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Hertz Global Holdings (NYSE:HTZ)

Q1 2013 Earnings Call

April 30, 2013 10:00 am ET

Executives

Leslie Hunziker - Staff Vice President of Investor Relations

Mark P. Frissora - Executive Chairman, Chief Executive Officer, Member of Executive Committee, Chairman of Hertz Corp and Chief Executive Officer of Hertz Corp

Elyse Douglas - Chief Financial Officer and Senior Executive Vice President

Analysts

Adam Jonas - Morgan Stanley, Research Division

Brian Arthur Johnson - Barclays Capital, Research Division

Michael Millman - Millman Research Associates

Richard Michael Kwas - Wells Fargo Securities, LLC, Research Division

Afua Ahwoi - Goldman Sachs Group Inc., Research Division

John M. Healy - Northcoast Research

Fred T. Lowrance - Avondale Partners, LLC, Research Division

Christopher Agnew - MKM Partners LLC, Research Division

Philip Volpicelli - Deutsche Bank AG, Research Division

Yilma Abebe - JP Morgan Chase & Co, Research Division

Operator

Welcome to Hertz Global Holdings First Quarter 2013 Earnings 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 of this date, and the company undertakes no obligation to update that information to reflect changed circumstances. Additional information containing these statements is contained in the company's press release regarding its fourth quarter results issued this morning and in the Risk Factors and Forward-Looking Statements section of the company's 2012 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 p.m. Eastern Time and running through May 14, 2013. I would now like to turn the call over to our host, Leslie Hunziker.

Leslie Hunziker

Good morning. You should all have our press release and associated financial information. We've also provided slides to accompany our conference call that can be accessed on our website at www.hertz.com, Investor Relations.

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., the publicly held company. Results for the Hertz Corporation differ only slightly, as explained in our press release. With regard to our IR calendar, we'll be presenting at the Wells Fargo Industrials Conference on May 8 in New York City and at the Barclays High Yield Conference in Chicago on May 21.

This morning, in addition to Mark Frissora, Hertz's Chairman and CEO; and Elyse Douglas, our Chief Financial Officer, on the call, we have Scott Sider, Group President of Rent-A-Car, The Americas; Michel Taride, Executive Vice President and President of Hertz International; and Lois Boyd, Group President of Hertz Equipment Rental Corporation. They'll all be on hand for the Q&A session. Now I'll turn the call over to Mark.

Mark P. Frissora

Good morning, everyone, and thanks for joining us. Let's start on Slide 5. You can see that 2013 is off to a strong start. Consolidated revenue was up 24.3% worldwide in the first quarter. Clearly, the 38% growth in U.S. Rent-A-Car was a big driver of the top line increase, primarily due to the incremental Dollar Thrifty volumes. But we're really operating on all cylinders. U.S. rental car off-airport revenue was 14% higher in the first quarter. Our North American equipment rental business was up 20% when you exclude the effects of currency, and Donlen Leasing and Fleet Management revenue increased 16% to $128 million. Corporate EBITDA was up 74.2% year-over-year, representing a 440-basis-point margin improvement. Profits were driven by strong revenue growth, a 200-basis-point decline in total consolidated fleet depreciation expense as a percent of sales, this is on Slide 6, and a 180-basis-point decline in direct operating and SG&A expenses as a percent of sales, which resulted in 5.4% higher revenue per employee.

On the next slide, adjusted pretax income was $144.5 million, significantly eclipsing the $29 million generated last year, and adjusted pretax margin was 4x higher year-over-year. We reported adjusted earnings per share of $0.21 in the latest period compared with a $0.05 profit last year. Strong contributions in North America from both rental car and equipment rental more than offset soft European results.

Let's review some of the highlights by business unit. In the U.S., on Slide 8, rental car revenue was up 38.1%, supported in part by the incremental volume from Dollar Thrifty, which we acquired in November of 2012. Higher pricing across the board and robust off-airport volumes. Total U.S. rental car volume increased nearly 32%, driven by leisure airport, inbound, insurance replacement and 51 net new locations off airport. This higher demand more than offset some volume weaknesses on airport related to weather disruptions, to airline traffic and because there was 1 less day in the quarter compared with 2012's leap year.

On Slide 10, total revenue per day was up about 5%, which is the new and only way we will measure pricing going forward. In this new way, we are matching Dollar Thrifty's calculation, being more transparent and making it easier for you to compare to our other public competitor. In the new total RPD, we included all ancillary revenue like NeverLost and fuel options. Many people have asked us for the old methodology of rental rate revenue per day, which included only a few ancillary items. We don't feel this is a comprehensive view of pricing. However, today, using the old methodology, I'll tell you that U.S -- the total U.S. rental revenue per day was up 3.4% year-over-year. The RPD improvement came from 3 areas, primarily. First is the holiday effect. This year, the first quarter benefited from peak holiday rates in both January and March. At Christmastime, rental demand is typically evenly split between the week before and the week after Christmas. But in 2012, because of where Christmas fell during the week, we experienced higher demand the week after Christmas, and those rentals weren't returned until January, so January benefited from stronger volumes at higher rates. As you know, Easter fell in March this year versus April last year, which also pulled spring break ahead in most regions. So March got incremental price and volume benefits this year as well. The second is the rise in fleet cost. Historically, as fleet costs rise, so does pricing. The correlation between the 2 is a 0.72 R squared. The third driver RPD was ancillary revenue, where we've been increasing our focus on counter sales.

U.S. rental car fleet efficiency on Slide 11 was down about 1 percentage point from last year. A 4.4% longer average rental length driven by more leisure and insurance replacement transactions was offset by some fleet inefficiency as we were still transferring the Advantage fleet in the quarter after having already taken on the Dollar Thrifty fleet. So in effect, we were operating 3 different fleets last quarter. As we continue to work through the synergies, we'll be able to realize more of the potential fleet efficiencies.

On Slide 12, you can see a higher level of retail car sales inventory also had an impact on utilization due to the roughly 30-day presale holding period.

Adjusted pretax margin on Slide 13 was 15.9% in the latest period, a 520 basis points increase over last year. This earnings performance had multiple catalysts: Higher revenue, longer rental lengths and 80 basis points decline in total operating expenses as a percent of revenues, an increase in revenue per employee and a 290 basis point improvement in fleet depreciation as a percent of revenue.

Moving to Slide 14. While the U.S. economy continues to grow, operating conditions in Europe remain challenging. Having said that, employee productivity is up. Our fleets are tighter, rental length is expanding, inbound revenue is up and net depreciation per unit is down 2% year-over-year. In the first quarter, we rebranded our 33 Advantage locations as Firefly, our new brand to address the deep value segments in Spain, Italy and France. Our goal is to open up an incremental 6 new Firefly locations this year. We'll also be opening up about 140 new corporate locations across Europe and under the Thrifty marquee, and we recently launched a referral service to serve Dollar Thrifty U.S. customers coming into France and Spain. If you adjust our 2012 first quarter Switzerland revenue as if it were already franchised then, total European rental car revenue was essentially flat year-over-year, excluding the impact of currency. We believe the downward trend has bottomed in Europe as transaction days were up nearly 1%. Pricing was down 0.9%, although we did initiate price increases in certain markets. If you also exclude the discounted Firefly rentals, total pricing was actually an improvement of 0.5 point in the first quarter.

Moving outside of Europe on Slide 15. Earlier this month, we invested a 20% stake in China's most recognized rental car brand. Our new partner, China Auto Rental, is the domestic market leader in the $2.5 billion Chinese rental car market, generating more than $250 million in revenues in 2012. That's 2.5x larger than any of the other domestic players. Its 50,000-unit fleet is more than 4x the size of its nearest competitor, and the company has strong financial partners in Legend Holdings and Warburg Pincus. China Auto Rental's roughly 300 full-service locations will be cobranded with Hertz. It gives Hertz exposure in the domestic self-drive market while Hertz offers China Auto Rental greater access to inbound foreign customers, corporate business and chauffeur drive services. The terms of the transaction also include a commission structure for any Hertz inbound referrals. Partnering with the largest, most recognized and valued car rental brand in China provides us the best path to rapidly gaining share in an emerging market that's expected to grow more than 15% annually through 2016.

Now let's talk about equipment rental on Slides 16 and 17. Its string of year-over-year double-digit growth continued with rental revenue excluding currency up 17.6% worldwide and 20% in North America in the first quarter. Based on the equipment rental markets' projected 6% to 7% growth rate this year, according to the American Rental Association, we believe we significantly outperformed the North American markets growth rate. The top line increase is being driven by the beginning of the non-res recovery and continued strength in oil and gas, industrial and specialty markets. With our North American construction revenue up 24% in the first quarter and continued upward trend of the Architectural Billings Index and increases in commercial loan activity, we believe the nonresidential construction recovery is starting to pick up, and we are well positioned to take advantage of the upturn with the fleet investments we made last year. In the first quarter, total pricing in North America increased 3.9% with non-contracted pricing up 5.6%. National Accounts represented 52% of first quarter rental revenue. Total U.S. pricing was 4.1% higher than the year-earlier period. The higher demand benefited from greater overall rental penetration as more companies turn to renting versus buying equipment. Additionally, further penetration of the less cyclical industrial, specialty markets and entertainment services segments is driving revenue growth and better fleet utilization. In the quarter, time utilization improved by 240 basis points in North America, while dollar utilization increased by 170 basis points. Corporate EBITDA in North America increased 32.3%, resulting in a 420 basis points margin expansion with strong growth and a [indiscernible] quarter and operating infrastructure already in place compared with last year, and corporate EBITDA flow-through was 65%. For the full year, we still expect flow-through to be in the range of 55% to 60% as we continue to invest in development programs for employees, add sales force, new greenfield locations to support our clients and markets and technology to drive customer satisfaction. Overall, for the company in total, our first quarter results exceeded our expectations, keeping us on track to deliver our 2013 financial goals.

Now let me turn it over to Elyse for a more detailed financial review of the last 3 months, and then I'll come back and give you some color on the second quarter.

Elyse Douglas

Thanks, Mark, and good morning, everyone. For the first time since going public in 2006, we recorded a positive first quarter GAAP earnings per share of $0.04, an improvement of $0.17 versus the first quarter of 2012. Major contributors to this achievement were strong revenue growth of 24.3%, driven by stronger volumes and better pricing in both rental car and equipment rental, and lower net depreciation per vehicle in our car-rental segment. The inclusion of the Dollar Thrifty fleet, lower depreciation rates, lower car costs in Europe, continued growth in retail car sales channels and an increase in mix of risk cars in the U.S. more than offset softening residuals. And while direct operating expenses increased 21.3%, primarily due to the acquisition of Dollar Thrifty, they declined by 150 basis points as a percent of revenue as improved pricing and labor productivity more than offset higher damage cost, due in part to increased winter storms this year compared to the first quarter of 2012.

Also, the actions we've taken to improve our debt structure are reflecting favorably in net interest expense, where the first quarter of 2013 was only 7.3% of revenue versus 8.3% in the same period of 2012. Now let me talk about the EPS calculation. First of all, as a reminder, when we report positive GAAP net income, we fully dilute the share count when calculating both GAAP earnings per share and adjusted earnings per share. The share count is diluted for incentive stock-related items and the convertible notes. In March, we purchased 23.2 million shares of common stock in connection with the private equity sponsor sale of 60 million shares, bringing their ownership down to 12.5%. The shares we purchased will be held as treasury stock. And we announced our intent to settle the conversion of our 5.25% senior convertible notes and 100% stock. We bought the shares to prevent further share dilution from the convertible notes. This transaction results in changes to how we calculate earnings per share, which are shown on Slide 20.

You will see there are 4 major changes to the share count since the fourth quarter. First is the movement in our stock price, which impacts the dilution related to stock-based incentive compensation, as well as the converts, but only prior to the share buyback. Second is the share buyback transaction, which results in a decrease in basic shares outstanding. Third is the change in policy for settling the convertible notes from a cash stock blend to a 100% common stock share settlement, which sets the dilutive impact on the convertible notes at 57.3 million shares going forward. And lastly, since the transaction occurred in March, the calculation is based on a weighted average number of shares for the first quarter.

The other change to the EPS calculation is the interest expense on the convertible notes will need to be added back to earnings, as shown in the example on Slide 21. The interest add back is necessary while the convertible debt is outstanding. The debt is set to mature in June of 2014.

Moving to Slide 22. The first quarter consolidated interest expense was up year-over-year due to the Dollar Thrifty acquisition but improved 100 basis points as a percent of revenue. Cash interest expense increased about $22 million, reflecting higher fleet levels and the additional acquisition financing. For the full year, we continue to expect cash interest to increase approximately $100 million to $120 million over 2012, depending on fleet levels.

Moving to Slide 23. The first quarter effective tax rate is 75.1%, reflecting mainly taxes paid in the U.S. The high rate is due to the limitation of loss benefits in foreign jurisdictions where we had established reserves that are going to benefit in the tax provision. We continue to expect our full year normalized tax rate to be 35%. This is due to the higher concentration of U.S. profits as a result of the Dollar Thrifty acquisition and as an increase from 34% in 2012.

Turning to cash flow on Slide 24, we are utilizing the new format that we previewed at our Investor Day meeting earlier this month. The goal of reporting free cash flow in this format is to highlight the key drivers of operating cash flow and the net investments made to support business growth. Free cash flow excludes acquisitions and share repurchases. Free cash flow is typically negative in the first half of the year as we begin fleeting up for the seasonal peak in Rent-A-Car. In the first quarter, it was negative $78.7 million, representing a $5.6 million improvement over last year. Operating cash flow was quite robust, increasing $171.8 million on a year-over-year basis due primarily to higher earnings. Net investment increased by $166.2 million year-over-year. Contributing to that increase was a worldwide rent-a-car fleet growth increase of 98.2 million, primarily due to the incremental fleet requirements associated with the Dollar Thrifty acquisition and timing of fleet payments. Hertz fleet growth also increased $38 million over last year as we intentionally frontload equipment purchases in the first half of the year to meet incremental demand. We continue to expect our growth spend on equipment rental fleet to be around $600 million to $700 million for the full year and a net spend between $400 million to $500 million. Finally, non-fleet capital expenditures increased $30 million versus last year as we step up our investment in IT facilities and service vehicles. We are still targeting full year free cash flow of $500 million to $600 million.

Recent debt-related activity is summarized on Slide 26. You can see we continued to reduce our borrowing costs. So far this year, we have executed 3 financing transactions. In January, we issued $950 million of U.S. ABS notes at a blended yield of 1.69% and a weighted average life of 4.7 years. The ABS market remains strong, and this transaction continued the trend of lowering our all-in cost from previous-term ABS issuances. We issued $255 million 5-year Senior unsecured notes in March at a yield of 4.25%. The proceeds were used to partially replenish the liquidity used in the share repurchase, which I discussed earlier. And early in April, we repriced the $1.37 billion tranche of our term loan facility, locking in a reduction of 50 basis points on our borrowing spread and 25 basis points on the LIBOR floor. We estimate this will result in interest savings of around $7 million in 2013. Our liquidity cushion at March 31 was $1.4 billion. Our net corporate debt to corporate EBITDA leverage ratio was 3.6x. However, if we include a full year of EBITDA for Dollar Thrifty, the pro forma ratio would be 3.3x and the leverage ratio dropped to 2.8x with the full run rate cost synergies of $300 million. With that, I'll turn it back to Mark.

Mark P. Frissora

Thanks, Elyse. As I mentioned -- I'd like to pick this up on Slide 29 again. As I mentioned before, the first quarter financial results came in better than expected. It was really a strong quarter across the board for us. The Dollar Thrifty integration synergies are tracking ahead of plan. We installed our car-sharing technology in roughly 25,000 vehicles globally in the first quarter, and we're continuing with the rollout with a goal of having at least 80,000 telematic packages installed by year end. Our current installed base gives us the largest car-sharing fleet in the world now by a large margin. We also opened up both off-airport and equipment rental facilities over the past 3 months to address the higher volumes in those markets, and we saw what we hope is the beginning of growth in Europe.

Looking ahead on Slide 30, in terms of fleet costs, the first quarter improvement in the U.S. was significant but also had the easiest comp this year. As we mentioned in February, the second and third quarters will be more difficult. In response to recorded gains on car sales, we made adjustments to depreciation rates in each of those quarters last year. But for the full year, we're still expecting U.S. monthly depreciation per vehicle to be down 4% to 5%. On the top line in April, we experienced some softness in both the car and equipment rental businesses in the U.S. due to the holiday shift and the initial impact of the sequester. Volumes in our government businesses were down double digits this month in our commercial accounts. With exposure, 2 government customers also cut back on travel. The volume softness has had an impact on U.S. rental car pricing at a time when the industry is seasonally over-fleeted as we begin to fleet up for the summer peak. When April pricing was weaker than the first quarter overall, it was expected due to the holiday shift. Based on what we see today, conditions are still positive for pricing in 2013 due to lower used car residuals driving fleet costs higher, which, as I said, strongly correlates to higher rental rates. For the full year, keeping our original volume assumptions intact, we continue to be comfortable with the 2013 guidance we announced in February, which is reaffirmed on Slides 31 and 32. Let's open it up to questions now. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question, we'll go to the line of Adam Jonas with Morgan Stanley.

Adam Jonas - Morgan Stanley, Research Division

There was a slide that you put in the second quarter -- sorry, in the fourth quarter deck that we didn't see here on U.S. monthly rack depreciation per unit. Could you update us there? And also, your utilization down year-on-year, you highlighted that's because of growth in the used business, having more of the inventory available. Adjusting for that, would your utilization have been more -- would it have been exactly stable or perhaps improving year-on-year?

Mark P. Frissora

On the depreciation question, do you have an answer, Elyse, on that? I don't know. I don't have the data in front of me.

Elyse Douglas

Yes, I mean, we've given, in the past, U.S. per unit costs, which are down 5.3%. And in Europe the unit cost is down 2.4%.

Mark P. Frissora

Okay. And then the second part of your question dealt with?

Adam Jonas - Morgan Stanley, Research Division

So with -- if you -- without the retail car sales, the utilization would have been about flat year-over-year in Q1.

Mark P. Frissora

Okay, so it would've been flat without the retail sales increase that we're actually experiencing and having those cars in queue, right?

Adam Jonas - Morgan Stanley, Research Division

Correct.

Mark P. Frissora

Right. The primary driver, as I mentioned, when we talked about in the earnings script that we just read was the fact that we were operating with 3 fleets: Advantage, Dollar Thrifty and Hertz. So we expect to actually get significant utilization improvement over the next couple of years as we combine our systems and work out the efficiency due to the demands, which are just the opposite in terms of when the peak and trough are with Dollar Thrifty versus Hertz.

Operator

Our next question will go to line of Brian Johnson with Barclays.

Brian Arthur Johnson - Barclays Capital, Research Division

Can you give us a sense of -- just can you quantify both the pace and time -- the amount and the kind of timing of the DTG synergies? You're saying they're going ahead of schedule. Does that mean we could potentially see what you previously guided to faster, and if so, when? Or is there potential, especially as you bring these fleets together, to see even greater synergies?

Mark P. Frissora

Yes, I think, in the past we've described them as $100 million a year each year, and I'm not -- roughly, I mean, so it's ratably over the 3-year period. I really don't -- I'm not comfortable, at this point anyways, telling you what's going to be more or less. At this point, we're just starting and -- but we had our own monthly goals, and we were able to exceed those monthly goals. And so until we get more into the heavier lifting months where the goal start to go up, I'm not comfortable forecasting a higher number at this point, so pretty much status quo right now.

Operator

And our next question will go to line of Michael Millman with Millman's Research.

Michael Millman - Millman Research Associates

Could you give us some idea of what you're seeing in the res book regarding pricing and maybe which markets are weaker or stronger? And also, by holding cars longer, can you decrease your depreciation? And to what extent?

Mark P. Frissora

Okay. So the first question, which dealt prospectively with pricing, we don't talk prospectively about pricing for obvious reasons, but we can say, as I mentioned to you in the script that we've just talked through, we think industry continues -- industry conditions continue to be right for good prices and good price increases. In terms of the res build, what we see going forward, again, as I mentioned before, a little weak this month due to a variety of factors. We expected to see weakness this month. The question on depreciation, in terms of aging the fleet, you can always age the fleet and actually help your depreciation curve, so that's always an option that rental car companies have if they believe that there are certain types of fleet they want to age, and that can help them if it makes sense to -- the maintenance costs don't outweigh, if you will, the aging, that's the way you think about it, because you have to make sure that if you are going to age your fleet, the increased maintenance costs are offset by better depreciation and there's no customer service issues, so that is a methodology that companies use.

Operator

Next question we'll go to line of Rich Kwas with Wells Fargo Securities.

Richard Michael Kwas - Wells Fargo Securities, LLC, Research Division

Mark, on equipment rentals, so Q1 came in better than expected. Was mix better than expected or was this all just volume coming through?

Mark P. Frissora

I think it's just volume coming through. It wasn't a mix issue, really. I mean, other than -- I mean, we planned for some mix shift going on this year. And so it was on the plan, executed well in the quarter. Pretty much had great execution of all of our businesses. Everyone came in where they were supposed to or better, so again, felt good about the execution and felt good about the mix, a little bit of goodness on the pricing front. We were expecting good pricing given what the holiday season was on the U.S. Rent-A-Car side. But yes, pretty much good execution around the board and on the equipment rental side. Things came in as expected. Maybe volume was a little bit stronger than we had anticipated. I think that was the only thing in the quarter that might have been good to what we had originally anticipated, a little bit stronger than we thought.

Operator

Next question comes from the line of Afua Ahwoi with Goldman Sachs.

Afua Ahwoi - Goldman Sachs Group Inc., Research Division

Just sticking a little bit on the pricing issue. For April, given that Easter was obviously in the first half of the month, did you see a difference as the weeks progressed throughout April? And then just really quickly on the emerging markets exposure with China. Is there any other markets that you're looking at to do similar acquisitions or joint ventures?

Mark P. Frissora

Yes, so on the pricing front, obviously, March was stronger than it should have been because of the holidays, having Easter in March. And so weakened, if you will, the first couple of weeks in April, and yes, we did see improvement as April continued in the back half of April, so that's very true, what you're suggesting. In terms of other transactions or anything else we're considering, I mean, we're always looking at emerging markets, but we consider emerging markets really to be -- the ones we're investing in would be Brazil and India and China, and we're always looking for partners, as well as things that we can do to improve our position in those emerging markets. But in terms of -- I'm not indicating we have any deal pending at all. I was just saying that, that's something of an opportunity that we're always looking forward to and always looking at the marketplace to improve our position.

Operator

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

John M. Healy - Northcoast Research

Mark, I wanted to ask about DTG again. You've had the business now for about 5 or 6 months, and I was hoping maybe you could give us some color about maybe what your biggest surprises have been since you've been in there and kind of looking at things, getting to know the folks and kind of bringing the Hertz practices and mixing them with the DTG practices. Maybe your biggest surprise to the upside and maybe your biggest surprise to the downside would be helpful.

Mark P. Frissora

I think there really hasn't been any downside. I think the company was well run when we bought it. They have a lot of best practices that they were using that we've actually have done up to tier at Hertz, in some cases. They have -- they had good -- really good management team, a very entrepreneurial culture. They had stripped the business down to its most fundamental structure after the recession that they went through and the tough times that they incurred. So we didn't add a good lean model with good talent, good entrepreneurial spirit, and we're trying to adopt as much of that as we can into a much bigger company and then take anything that we thought was really well done and adopting it as our own and being very open-minded about that. And I've also included -- several members on my senior team now include Dollar Thrifty personnel, so again very positive, nothing really negative to report. There have been no bad surprises here, just positive ones.

Operator

Next we'll move to the line of Fred Lowrance with Avondale Partners.

Fred T. Lowrance - Avondale Partners, LLC, Research Division

Mark, just wanted to dig in a little bit more on a question -- a couple of questions ago. If you look at -- with this Easter shift, if you look at March and April together, how would you -- what would you say your pricing and volumes kind of look like in relation to the first 2 months of the year, which I think we knew were going to be strong? But again, take March and April together, how does that look?

Mark P. Frissora

I don't know if I've actually combined those 2 months and looked at overall pricing. But again, in April, traditionally, people are over-fleeted, so the fleets are -- certainly aren't tight right now. They haven't -- they weren't tight last week. They're not tight this week. Everyone -- no one's off-selling right now. So when fleets are looser, pricing usually weakens. Having said that, volume, as demand increases as we move into the summer season, the opportunity for pricing becomes better. Overall, for those 2 months, I think it's clear to say that we'd have an overall positive pricing number. But again, I don't want to get into prospective pricing discussions, but the pricing is certainly weaker than it was in the first couple of months given that the first couple of months had some seasonality in the pricing due to the way Christmas and the holidays fell from 2012 to 2013.

Operator

Next we'll move to the line of Christopher Agnew with MKM Partners.

Christopher Agnew - MKM Partners LLC, Research Division

I wonder if I could ask about what you're seeing for corporate pricing trends in the first quarter. And then can you also -- you discussed government and corporate accounts with government exposure. How much of that is -- or what percentage is that of your mix?

Mark P. Frissora

Government business in the Rent-A-Car side is probably only about 3% or 4% of our volume, but there were ancillary travel-related impact that we get overall. And Government business right now is down 25% April month-to-date, but -- and it was up the first 2 months, just so you know. It's a small percent of our mix, but it does include a lot of customers that we do business with who do business with the government segment. My guess is probably in the range of 10% to 15% of our revenues have some kind of impact or some kind of a corollary to the government. In the equipment rental side, same thing, probably 15% to 20% of our customers there are tied to the government, and it could be government projects that are funding local municipalities. It could be actually government customers that we have. So all in all, that impact, when it's down significantly, can have an impact to our overall revenue base. So I think that's about the best way I can answer it.

Operator

We'll move to the line of Philip Volpicelli with Deutsche Bank.

Philip Volpicelli - Deutsche Bank AG, Research Division

Could you please prioritize the uses of the free cash flow that you plan to generate from 2013 between share repurchases, debt reduction, acquisitions and possible dividends?

Elyse Douglas

Sure. I'll take that. Obviously, we took on some debt to buy Dollar Thrifty, so we'll be looking at paying down debt, but we're also looking at investments in the business. And so as we weigh the pros and cons, we'll make the best decision that we think will drive better shareholder value. So I guess in the short run, it will be debt repayment, but we're also looking at investments, and then down the road we'll be looking at return to shareholders.

Mark P. Frissora

Once we become investment-grade.

Elyse Douglas

Right, once we become closer to investment-grade.

Mark P. Frissora

Statistics, right?

Operator

We do have a follow-up question from the line of Fred Lowrance with Avondale Partners.

Fred T. Lowrance - Avondale Partners, LLC, Research Division

I was just trying to get a follow-up in there on that -- the March, April thing. I was just interested to see if you -- what I was trying to get to is, if you strip out that Easter shift kind of like Afua was trying to get to and you look at the second half of April, would you -- obviously, you've got a sequester going on, we know that's impacting other travel businesses as well, but would you still sort of classified that period as soft on a year-over-year basis? And then, unrelated, can you give us sort of your latest commentary on the FTC's digging into investigation of the whole Advantage divestiture?

Mark P. Frissora

Okay, so again, going back to the pricing question that you just asked, I think the best way to answer it is, we're not surprised at the weaker volume and pricing that's going on right now. So there was no surprise here. We still believe the overall pricing environment is positive. So I don't want investors to read too much into this and think that we think that pricing's crashed and burned. We don't think that's happened. We expected pricing to be weaker in April because volumes softened in April. The Easter fall -- the holiday fall made it even worse than normal, and we were expecting that. So just trying to explain it so people understand why it's a little weaker and why volume's a little weaker. It has to do with the holiday effect, plus we think the sequester had some issues. But that doesn't mean that the environment, we think, has changed or that there's some significant big risk on the pricing environment out there. We think that this year, again, will bode well, pricing environment given that there's tight -- given that there are fleet cost increases and some residuals weakening, that usually bodes well for the industry. The industry usually moves pricing up with a fairly higher R squared, as you look at our business historically over the last 40 years. And then on the FTC, as we said previously, Hertz has continued to work cooperatively with the FTC. We're in full compliance with all the requirements of the consent decree and all -- today, all the divestitures required under the terms of the decree have totally gone smoothly. And based upon the communication we've had directly with the FTC staff and to our council, we've got no reason to believe the commission will not execute the consent decree in due course. We've got no comments on the matter that goes between the buyers of Advantage and the FTC. That's their issue. It has nothing to do with us, so we see no issues with the consent decree being issued. It's just a formality at this point, making sure that they tie up their loose ends with the buyer of Advantage. And we believe that's proceeding smoothly, from what we've heard.

Operator

And next we'll go to line of Yilma Abebe with JPMorgan.

Yilma Abebe - JP Morgan Chase & Co, Research Division

On the equipment rental business, away from seasonality like you described and away from the government-related business, the 15% to 20% of the business, how does the balance of the business look like in April?

Mark P. Frissora

I think just in general, the balance of the business is solid. It's kind of where we expected it. So we have -- the one thing that I need to remind investors of is that we have growth drivers that are growing us way beyond the market on the equipment rental side. We're outpacing the market in the Rent-A-Car side. We're outpacing the market in off-airport, in Donlen and in leisure, so we're definitely growing faster because we've got not only the revenue synergies on the leisure side, but we have more outlets that have leisure product than what we had in the past. We weren't able to take advantage of that growth in the past. So Hertz, unlike the other rental car companies, never had a leisure brand to speak of in all of the airports. So this is helping us grow faster than the market because of it. So we feel pretty good about our resiliency given some of the issues that I talked about, like the sequester. Volume is good in April.

Operator

And our final question comes from the line of Christopher Agnew with MKM Partners.

Christopher Agnew - MKM Partners LLC, Research Division

I wonder if you could discuss the opportunity in Europe given expansion of Thrifty stores and the rebranding of Advantage to Firefly and what you see as the sort of market opportunity there given such a fragmented value leisure base. I think it's 25% of market is relatively fragmented.

Mark P. Frissora

Yes, for us in Europe, we view Europe positively, and certainly in the second half of the year and moving in the second quarter, we think there's going to be year-over-year improvement due to a couple of different issues. One is volume growth. Obviously, when you add 143 locations and you launch Firefly, which we think is even a better brand than Advantage, and you do that in a differentiated way, which we're doing, separation of uniforms, cars and people, that we think that's going to be a big boost to revenue. We also believe that our fleet changes that we've made there to match what we do in the U.S., we're selling cars in more profitable channels. Our volume is up 42% on used cars. We're improving the amount of used cars that we sell and, again, selling them in better channels. Our fleet depreciation will continue to be favorably disposed. It will be down year-over-year. So in spite of some issues around the European economy, we think we've reached a low point and we're improving. So inbound, there's a big opportunity with these brands that we never had before, so the new Dollar Thrifty brands gives us a lot of inbound opportunities well that never existed. And I think Europe -- again, I've invested a lot in the restructuring of Europe over the last 12 to 18 months. We'll start realizing the benefits of that also in the second half of the year. So we have a lot of good things that will be happening, we believe, in Europe, both on the growth side as well as the efficiency side coming up over the next 6 months.

Operator

This is all the time we have for questions today.

Mark P. Frissora

All right. So again, I want to thank everyone for attending the call, and look forward to talking to you and updating you at the next call.

Operator

That does conclude our conference for today. Thank you for your participation and for using AT&T TeleConference service. You may now disconnect.

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