehicles. It is not possible to determine if recent news on Chrysler’s bankruptcy would be viewed as a positive or negative to future residual values. News of Chrysler’s financial stress has been in the market place for over 6 months and at least for the time being their prospects for a reorganization appear to be reasonably good. In the event that a permanent deterioration in residual values were to occur, there will be a corresponding impact on our results of operations and cash flow in future periods associated with incremental depreciation that will be necessary over the remaining life of those vehicles. In that situation, the company would operate the vehicles over a longer holding period in order to generate additional revenue to offset the incremental depreciation.

I will now turn the call back to Scott for his discussion of our outlook for 2009.

Scott L. Thompson

We remain cautious in our outlook for 2009, given the fluid nature of the economy and the uncertainty surrounding domestic automobile manufacturers. Consistent with what we reported to you during the fourth quarter 2008 call, we expect that vehicle revenue for 2009 will be down 6% to 12%, primarily driven by lower transaction volumes that will be partially offset by improvements in rate per day as the industry becomes more tightly fleeted in order to better balance the supply with reduced demand level and deal with the unfavorable credit market.

In closing, the management team is pleased that during the first full quarter of operations that we were able to eliminate some of the uncertainties surrounding our liquidity with the amendments of our credit facilities and through deleveraging of our balance sheet. We’re pleased with the progress made in reducing the company’s credit exposure to the various automobile manufacturers and forging a significant secondary supply agreement with Ford Motor Company. Our employees are committed to take the actions necessary to succeed and have embraced the necessary changes in the organization. We also continue to be pleased with our lending group and manufacturing partners. The support and effort of these groups have been vital and will continue to be vital in executing our plan.

That concludes our prepared remarks. Operator, please open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from John Healy – North Coast Research.

John Healy – North Coast Research

Since you guys have been there, you’ve been pretty clear in your message in terms of managing the business for cash flow, liquidity, and reducing expenses, and you guys have made substantial progress there, and you’re starting to look at the business and it seems like there’s some progress being made in the industry in terms of the industry being more right fleeted and more rational pricing. When you look out a little bit longer term, how do you feel about what the right size of this company should be from a fleet size and maybe a location standpoint? I’m trying to understand where you want to position Dollar Thrifty longer term in the industry and what size a player that you guys feel that you can be in the industry on a standalone basis.

Scott L. Thompson

Right now, let’s call us a 10-12% market player right now. I think that is probably the market share for this company. I don’t think any of our competitors are going to give up significant amount of market share without a fight, and a fight we probably don’t want to have. I also think that Dollar Thrifty has been very clear that if anybody tries to work in stand box and take share that we’ll aggressively protect our share through reduced revenue per day. Overall, I’d say we’re a 10-12% player. I think that we can be very successful as a standalone company, and I think there is opportunity both to run the fleet we have better and I also think we have under-invested probably in some of our international operations and our franchising network.

We’ve got to get through the storm, as we talk about internally here, kind of walking through the minefield without tipping on any of the mines, but I think we can see an end of the minefield and a pretty robust environment after you get to the other side.

John Healy – North Coast Research

From a fleet standpoint, you guys had about 100,000 cars here per average period. How big of a fleet do you guys want to operate if the economic environment were to stabilize from here?

Scott L. Thompson

I think if you tell me what GDP is going to be in the future, I could probably tell you fleet size, but I think we want to be a 10-12% player. I think we’ve been fairly clear that without the GDP cars that we would not be fleeting up as much during the summer and will be cutting off the peak, and that we’re going to run primarily a risk fleet, and that’s probably call it 95% and 5% GDP, so our peak fleeing even if you get back to what I’ll call a normal economy I doubt will be as tall as it was before, but that’s really going to be dependent on the market. We want 10-12% of the market share.

Operator

Your next question comes from the line of Jordan Hymowitz – Philadelphia Office.

Jordan Hymowitz – Philadelphia Office

What is the gross depreciation per vehicle versus the net? In order words, what was the gain on sale of vehicles and how many cars did you sell?

Scott L. Thompson

It’s not significantly different. The gain/loss for the quarter was a few hundred thousand dollars and immaterial to the quarter, and our gross and net depreciation are effectively the same number.

Jordan Hymowitz – Philadelphia Office

So the gain per car or loss per car is essentially nothing?

Scott L. Thompson

It is insignificant.

Jordan Hymowitz – Philadelphia Office

Can you talk about the 4% increase in revenue per day by month, and more importantly, you guys are very concentrated in six regions or cities; was any of them substantially different from the other, most notably Hawaii or Florida?

Scott L. Thompson

Let me talk about it first in segments because I think there’s been a lot of talk about segments between the business segment and leisure segment. I think as you know we’re primarily leisure focused. Our corporate business is probably about 5% of the mix and 95% is leisure. In the 5% business sector, I think you might be surprised that revenue per day was up in our business sector and transactions were down, and when you look at the total revenue in the business sector compared to leisure, there is about a 200 basis points difference. We were 8.6% in total revenue down overall, and business was off about 11%, but rate per day in that segment was actually up.

Jordan Hymowitz – Philadelphia Office

You said revenue increase was 4.1% on the average. What was it by month?

Scott L. Thompson

Fairly steady, I guess is the way I would answer that. Not significantly different between the three months. You didn’t ask this question, but I know you’re going to get back in the queue and ask this question because I’ve talked to you before, and when I answer that question, we have to realize that March was Easter affected, so the fact that it was about the same in March for rate per day. If you Easter affect it, you’d probably say that March was stronger than you would’ve expected. Having said that, we benefited from Easter moving into April with stronger rate per day in the April period.

Jordan Hymowitz – Philadelphia Office

Yes, but Passover was in March, I think.

Scott L. Thompson

That’s true.

Jordan Hymowitz – Philadelphia Office

What about by region?

Scott L. Thompson

Not significantly different. As you know, this business is a local business, and individual markets are kind of always up and down depending on whether or not one of our major competitors or ourselves got overfleeted in that market place, but when you go through and look at the locations either on a city level or regional level, there’s not a significant difference between the regions. You might say that the Northeast was slightly weaker, but not significant when you really look at it.

Operator

Your next question comes from the line of Christina Woo – Soleil Securities.

Christina Woo – Soleil Securities

Nice job on right-sizing your fleet as well as looking at your operations and I think closing some of your locations. I’m wondering if you can speak to the location closures, specifically what the costs of those closures were in the first quarter and where they’re reflected in your financial statements and expected costs for the remaining closures.

Scott L. Thompson

The closures mainly are smaller locations. They’re mainly local market operations. The costs related to closing really aren’t significant to the quarter, nor do we expect the closing of the future stores to be significant to the year. They’re a rounding error.

Operator

Your next question comes from the line of Michael Millman – Millman Research Associates.

Michael Millman – Millman Research Associates

In talking about revenue per day, particularly what it was April and did it change as you got past the Easter holidays and some indication of where you see that revenue per day both sequentially and year over year, indications for May and June regarding your fleet which you said was 15% end of quarter, where is it today and where do you think it’s going to be at its peak compared to past peaks?

Scott L. Thompson

April was from a rate per day standpoint more robust than March, but before you get excited, as I mentioned, you have Easter adjust that. I think what we said overall is we expect for the year for our revenues to be down 6-12% and for that basically to be offset by transaction days will be down more and rate per day would be positive. I can tell you that April as a month our total revenues were down about 1%, but we do not expect that that would be the trend for the quarter, as we would expect them to be softer in May and June. You asked about fleet. At the end of the quarter, it was down 15%, and although I don’t have a daily number in front of me, I would expect as we sit here today it’s probably down 15 or 16%, and again as I mentioned in my prepared remarks, we have significantly fewer cars on order today than we had in the past. As far as peak fleeting, Cliff, do you have that number in front of you? It’s probably around 16-17% down from the peak?

Clifford Buster

That’s about right.

Scott L. Thompson

Yes, 16-17% down at the peak. Obviously, we’re running the company for liquidity, but also the lack of GDP cars has caused us not to want to fleet up to the same extent we might have in prior years to mitigate the risk of de-fleeting in the fourth quarter.

Michael Millman – Millman Research Associates

Regarding your restricted cash, could that be used to pay down the $400 million due at the beginning of the year or will that be needed to increase the fleet seasonally?

Scott L. Thompson

Yes, the unrestricted cash can be used to either pay down debt or to buy cars.

Michael Millman – Millman Research Associates

I was just trying to get an idea as to how much you need to buy additional cars compared to how much of that is excess?

Scott L. Thompson

I don’t know how much of it is excess because I don’t know what the demand is going to be in the future, so I think we’ll balance it out with demand and cost of capital, whatever the market place tells us the debt market is.

Operator

Your next question comes from the line of Conor Ryan – Deutsche Bank.

Conor Ryan – Deutsche Bank

What effect did you see from working capital in the quarter and what effect do you see from working capital going through ’09?

Scott L. Thompson

Can you help me with more detail what you’re asking?

Conor Ryan – Deutsche Bank

Was working capital a source or use of cash in the quarter, and do you project it to be a source or use of cash in ’09?

Scott L. Thompson

I’m going to let Cliff think about that for a second. I think the way at least I think about working capital is we don’t have significant CapEx. We expect our CapEx in the future to about equal depreciation, so I think any working capital changes depending on how you define working capital would be fleet issues and enhancements related to investments in fleet, and we’re not expecting to fleet up significantly, so I don’t expect to see any drain on working capital. Is that fair, Cliff?

Clifford Buster

That’s a fair statement. When we look at what the true working capital items are that are operations related and not tied to the fleet, it’s not a significant source or use as we look forward into 2009.

Operator

Your next question comes from the line of Christina Woo – Soleil Securities.

Christina Woo – Soleil Securities

You had said that you will fight for market share, fight to keep a 10-12% share. As Hertz starts to staff their Advantage franchise and reinvigorating that brand, if there was an offer incredibly compelling pricing as has been the history with the Advantage brand, would you suggest that you would match that pricing in order to maintain that share or will the tradeoff really be in looking at your own profitability and potentially giving up some share in order to have a stable profit margins?

Scott L. Thompson

Hertz did acquire the Advantage brand. Hertz is obviously a large company with a fabulous brand, and I don’t know exactly what they’re going to do with the Advantage brand. To the extent that they’re going to use it to lessen their dependency on the opaque channel and tuck in Simply Wheels with their homegrown brand, I think that event wouldn’t be significant to us. If their business plan is to grow leisure share significantly, and I wouldn’t talk about any company in particular, but I think if anybody in the renal car space works to grow market share aggressively, I think all of the competitors in the industry will protect share, so to answer your question specifically as to how Dollar Thrifty reacts when somebody tries to take share is as we said historically, we’ll go down as low as we need to go to protect our share. I think we’re in very good position to battle down in the muck if we have to. We have a low cost structure. We’ve taken a fleet into this downturn that is priced correctly. It’s all risk fleet with an average cost of around $10,000 per unit and an average life of less than a year, so I don’t know what the future brings, but I think we’re positioned for whatever is headed our way.

Operator

Your next question comes from the line of Michael Millman – Millman Research Associates.

Michael Millman – Millman Research Associates

Could you talk about where you stand and where you think the industry is going regarding prepay and also where you think you might be using leasing as an alternative to buying cars?

Scott L. Thompson

Leasing is something that we’re used to do in the industry, and we continue to look at it. If the leasing option becomes available and makes financial sense versus buying the cars, we’ll certainly take advantage of that. We’re talking to several companies, and additionally we’re talking to what’s I’ll call new Chrysler and I’ll call old GMAC on areas of finance. I just don’t know for sure what the market is going to be out there, but it’s certainly an area that we’re entertaining. On prepaid, certainly prepaid is a part of primarily of the overseas market, and we continue to play in that market, and that market continues to expand, and I think we’ll make investments in the future so we can continue to be competitive in that area.

Michael Millman – Millman Research Associates

I was thinking prepay domestically.

Scott L. Thompson

On the domestic side, I don’t see that as a near-term issue in the market place. Where I’m seeing prepay is really in the overseas market.

Michael Millman – Millman Research Associates

I guess connected to that is the opaque market, what trends are you seeing in the amount of cars that are going into the opaque market currently compared to where it may have been a year ago?

Scott L. Thompson

We are not in the opaque market. I believe others are in the opaque market, and I don’t have any firm data to answer that question. I have a perception, but I’d like to keep that to myself. I really don’t have any firm data on that.

Michael Millman – Millman Research Associates

So you’re saying that your excess cars, you just keep in your lots rather than pushing them into the opaque market?

Scott L. Thompson

The opaque market is really distressed market, and we have other weavers we use when we are over-fleeted in situations. It’s just that that doesn’t have happen to the opaque channel.

Operator

Your next question comes from the line of Jordan Hymowitz – Philadelphia Office.

Jordan Hymowitz – Philadelphia Office

You said you’re going to be at 95% risk, and I assume most of the industry is going to more toward that model because program is going to become increasingly unavailable. I guess my question is if that occurs are you going to have more and more flexibility on who you purchase from and negotiate with, in terms of instead of becoming a car rental company, you’re increasingly going to be dependent on residual values in the entire industry, not just you, for determining your profitability?

Scott L. Thompson

I think your observation that the industry is moving more towards risk versus program cars is true. I think when you do that, it does change some of the dynamics of the industry, and we’re more dependent on residual values, and for sure, we are, and I think from what I’ve seen from our friends and competitors, I think they’re moving in that direction also, but I am not sure we haven’t always been kind of a little bit in the used car market and somewhat dependent on residuals. I think all of us have said that we’re going to run cars a little bit longer, put a few more miles on them before we take them to auction, and I think that also speaks to moving more towards a risk fleet.

Jordan Hymowitz – Philadelphia Office

You guys at one point, I think it was the mid ‘90s, had dealerships and I know Hertz still has some for these cars. Have you thought about re-entering that business or other disposal mechanisms?

Scott L. Thompson

Right now, I think we’re comfortable with the way we’re disposing cars. We’re continuing to look at some different options, but I don’t expect to be making any investment in the retail side of the car business right now.

Operator

Your next question comes from the line of [Ken Hamilton – HBB].

Ken Hamilton – HBB

Do the recent events at [Sencora] have any impact on your fleet financing?

Clifford Buster

At this point with respect to Sencora, nothing has officially happened that would trigger anything with respect to the fleet financing structures because the note holders would have to declare an amortization event. Even if that were to occur, what that really means in terms of our fleet financing and our liquidity is not that significant because we’re allowed to run those cars in the ordinary course of business and sell them at them at their disposition date. So it’s a 6-month issue. The Sencora tranche that we have matures in January, and we will continue to run these calls in the ordinary course, and we have already planned for the January amortization of that facility, and as we have mentioned a couple of times in the call, we have $574 million of restricted cash today to deal with upcoming maturities.

Ken Hamilton – HBB

This is using TALF money?

Clifford Buster

I think that’s something that we are going to continue to look at. I know some of our competitors are looking at that. Early indications are that to meet the AAA requirements the significant additional collateral enhancement that would be required at a 55% to 65% level is going to make that fairly challenging and also probably not particularly a cost efficient mechanism, but we are continue to analyze the markets over the next several months.

Operator

Your next question comes from the line of [Gentry Klein – Seedis Capital].

Gentry Klein – Seedis Capital

Can you talk a little bit on the letters of credit back in vehicle enhancements in terms what the amount is today and how you see that fluctuating over the year given fleet reduction and depreciation assumptions?

Scott L. Thompson

I don’t know if we have that detail in front of us. Do you know in general?

Clifford Buster

In general, the enhancements that we have in our securitizations are primarily cash oriented. There is roughly $54 million of letters of credit securing our US securitization structures. There is another $40 million that secure our Canadian securitization structures. Given the fleet levels that we anticipate running and our current financing, I really don’t expect that change over the course of 2009 right now.

Gentry Klein – Seedis Capital

Is this down? I thought at year end it was about $320 million or so of LCs backing the surety bonds and vehicle enhancements. Are those numbers a reduction from the refinancing of the credit facility or reduction in fleet?

Clifford Buster

They would have come down as a result of the refinancing of the credit facilities, and when prepaid the conduit and liquidity facilities early in March, there was significant letters of credit that supported that $500 million of financing.

Operator

Your next question comes from the line of John Brecker with Longacre Management.

John Brecker – Longacre Management

Could you discuss potential TALF and how that would assist your company with financing the fleet?

Scott L. Thompson

Sure. Net, it’s a positive. No question about that. The unknown is exactly what the enhancement level is going to be in order to create a security which is AAA. The current enhancement level may be 30%, and I don’t know what it’s going to take to be AAA under that program, but probably at the high end 60%, so once we know what the market conditions are that they would issue under, we can look at that and do basically an internal rate of return computation, whether or not it makes sense to get that debt and whether or not we can earn a significant return on the investment we’d have to make in enhancements, if that helps you. No question it’s a net positive, and we have lots of people in the sector working on that. We are somewhat fortunate in that being the smallest player in the industry, the amount of fleet financing that we need to finance going forward is not nearly the gross dollar number that some of our competitors need to work with, and we currently are fairly liquid, and we’re watching it closely, and we hope it develops, but that’s about all I can tell you about it right now, but no question it’s a net positive.

Operator

Our last question comes from the line of John Healy with North Coast Research.

John Healy – North Coast Research

I have a question on the vehicle financing facility right now where it stands in terms of enhancement. Because the conduit facility that expired was the highest level of enhancement, can you tell you where you are in terms of that facility today and what is on a blended basis the enhancement that’s required and maybe of that restricted cash balance that you have, if any of that amount could be given as a backup to the holding company level as well?

Clifford Buster

With respect to the enhancement level, if you look across all three of the structures, they’re varying, but it’s about 30% as Scott just mentioned in terms of the overall enhancement level. As of the end of the quarter, we had about $157 million of cash within the securitization structures that represented excess enhancement that could be given as backup.

Operator

I would now like to turn the call back over to Mr. Scott Thompson.

Scott Thompson

We appreciate the opportunity to serve and look forward to providing you additional information on our progress during the second quarter earnings conference call. Thank you for your time today and your continued support.

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