Hertz Global Holdings, Inc. Q2 2009 Earnings Call Transcript

Jul.29.09 | About: Hertz Global (HTZ)

Hertz Global Holdings, Inc. (NYSE:HTZ)

Q2 2009 Earnings Call

July 29, 2009 10:00 am ET

Executives

Leslie Hunziker – Staff Vice President, Investor Relations

Mark P. Frissora – Chairman and Chief Executive Officer

Elyse Douglas – Chief Financial Officer

Joseph R. Nothwang – Executive Vice President, President of Vehicle Rental

Michel Taride – Executive Vice President, President of Hertz Europe Limited

Gerald A. Plescia – Executive Vice President and President of Hertz Equipment Rental

Analysts

Michael Millman - Millman Research Associates

Emily Shanks - Barclays Capital

John Healy - Northcoast Research

Richard Kwas - Wells Fargo Securities, LLC

[Matthew Sporer] – Strategic Value Partners

Gentry Klein – Cedrus Capital

Chris Doherty - Oppenheimer & Co.

[Myra Lee – Frese]

Ryan Brinkman - J.P. Morgan

Yilma Abebe - J.P. Morgan

Operator

Ladies and gentlemen thank you for standing by and welcome to the Hertz Global Holdings 2009 second 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 second quarter results issued yesterday and in the risk factors and forward-looking statements section of the company’s 2008 Form 10-K. Copies of this filing are available from the SEC, from 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 also being made available for replay starting today at 12:30 Eastern and running through August 12, 2009.

I would now like to turn the conference over to our host, Leslie Hunziker. Please go ahead.

Leslie Hunziker

Good morning and welcome to Hertz Global Holdings 2009 second quarter conference call. You should all have our press release and associated financial information. We’ve also provided slides to accompany our conference call which can be accessed on our website at www.hertz.com/investerrelations.

In a minute I’ll turn the call over to Mark Frissora, Hertz’s’ Chairman and CEO. Also speaking today is Elyse Douglas, our Chief Financial Officer. In addition we have Joe Nothwang, Executive Vice President and President of Vehicle Rental and Leasing, the Americas and Pacific, Michel Taride, Executive Vice President and President of Hertz Europe Limited, and Jerry Plescia, Executive Vice President and President of Hertz Equipment Rental. They’ll be on hand for the Q&A session.

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 turn the call over to Mark Frissora.

Mark P. Frissora

Good morning everyone and thanks for joining us. Let’s get started on Slide 6. On June 25 we provided guidance for the 2009 second quarter and as you’ve seen from last night’s press release, we performed very well against those projections. While the global economy continues to have an adverse impact on rental volume and revenue year-over-year, Hertz is benefiting from improving profit retention and margin expansion as our cost savings initiatives take hold.

While consolidated second quarter revenue fell 19% year-over-year excluding currency, we were able to reduce adjusted operating expenses by 23% and adjusted SG&A by 26%. These cost actions led to adjusted pretax profit retention of 86% in the 2009 second quarter, and contributed to $81 million of adjusted pretax income. If you look at it from a corporate EBITDA perspective, which is similar to our metric for covenant calculations, profit retention was 81%.

This is our third consecutive quarterly improvement in profit retention. We expect to maintain this trend through the back half of the year as we implement our expanding pipeline of cost savings projects. We’re more focused than ever on improving fleet and labor productivity as well as operating process efficiencies.

Total worldwide rental car fleet efficiency was 79% in the latest period, 320 basis points higher than the first quarter of 2009 and 261 basis points better than last year. We’re operating a much tighter fleet today. Average fleet units are down 15% compared with last year’s level, outpacing the 12% worldwide decline in rental car transaction days. The continued improvement in fleet efficiency is being driven by more strategic management of logistics and extended transaction length.

Consolidated worldwide labor costs declined in the 2009 first half by 22% from last year, reflecting our focus on adjusting our workforce to current business levels. In U.S. rent a car specifically, labor costs were reduced by 19% during the quarter compared with a 15% decline in total transactions year-over-year. This is evidence of the success we’re having in driving labor efficiency across our largest business unit.

Fleet and labor efficiencies along with better administrative productivity and the closing or consolidating of underperforming locations drove an increase in worldwide rental car adjusted pretax margin of 150 basis points to 9.7%. This is a huge accomplishment for us given the extremely challenging operating environment and a tough year-over-year comp in U.S. Rent a car. Year-to-date we’ve generated $361 million of incremental consolidated cost savings, well on pace to meet or exceed our goal of $570 million for all of 2009.

Today our biggest challenges are with on airport business travel and in our Equipment Rental business. According to our analysis of data from Airline Global Distribution Systems for the second quarter year-over-year business travel reservations declined 21%, while leisure travel was off only 9%. Encouragingly, the rate of volume decline in Hertz’s commercial business has stabilized and we’ve even seen sequential monthly improvement over the last 90 days.

In the Equipment Rental market, industrial activity over the last three months declined 30% from last year. Non-residential construction starts were off 43% between January and May of 2009, and McGraw Hill continues to revise his forecast done in response to industry conditions. And while stimulus projects have been identified and funded, they are slow to get underway. For Hertz we’ve seen a flattening of overall Equipment Rental demand in the last months, but pricing continues to be under pressure.

The good news on Slide 7 is that there are many other encouraging trends in our business that cause us to be optimistic. For example, in the U.S. pure pricing increased 2% in the second quarter 2009 over the prior year, driven by leisure price increases. U.S. revenue per day was down only 1% year-over-year, significantly better than the 3% decline reported in the 2009 first quarter. Leisure RPD was flat year-over-year and insurance replacement RPD increased 1%. However, this is being offset by a higher percentage of lower priced off airport business, a shift in car class to smaller vehicles to meet off airport and leisure demand, still constrained commercial pricing and longer length rentals.

Moving to Slide 8, on the upside rental link which was a focus for us this quarter across all categories was up 4% compared with the year earlier level. The extended rental link led to a 3% increase in revenue per transaction over last year. And when combined with 14% less fleet, it helped drive our U.S. rental car fleet efficiency up by more than 320 basis points compared with last year, and 354 basis points versus the 2009 first quarter.

The off airport replacement business reported increased revenue per day and revenue per transaction year-over-year as a result of an improved mix of accounts. Residual car values in the U.S. are continuing to strengthen as supply of late model, used vehicles remain tight and used car dealer inventories need replenishing.

Our new value brand Advantage Rent a car now has 18 locations in operation from the original four open at the time of the acquisition. It has regained its relationships with all third party online websites, where its market share is now in the mid-20% range. These results are exceeding our expectations.

Finally, in the U.S. advance bookings continue stronger, boding well for this quarter’s peak travel season. Today we have visibility through September.

In Europe, on Slide 9, advance bookings are also stronger as we move to the peak travel season. As a result, we are adding fleet to insure we capture all of this higher than expected demand. And there’s stabilization in used car prices overseas, with a few regions even showing residual value improvement from a year ago. International transaction days were down 14% year-over-year, but our fleet is 15% smaller, reflecting the efficiencies we’re achieving on this front. In fact, international fleet efficiency is up 141 basis points from a year ago. Europe’s adjusted pretax margin was positive in the 2009 second quarter, reversing the negative margin trend we’ve seen over the past two quarters. The second quarter margin was only slightly below prior year. By the end of the third quarter we expect to achieve a year-over-year increase.

On the next slide, in our Equipment Rental business there continues to be too much fleet capacity industry wide, a reflection of weak demand and lower residual values. HERC worldwide demand was down 30% in the second quarter compared with last year, and was 420 basis points lower than the first quarter. This is putting terrific pressure on pricing and some competitors continue to be highly irrational. Our pricing fell 7% from year ago levels. While we’ve seen volume stabilization monthly, we’ve not seen the normal seasonal uptick in summer demand for equipment. We believe we’re hovering near the bottom though, but only time will tell. In the meantime we continue our focus on better revenue management and cost savings initiatives. Our execution in these areas is paying off.

Corporate EBITDA margin in the quarter was 42.7% despite a 35% decline in Equipment Rental revenue excluding currency. We also generated a sequential quarterly improvement in adjusted pretax margin. Since the [inaudible] the year, there have been 11,000 construction and industrial projects deferred, representing more than $163 billion of potential spending for the construction and industrial markets. The good news is that these delayed projects are still in the pipeline and will eventually become a catalyst for the industry’s recovery.

China also offers opportunities for HERC. We opened our second location there in the industrial city of Chengdu in the second quarter, and in the future we have plans for expanding our coverage into India and the Middle East.

Now let me change direction and talk for a minute about cash flows and liquidity on Slide 11. Year-to-date June, total net cash flow was $632.8 million versus a $1 billion use in last year’s first six months, an improvement of $1.6 billion. Net working capital days as of June 30, 2009, improved 4.9% to negative 42.5 days. Days sales outstanding were better by 10% as we aggressively executed on collections. Inventories days on hand improved 15% due to better inventory management techniques. And DPO’s improved nearly 3% as we were successful in extending our vendor payment terms. We have done a great deal in the first half of the year to maintain our $1.7 billion of corporate liquidity position which includes unrestricted cash, even as we begin addressing our 2010 refinancing needs.

We recently executed an equity and convertible debt public offerings. The deals were significantly over subscribed. We ended up generating $790 million of net proceeds from these public offerings, and another $200 million of net proceeds from a private offer with our sponsors that closed in July. These proceeds will help solidify our already strong liquidity position. Our goal for the transaction was twofold, to take advantage of windows of opportunity in the credit and equity markets, to secure incremental liquidity in advance of our refinancing, and to preserve as much existing liquidity as possible to support post-refinancing growth and initiatives. Let me state for the record that as of today the initiatives we’re taking to satisfy our 2010 refinancing needs do not include the issuance of more equity.

We have been very committed to growing our business despite the recessionary environment that’s impacting today’s operations. Hertz is an industry leader with a long term focus on success. As such, we’re investing in product, technology and geographic growth to further our position. This is on Slide 12. In the second quarter, our U.S. prepaid rental program continued to build momentum, generating $38 million in revenue since December the 2008 launch.

Connect, our car sharing program, now has more than 5,000 members worldwide. Our U.S. multi-month rental offering, which is being promoted as a monthly lease alternative, generated a 26% higher revenue in the second quarter versus last year. I’ve already told you how well the Advantage integration is going. I’m really pleased with the early benefits we’re accruing from this new value brand. In 2010 we expect to more than double the number of current locations.

After having purchased Advantage, Eileo and Rent One early in the second quarter, we recently completed two more small acquisitions, Irving Industrial Rentals which is in keeping with our roll up strategy in the Equipment Rental business, and Automoti, Incorporated, a virtual full service used car showroom. By acquiring Automoti we leveraged their e-commerce platform to expand our retail car sales business. Through the Hertz Rent-to-Buy program, we provide customers with a financially attractive solution for purchasing late model used vehicles in a simple, streamlined way after test driving them as a three-day rental. Even better, our cars can be sold while they’re still on rent and generate revenue, reducing vehicle down time and improving net proceeds on each car sold.

And finally we opened three wholly owned rental car locations in China, two in Shanghai and one in Beijing, marking our entry into this growing region’s rental car industry. And we have plans to open a second location in Beijing later this year.

As you can see we’re continuing to diversify our revenue base and product offering while aggressively driving our cost reduction initiatives, which over time should yield improved liquidity, improved profitability, growth and optimize cash returns in spite of economic cycles. At the same time, the latest survey showed that we’re improving customer and employee satisfaction, key initiatives for the company and me personally.

With that I’ll turn it over to Elyse for a more detailed financial review.

Elyse Douglas

Thanks Mark and good morning everyone. Let me begin by summarizing the consolidated results for the second quarter starting on Slide 13. As Mark mentioned, we generated $1.8 billion of total revenue and $81 million of adjusted pretax income in the second quarter. It’s worth noting that our adjusted pretax does not include a $48.5 million gain recognized in April when we purchased $150 million of face value, high yield debt at market prices. And the profit retention of 86% Mark highlighted was the result of actions to aggressively size the business to market conditions and the achievement of sustainable cost savings as we drive continuous process improvements throughout the businesses.

As a result, adjusted direct operating and SG&A declined 23 and 26% respectively in the second quarter year-over-year. Now let me discuss these performance trends in a little more detail by business unit. I’ll start with worldwide Car Rental. Despite a 15% fall off in revenue, excluding the impact of currency, the adjusted pretax margin improved to 9.7% in the second quarter from 8.2% a year ago, driven primarily by improvements in the U.S.

Before I discuss the cost efficiencies driving margin improvement in U.S. Rent a car, let me spend a minute on revenue per day versus pure pricing, which Mark mentioned earlier. Slide 15 shows the year-over-year change in U.S. Rent a car revenue per day which fell 1%. However, when you adjust for the impact of changes in mix, price is actually 2% higher in the quarter. Revenue per day is a combination of both price and mix. Mix encompasses off and on airport business, leisure, commercial and insurance replacement rentals, rentals related to all different types of car classes, the various reservation channels, and various lengths of keep transactions from hourly, daily and weekly to multi-month.

When we talk about pure pricing, we back out the impact of mix on RPD to get more of an apples-to-apples price comparison. As we’ve stated in the past, although with small car insurance replacement rentals has a lower rental rate per day versus a daily SUV rental, both transactions are profitable as the costs associated with each transaction are proportional to revenue.

Now looking at the profit improvements in U.S. Car Rental on Slide 16, direct operating expenses and SG&A were both down in line with volumes but also down as a percent of total U.S. revenues. Key drivers of the U.S. cost improvement are structural and process changes, driving reduced damage and transporter expenses, and improved employee productivity as measured by transactions per employee, which was up 7% over last year. All of this contributed to an improved year-over-year adjusted pretax margin for U.S. Rent a car.

In European rental cars, expenses were also down in line with volume and also down as a percent of revenue. European employee productivity increased 6% year-over-year in the second quarter. In light of the economic conditions to right-size the business we closed or consolidated 18 unprofitable locations and we took specific actions to improve the profitability of a number of our corporate accounts and travel partnerships.

Our worldwide Car Rental fleet efficiency shown on Slide 17 improved in the second quarter by 261 basis points and revenue per transaction increased 1.6% year-over-year. In the U.S., fleet efficiency was up 320 basis points over last year on a smaller fleet due to a higher mix of longer length rentals, as well as the result of reengineering processes related to vehicle delivery, maintenance, deletions and vehicle related down time. Revenue per transaction in the U.S. was up 3% in the quarter compared to a year ago.

In our international business, we also operated with a smaller fleet and our mix of vehicles included a larger percentage of less expensive, smaller cars to better match rental demand. Subsequently, international rental fleet efficiency improved 141 basis points over last year and 273 basis points over the first quarter, primarily driven by improvements to fleet planning and fleet distribution processes.

Now let’s take a look at rental car monthly net fleet depreciation or car costs. Our worldwide costs were lower by 3% in the second quarter versus the first quarter, but 6% higher than last year due to weak residual values internationally and tough year-over-year car sale comps in the second quarter for the U.S.

In Europe car costs increased by 15% versus the second quarter of 2008 and as a residual values on the risk cars remained weak across the continent. However, a significant improvement in fleet interest expense offset nearly all the increase in depreciation. It’s important to note that we cut car costs by 13% sequentially from the first quarter, and I’d point out that absolute car costs in Europe today are still 12% lower than in the U.S.

In the U.S. our car costs improved by 3% compared with the first quarter and 7% from January to June. However, on a year-over-year basis they increased by about 8%. This comparison is distorted, because in the second quarter last year we sold a substantial number of small, fuel efficient cars at premium prices as fuel costs went over $4.00 a gallon. However, if you adjust out car sales gains and losses for a more normal comparison, you’d find that car costs for the 2009 second quarter actually showed a reduction year-over-year, stemming from lower new car prices and improved fleet portfolio management. We expect to see continued car cost reductions throughout the year.

As you can see on Slide 18, the residual values experienced on U.S. risk car sales improved 6 percentage points since year end 2008 on an age adjusted basis. This positive trend in residual prices allowed us to delete some of our older, higher cost vehicles and replace them with more economic new cars as Mark mentioned.

At June 30, risk cars in our U.S. fleet represented 68% of the total fleet and the average age of the overall U.S. fleet was 10 months compared with roughly 8 months in the second quarter of 2008. During the quarter while the GM bankruptcy was big news on the macro level, it had essentially no impact on our business. The new GM has affirmed our program car contract terms and the residual values for GM vehicles have actually improved since the date of the filing.

Let me discuss the results of our Equipment Rental business on Slide 19. As Mark told you, HERC continues to be impacted by the weak demand in all segments of the equipment rental market and the irrational pricing that’s resulting from too much supply in the industry. While Mark mentioned total revenues declined 35% due to volume and pricing, on a same store basis, worldwide revenue was down only 29%, both in constant currency terms compared with last year. During the quarter we reduced our equipment fleet’s net book value by another 25% year-over-year and 11% since the beginning of 2009. As equipment fleet net book value disposals of $38 million in the quarter outpaced purchases of $15 million, we reported negative net CapEx of $23 million compared to net CapEx of $38 million a year ago, a $61 million improvement.

Year-to-date disposals of constant currency were approximately $300 million of original equipment costs versus year-to-date purchases of about $30 million. Mark highlighted the strong corporate EBITDA margin that Hertz continues to generate. This has been achieved through aggressive cost cutting initiatives. Since the beginning of the year we’ve taken an additional 15% reduction in force, implemented wage cuts, de-layered the operations and cross-trained employees to improve operational efficiencies. We’ve closed or consolidated 21 underperforming branches since the year began.

Labor productivity, measured as rental revenue per employee normalized for pricing, improved by 5% sequentially. Additionally, we’ve streamlined the North American regional offices over the first half of the year from seven down to five. These actions have contributed to second quarter adjusted pretax income of $24.7 million, a margin of 8.9% compared with $700,000 in the first quarter of this year.

Hertz quarterly efficiency on Slide 20 was 10.3 percentage points below the prior year as declines in rental demand outpaced our fleet reduction. Fleet efficiency was 6.2 percentage points lower when you exclude the impact of pricing. Compared with the first quarter of this year, however, fleet efficiency improved so we’re making some progress. We’ve also slowed the rate of fleet sales in this quarter after aggressively de-fleeting in the third and fourth quarters of ’08 and in the first quarter of 2009. At June 30, our worldwide equipment fleet age was 40 months, a 2 month increase compared with the fleet age at the end of the first quarter. We still feel comfortable aging the fleet into the mid-40s range without deteriorating the customer experience.

Moving on to Slide 21, there are a few consolidated income statement metrics that I want to touch on before we get into the cash flow discussion. First as it relates to earnings per share, I want to quickly take you through the change in share count as a result of our recent equity offering. Adjusted diluted earnings per share was $0.12 in the second quarter, which was calculated using a normalized full year share count of 407.7 million shares. On a GAAP basis, however, the second quarter EPS was $0.01 based on a weighted average diluted share count of 349.2 million.

Restructuring and restructuring related charges in the quarter were $33.3 million, of which $22 million was cash. These charges, outlined on Slide 22, primarily related to severance costs, facility closures and other one time expenses. As market conditions begin to improve over the next year, we expect restructuring will decline as we get back on track to grow the business.

Now moving to taxes. Cash income taxes paid in the quarter were $6.2 million. For the first half of 2009, the GAAP effective income tax rate was 14.9. We expect the full year effective income tax rate to be between 16 and 17%.

Now if you move to Slide 23, it shows our quarterly financial covenants that we are required to meet under the corporate credit facilities. As of June 30, our consolidated leverage ratio was 4.32 times, well below the maximum, 5.5 times allowed. The interest coverage ratio was 2.46 times, well above the minimum requirement of 2 times. We had sufficient cushion under both covenants even before our financing transaction. So we’re favorably positioned to continue to meet our covenant tests going forward.

Now let’s look at our cash and debt positions on Slide 24. As you know, we completed the equity and convertible debt public offerings in the second quarter, which generated net proceeds of $790 million and improved our overall liquidity position. An additional $200 million was received in July, related to the private equity offering. The proceeds received in the second quarter were used to pay down $70 million in corporate revolving debt and $720 million in fleet revolving debt. This strategy gives us the maximum flexibility going forward to maintain our corporate liquidity to be used to fund the growth initiatives Mark discussed earlier or to satisfy a portion of our fleet refinancing needs, although this is not anticipated.

As a result of these actions, the ABS structure is well over collateralized today. Allowing advance rates to decline, however, meaning debt outstanding represents a smaller percentage of the fleet’s value, negatively impacted levered after tax cash flow as the investment and fleet equity was inflated at quarter end. Due to the lower advance rates, levered cash flow year-to-date was a use of $191 million compared with the source of cash last year. This is on Slide 25. If we exclude the impact of the recent offering, and normalize the investment in fleet equity, we generated levered after tax cash flow of $120 million, a 67% year-over-year improvement.

Total net cash flow was $632.8 million for the first half of 2009. This compares favorably to the 2008 first half, when we reported a total net cash outflow of $1 billion, an improvement of $1.6 billion or $1.1 billion excluding the impact of the financing transaction. Total debt decreased by $1.2 billion to $9.8 billion from December 31, 2008. Total restricted and unrestricted cash and equivalents were $759 million, which brought total net debt down 6% from the beginning of 2009 to $9 billion. Since Hertz was sold by Ford in December of 2005, we’ve paid down $2.3 billion of total net debt of which nearly $800 million was net corporate debt.

On the next slide, in terms of the [audio impairment] fleet refinancing efforts, we are in active dialog with new and existing lenders and capital market investors as well as leasing companies and car manufacturers. We are making good progress on a number of fronts.

Our refinancing needs are essentially in the second half of 2010, but we expect to close a portion of the refinancing this year and particularly amending and extending a number of our fleet conduit facilities which we expect to close this quarter. Let me take a [audio impairment] to discuss developments in potential TALF financing. Based on a recent rating methodology report by the S&P, they will not be in a position to provide triple A ratings on rent a car transactions. However, Moody’s has indicated they can provide us a triple A rating and we are currently working with Fitch as they develop their rating criteria. While TALF financing is still a possibility, it’s important to note that other capital market opportunities exist and we expect these markets to develop favorably over time.

For example, the recent capital market deal by Avis bodes well for getting a non-TALF capital market transaction done. And our current thinking on timing for executing an ABS transaction is in the fourth quarter. We are pursuing a number of refinancing opportunities, which collectively could provide potential funding of up to $8 billion while our expected refinancing need is only $4.2. This is shown on Slide 26. Given the dialog to date we feel comfortable about achieving these objectives.

With that, I’ll turn it back to Mark.

Mark P. Frissora

Thanks Elyse. Let’s move forward to the next slide. With these and the trends we’re seeing in the U.S. rental car business, advance bookings continue to build, exceeding our expectations. Leisure volume and pricing are stronger. Our number of contracted accounts is showing a net increase year-to-date. Advantage’s market share is getting back on track as we expand geographic coverage. And off airport continues to strengthen its margins by keeping costs for start up locations low and securing longer length rentals.

We generated double digit adjusted pretax margin in U.S. rent a car in the second quarter and improved our corporate EBITDA margin over last year in the second quarter. Essentially, higher car costs year-over-year are being offset by better fleet efficiency. We’ve been successful in developing a number of new car sales channels, including direct to dealer and rent to buy, which allow us to reduce the time it takes to sell cars. In addition, we’ve made great progress in leveraging our contribution management system to improve both yield management and fleet plan optimization in all [audio impairment].

Fleet management and logistics are also benefiting from the addition of the Advantage business and our ability to capitalize on fleet synergies. Denver Airport is our pilot location to share fleet between Hertz and Advantage during specific periods. In this market, our rental facilities are less than one mile apart. We are able to accelerate the ramp up of the Advantage fleet in this market by approximately 8% by moving excess weekend inventory at Hertz to Advantage, and then returning those cars to Hertz on Monday morning. This methodology permits accelerated volume growth at Advantage while increasing fleet utilization at both brands through fleet sharing. The end result is lower per unit vehicle cost for both businesses.

In Europe, our rent a car business is slowly improving. The signs are there but it’s still going to take some time. Inbound travel from the U.S. to Europe, our highest contribution business, has improved since quarter end. And domestic bookings are increasing as Europeans are choosing intercontinental travel destinations.

For our part, we have a significant restructuring program underway in Europe to create a two region structure compared with the country based arrangement we have today. This entails dividing 10 countries under the leadership of two new regional vice presidents, consolidating back office administration functions, de-layering the organization’s structure and instituting process efficiencies. This project is about halfway completed. We are already seeing early benefits and expect to report $35 million in annual savings once the program is fully completed in the second quarter of 2010.

As you know, our Equipment Rental business continues along a tough road. This is fully a result of macroeconomic conditions, exacerbated by competitors seemingly undisciplined operating strategies. Again I’m pleased with how our team is navigating through this difficult environment. We’re pursuing new business opportunities like rentals for the entertainment and event industries, and we’re retaining our national account base and evening taking market share from competitors by differentiating ourselves through superior rental service and broad equipment selection.

In fact, HERC was recently awarded the U.S. Communities Government Purchasing Alliance Contract for equipment and tool rental services. Essentially, this contract allows state and local governments, nonprofits and educational institutions the ability to access rental equipment and services using pre-established pricing through the U.S. Communities Program. This contract was competitively solicited. HERC is the first and only equipment rental provider under the U.S. Communities Program. Currently there are 36,000 participating agencies registered. This new exclusive contract should enable us to increase customer diversification by penetrating local and state government markets, gain market share and extend customer relationships without any exposure to the competitive environment. We conservatively estimate this opportunity to be between $10 and $15 million in its first year.

There are many positive things going on across all of our businesses that will drive continued profitability improvement into the back half of the year, and while we don’t have much visibility yet to the fourth quarter volumes, we’ve been conservative in our performance assumptions and in adding fleet to meet the peak seasonal demand. Therefore we are confirming our original guidance for 2009 and, as a result of the current trends, we’ll tell you that we are very comfortable with our projections at the high end of the ranges.

Now let’s go ahead and open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michael Millman - Millman Research Associates.

Michael Millman - Millman Research Associates

I guess on your next to the last slide, you talk about advance bookings continue to build and leisure pricing continues which we’d expect seasonally but can you put that in some context year-over-year? And then sort of related, you appear and leisure increase was 2%, yet Avis announced that their second quarter numbers were up 5 to 7% total company, and maybe you can talk about why there seems to be such a discrepancy.

Mark P. Frissora

Yes, I guess in terms of the future demand, answer that kind of question first, you know on the rental car side again we see demand improving into the third quarter and beginning into the fourth quarter we’re seeing improvements in advance reservations there as well, a slight improvement. Again the visibility in the fourth quarter is much more murky but we see improvement. I guess, you know, we anticipate, the best way to answer that is our fleet will probably be down instead of being down 15% we saw in the second quarter, it’ll probably be down in the fourth quarter closer to the range of 5 to 8%. So a much lower reduction in order to see increased demand that we see coming. So those are kind of our fleet plans. So that might answer the demand equation.

We also expect our deprecation per vehicle to come down significantly in the third and fourth quarter, based on those numbers. I can’t tell you what that’s going to come down but it’s going to come down significantly from what you saw in the second quarter.

In addition to that, just talk about pricing for a minute, in the second quarter we saw our leisure on airport pricing was actually up 5.7%, Michael. So it was up significantly, in the range you saw maybe forecasted by Avis. Our commercial sector continues to be under pressure in the range of 3 to 5%. You know the other thing that I mentioned is if that we have a very broad swath of markets, unlike the other rental companies. Broader than any rental company frankly. And that creates, you know, in some cases a smaller increase in overall pricing. You know if you look at, you know, Budget, you know, as it relates to Avis Budget, that’s a big leisure brand for them. And Joe do you have some comments on that?

Joseph R. Nothwang

Just I think the opportunity for them to increase prices with the large umbrella that’s out there with the Hertz pricing on the premium side overall gives them the ability to grow on a percentage basis, you know, greater than Hertz has the leader in the pricing segment.

Mark P. Frissora

So that may explain it. But again it’s explainable to us. We’re not concerned about it. We know that we still have the price leadership position in terms of the highest prices out there. You can check that anytime you want. We’re the highest. Generally speaking, we have the highest prices across the country. So.

Michael Millman - Millman Research Associates

That’s second quarter pure airport plus 5 to 7%, 5.7, what does that look like in June and July?

Mark P. Frissora

I don’t have that data here, handy with me. But I mean I just gave you the statistics for the quarter, but in general pricing should continue to improve we hope if in fact demand continues to strengthen because fleets are very tight across the entire industry.

Operator

Your next question comes from Emily Shanks - Barclays Capital.

Emily Shanks - Barclays Capital

I just have a couple of questions. Thanks for all the info around the ABF side. One follow up on the balance sheet. Just to be clear, you guys did not buy back any of the bonds, i.e., the senior or the sub outside of the April purchases? Is that correct?

Elyse Douglas

That’s correct.

Emily Shanks - Barclays Capital

And then Mark you had mentioned that you still think that the HERC side of the business is over fleeted. Can you just give us a sense of what your view is around industry wide fleet levels at rack and then if you can somehow box how over fleeted you think it looks at HERC?

Mark P. Frissora

Okay, so you said industry fleet levels in rent a car and then also at HERC, right?

Emily Shanks - Barclays Capital

Yes please.

Mark P. Frissora

So in rent a car fleets are extremely tight with all vendors. I would say that, well we could tell Avis Budget and Dollar Thrifty were extremely tightly fleeted, more so than let’s say Hertz was going into the second quarter. [Erack] which we call [Erack] it’s Enterprise we felt were about as fleeted like we were. Not as tight. While we were tight we weren’t super tight, I’ll put it that way to you. Going into this new demand in July and August, we’re seeing further tightening actually because the demand is higher than what we anticipated and what the industry anticipated. Demand and again in July and August is probably I’ll say 3 points, 3 to 4 points probably higher than what we would have thought.

When we talked to the investment community back when we did our preannouncement of earnings improvement and we now [inaudible] so demand continues to strengthen, so will continue to cause very, very tight fleet through the end of August going into probably the first two weeks of September at least.

And on the HERC side, we think the entire industry is over fleeted obviously and that’s driven around the fact that instead of selling equipment at huge losses, people are hoping demand comes back because the losses on some of the equipment if you were to sell it today, you know, would have 5 to 6 to 7 year paybacks. So certainly, you know, when we look at those kind of payback formulas it makes sense to continue to age the fleet a little bit and then, you know, we’re putting it to use selectively where we have opportunities springing up due to pent up demand that we think will come back eventually and hopefully by the year end. And also due to some of the new programs that we’ve launched, new business contracts we’ve had. Jerry, do you want to add some color to that?

Gerald A. Plescia

Sure Mark. As you saw the first quarter, details from the major competitors, the industry appears to be 8 to 10 percentage points down in utilization from prior year. And based on the activity we’ve seen in the second quarter it appears that that has remained about at those levels. So it’ll take several quarters of additional fleet sales, auction sales by the industry to level set that fleet. And you know it’s really a matter of the equation of, you know, the rapid sale at auction plus the fees that create a large loss to sell rapidly versus a more orderly sale. That’s what the entire industry’s going through at this point.

Emily Shanks - Barclays Capital

And I have just one follow up question around the rack comments that you made, Mark. Do you think that, I mean it sounds like its extremely tight, you guys obviously have quite a bit of flexibility around being able to grow your fleet I would imagine to meet that demand. Are you seeing or do you expect to see that you guys would take market share going into the months of July, August, September given?

Mark P. Frissora

Yes, yes. And we do. We anticipate increased market share. We already saw it in June data. In fact on GDS market share which you can see, you know, on a real time basis our market share which has generally been flat even a little negative was up almost a full point in the month of June, through the first three weeks. So again, yes, we’re seeing improvements in market share and expect to have market share improvements due to the fact that we have more flexibility on the fleet to up fleet if you will when [inaudible].

Operator

Your next question comes from John Healy - Northcoast Research.

John Healy - Northcoast Research

A question for you, Mark. Just philosophically, with financing starting to come back to the rent a car business, what’s your level of confidence that the fleet discipline, the pricing discipline is something that’s sustainable in 2010 and maybe beyond? I’m trying to just understand what in a way you’re thinking about the industry going over the next year or two, once people start to lend to this business again.

Mark P. Frissora

I think, you know, I’m pretty confident that there’ll be more discipline as a result of this recession. I think if you look at other business models, historically what’s happened you’ll find that, you know, the industry leaders end up learning lessons, right, about how to maintain tight pricing and fleet discipline in environments after they go through, and, you know, feel the pain if you will of having sloppier discipline. So my guess is based on history and what I’ve seen in other industries as well as even this one there’ll be more discipline over, you know, the long haul as a result of what we experienced over the last 12 months.

John Healy - Northcoast Research

And then in the de-fleeting process, I was hoping you could talk about what your plans are for this year, when you guys might decide to start de-fleeting if you’re planning on doing so, maybe a little bit earlier than last year just to make sure that, you know, you’re able to get out of fleet for the beginning of the fourth quarter. And if there’s anything that we should anticipate from a program or risk car standpoint as we head now through the third quarter and into the fourth quarter.

Mark P. Frissora

I mean, you’re right, we typically will after the summer season begin de-fleeting. But we’re, you know, probably in the mode that we actually may increase the overall size of the fleet due to demand levels that we think will happen in the fourth quarter. We feel pretty comfortable. We have a lot of flexibility where, you know, we obviously if we need to hold some cars we’ll hold them, but we have a lot of flexibility with the program buys we’ve made with a couple of our key OEMs. And we pretty much have all the new cars we need and we want to rotate actually a lot of new cars in because of the fact that our cars have aged. And so we expect our depreciation to go down because these cars are at lower depreciation rates than our current ones. And our maintenance contracts would go down as we were able to rotate some of this older fleet in with new fleet. So we actually plan to rotate as many new cars in as we can during the end of the third and fourth quarter. And the overall fleet size instead of maybe being down 15%, again I signaled that it may be down 5 to 8%, again depending on demand. But obviously that means that we’re, you know, going to be just rotating and yet keeping the levels up there because of the demand as it increases.

John Healy - Northcoast Research

And then just two quick questions. Mark, can you give some color on what you maybe saw geographically in HERC this quarter and then, maybe a little bit more color than what you already did? And then the acquisition activity, a few quarters in a row, are you guys, you know, picking up some interesting assets? Is that something that we should continue to expect for you guys in the next couple of quarters? And maybe what your kind of pipeline looks for that and what type of properties you’re looking at.

Mark P. Frissora

Yes, I guess. Are all these questions related to HERC?

John Healy - Northcoast Research

On the acquisition side either rack or HERC, where there’s more priority.

Mark P. Frissora

Yes, I guess either one. I mean we’re looking at small, strategic acquisitions that are accretive immediately. And so there’s lots of opportunities on the HERC side as you look at smaller deals. And we’re trying to increase our ability to do deals faster and small acquisitions. So we’ve built an infrastructure around that, and built some relationships so we can do that a little quicker because we think that will get our revenue streams moving quickly.

In terms of growth overall, Jerry, I’ll let him comment on this, but overall there’s several regions that were actually showing improvement year-over-year but with western Canada is a region that was actually showing deterioration. So between the improvements and the deterioration, essentially it’s been stable and flat for the last 30 days. Jerry, do you want to make some comments on that?

Gerald A. Plescia

Sure. From a regional basis we saw the regions that were previously the worst, the western half of the U.S. and Florida, start to become less negative. So the ones that went into the recession deeper, fastest, have seen some stabilization. The industrial side of the business where there’s now somewhat of a downturn in industrial’s affecting western Canada, offsetting some of the improvement in Florida and the western region.

But we are encouraged overall that the volume decline which occurred month-by-month through the first quarter overall has been virtually stable from the very end of March really through the present day. So those dynamics are giving us a little bit of encouragement that we’re finding the bottom.

Operator

Your next question comes from Richard Kwas - Wells Fargo Securities, LLC.

Richard Kwas - Wells Fargo Securities, LLC

On corporate pricing, business pricing, I know you mentioned that volume stabilized here. What’s your sense for when you kind of comped the worst of the pricing issue there?

Mark P. Frissora

Hey, as soon as our rational competitors decide to behave and act rationally. So. I mean we’re protecting our national accounts. We’re protecting share there. And we’re hopeful that, you know, the pricing levels that we’re seeing will flatten out and improve. Year-over-year comps will begin to improve as you know as we move into, on the equipment rental side especially, as we move into third and fourth quarter, the comps become easier. Jerry, do you want to again make comments?

Gerald A. Plescia

The fleet balance is a big issue as fleet becomes more balanced with demand. Obviously that’s a big driver. And then internally as each rental company gets hold of their own initiatives. I mean, it’s really internally driven. We have a yield management program. We’re very selective and we do protect our largest and best accounts. And it’s really the give and take between fleet balance and what’s happening in the industry. So we haven’t seen that improve in the second quarter but we’re hopeful that, you know, just lately the last three or four weeks have quoted, new contracts are going out or about stable with the prior months. So there’s a little light at the end of the tunnel.

Mark P. Frissora

And the pricing on the rent a car side, Rick, really becomes much better on commercial accounts, business accounts, once we get through our September cycle. So the year-over-year comp there becomes easier as well because that’s where we saw kind of a precipitous drop in, you know, I’d say 3 to 5 points to drop in some of our large corporate accounts. And that becomes a much easier comp as we move through September and into October.

Richard Kwas - Wells Fargo Securities, LLC

Just on the fleet side, Jerry, it was mentioned, you know, that several quarters before the fleet size for the industry really, you know, meets with where demand is. What are we talking about here? Are we talking well into 2010? What’s your best guess on when things are really right sized on [inaudible].

Gerald A. Plescia

It’s anybody’s guess as to when the volume demand will start to uptick, but based on current conditions and the gap in utilization within the industry, I would say we have to get through the winter most likely. And as we head into the summer season or the peak season, probably around the second quarter, you know, mid-2010 is the best guess at this point, you’ll start to see construction start to improve. Stimulus project monies should start to impact some of that. And this general improvement in demand should help balance it. But that would be a best guess at this point.

Richard Kwas - Wells Fargo Securities, LLC

So is it fair to say that pricing and equipment rental should continue to deteriorate from here on out over the next two to three quarters until again the middle of next year?

Gerald A. Plescia

I don’t think we’ll see continued deterioration, you know, based on the volume trend we see now as that starts to balance and the comps get easier. I think we’ll see sequentially possible improvement off of these bottom rates. I don’t think it’ll continue to deteriorate from current levels at a significant pace.

Mark P. Frissora

I think to answer your question specifically, Rich, fourth quarter, you know, versus third quarter you should probably see some kind of pricing improvement. That’s our best guess right now.

Richard Kwas - Wells Fargo Securities, LLC

And then last question, Mark. In terms of the guidance you mentioned that you think it’s going to be up in the upper end of the range there that you’ve provided. What could kind of derail that forecast right now, knowing what you know?

Mark P. Frissora

Not a whole lot. I mean, you know, we’re pretty confident in that, you know. So I guess we feel like our assumptions that we’ve built into the fourth quarter for U.S. rent a car seem to, as I mentioned to all of you on the call, seem to be very conservative based on what we’re seeing. So I mean that would have to, like I said we built in conservative assumptions to build our guidance, right? So, you know, unless the bottom were to drop out in the U.S. and Europe rent a car markets and we were already very conservative, assuming continued volume degradation year-over-year into the fourth quarter, you know, unless again there’s something that crashes and burns here we feel pretty comfortable with our guidance.

Richard Kwas - Wells Fargo Securities, LLC

So some kind of meaningful macro shock over the next [inaudible].

Mark P. Frissora

Yes. Yes exactly.

Operator

Your next question comes from [Sam Epibonya] – Colonial Management. Please go ahead.

Mark P. Frissora

Hello Sam. Sam, are you there? Okay.

Operator

Moving on to the next question, it comes from the line of [Matthew Sporer] – Strategic Value Partners.

[Matthew Sporer] – Strategic Value Partners

I had a quick question about sort of where you saw the de-fleeting that’s been going on. And I think you mentioned it briefly, but the associated depreciation and amortization or the depreciation on the fleet itself, and how you saw sort of trending for the remainder of the year? If you saw?

Mark P. Frissora

On rent a car?

[Matthew Sporer] – Strategic Value Partners

Yes, sorry, on rent a car. How you saw depreciation changing with respect to the size of fleeting. If you saw the fleet was going to be about 15% smaller for the remainder of the year, would you expect that depreciation should follow that?

Mark P. Frissora

No, I did not say. I said that if in the fourth quarter and probably part of the third quarter that our fleet size would instead of being down 15% would be down in the range of 5 to 8%. And then in terms of our year-over-year depreciation per vehicle, we expect that to be down year-over-year in the U.S. on a full year basis, probably in the neighborhood of 1 to 2% down year-over-year for the full year in the U.S. by the time we get through with our fleet [audio impairment], you know, into the fourth quarter. Okay?

[Matthew Sporer] – Strategic Value Partners

Okay.

Mark P. Frissora

As you know, depreciation per vehicle was up in the second quarter somewhere in the range of 7 to 15% in Europe, but if you look at the slides you’ll see that. And now we’re saying you can do the math on this. If we’re going to be down for the full year 2% in depreciation per vehicle in the U.S., that’s showing significant improvement in depreciation and cost per vehicle that we anticipate going forward.

[Matthew Sporer] – Strategic Value Partners

Sure. But in aggregate, depreciation should continue to come off for the entire fleet as the size of the fleet decreases, even if there is going to be small up ticks.

Mark P. Frissora

Yes. That’s correct.

Operator

Your next question comes from Gentry Klein – Cedrus Capital.

Gentry Klein – Cedrus Capital

Just following up on the last question. On the rack side, I know you obviously expect depreciation to be down meaningfully for the rest of the year on a per vehicle basis. Can you break it out in terms of whether that’s the decline is how much of it’s based on mix versus an increase in [resid] values?

Mark P. Frissora

You know in terms of mix we’re not changing it that much. It’s changed, you know, in the last 12 months because of the leisure market. But a lot’s just declined in the overall price of the vehicle. And you’re right, residuals will certainly be stronger year-over-year than they were in the third and fourth quarter. So I don’t have an exact, you know, number for you but.

Elyse Douglas

The model year mix will improve, right? So as we cycle in more 2009 model year cars and less 2008 that’s going to drive that depreciation per car cost down.

Gentry Klein – Cedrus Capital

I guess what I’m wondering is how much of the decline in depreciation is due to the new model year versus the increase in [resid] values on your current fleet. Didn’t know if you had a sense of that.

Mark P. Frissora

If I were to guess it, you know, it’s probably 50-50. You know, 50% of it’s due to the decline and then the pricing of the new fleet. The other 50% would be due to better improved residual buys. And I’m hazarding a guess here by giving you rough math. Okay?

Gentry Klein – Cedrus Capital

Also you said you gained market share. Can you tell us who you were taking it from?

Mark P. Frissora

No. I don’t try and talk about competitors or market share. But I’m just talking about in GDS there’s something that’s out there that we can get real time market share on and in June we looked at GDS third party market shares, which is about in U.S. rent a car it’s probably 35% of our volume, 30 to 35%. And we’re showing improvement there, right? So we’re showing, you know, that’s not an area we’ve typically improved in because it’s third party stuff. But we almost had a full point improvement in the month of June which is significant for us.

Operator

Your next question comes from Chris Doherty - Oppenheimer & Co.

Chris Doherty - Oppenheimer & Co.

Mark, can you just clarify your comment in terms of HERC demand seasonally? Is it that you’re not seeing the historic pick up or is it that you’re not seeing any pick up at all seasonally?

Mark P. Frissora

Well, if we’re talking second quarter what we saw was flat, right? So instead of having a pick up in the second quarter like you’d normally expect, right, it was basically a flat environment where the deterioration year-over-year did not change. It stayed at a constant rate of deterioration. And that has continued actually into July. So we’ve had a fairly flat environment where the year-over-year decline is the same. It’s flat. Now we were hoping obviously that in the second quarter we’d start seeing a pick up, you know, with the season and we did not see that. Okay?

Chris Doherty - Oppenheimer & Co.

In terms of actual volume, Q2 was better than Q1.

Mark P. Frissora

It improved versus Q1 sequentially a little. Jerry?

Gerald A. Plescia

So net volume was down because we did see the decline monthly through the first quarter.

Mark P. Frissora

Right. Pricing drove about probably how much of the decline?

Gerald A. Plescia

300 basis points.

Mark P. Frissora

About 300 basis points of decline was due to pricing for the second quarter versus the first quarter.

Gerald A. Plescia

That’s right. Volume which ended the low point at the end of the first quarter flattened out the rest of the quarter, so on average we had lower net volume and lower pricing.

Mark P. Frissora

Did you hear Jerry?

Chris Doherty - Oppenheimer & Co.

Yes.

Mark P. Frissora

Okay, good.

Chris Doherty - Oppenheimer & Co.

And then Elyse just a question. I know there was some disclosure in the press release yesterday about change in accounting for CapEx. Can you just clarify that? My understanding is that right now when you guy a piece of equipment it becomes a CapEx item. And then when you pay for it, the fact that you pay for it or don’t pay for it is a balance sheet item in working capital. And that would be cash flow from ops. Now what you’re going to do is you’re going to sort of net that together in CapEx. Is that what the plan is?

Elyse Douglas

It’s actually, what we do today is exactly what you said. So the working capital piece goes in the operating cash flows and the actual equipment piece is in investing. And we’re going to now include them both in the investing category. So in a sense, you gross up the investing piece when you buy the equipment and then the working capital piece gets filtered out when you actually pay for it.

Mark P. Frissora

No change to overall totals on that.

Elyse Douglas

Yes. On the net cash flow it doesn’t have an impact.

Chris Doherty - Oppenheimer & Co.

If you were to have done that, stayed with the old accounting, can you tell us what that effect would have been for this quarter?

Elyse Douglas

Do we have that number for this quarter? I don’t know if we calculated. It would have been small for this quarter. I think the biggest difference is in the first quarter and that’s going to be fully disclosed in the Q.

Chris Doherty - Oppenheimer & Co.

And then just one last question in terms of rotating the fleet. I think Mark yesterday you made a comment in your interview that you’re bringing down the average age of the fleet sales from around 20 plus months to 14 or 15 months. How much of that started in Q2?

Mark P. Frissora

Yes. What we’re saying is we typically aged the fleet at 20 from an amortization standpoint it’s around 20 months, 21 months. What’s the exact age in QS? 20.5 right now. So what I said was that over the next 12 to 18 months that age is going to come down, probably in the neighborhood of 17 months roughly. Again it’s hard for me to get real prescriptive on this because it’ll be based on demand and if demand improves we’ll bring it down faster. But at this point kind of our plan would be that the age of that amortization, which means the fleet becomes if you will newer, would be going from around 21 to about 17. And we’d make it faster than that again if we had higher demand.

Chris Doherty - Oppenheimer & Co.

Will that negative effect your working capital in that you’re going to sell more of it quicker, in which case it may go to AR and stay in there for a period of time? I know it also has to depend on what the prices are and the prices are probably different versus selling at 20 months versus 15 months.

Mark P. Frissora

I don’t have an answer on that, but I mean we can get with you after the call. If you want to call us or call Elyse and we’ll answer the question and do the math with you on it. But in general, you know, certainly cash flows on a total net basis have improved because we’ve de-fleeted, right? So if you start growing the fleet again, you know, there’s lumpiness, you know, quarter to quarter as you grow it. In one quarter receivables and payables become out of balance and then they fix themselves in the subsequent quarter. So one of the reasons for our stronger cash flows, certainly over the last couple of quarters, has been twofold. One, because we’ve been de-fleeting and selling that fleet. That generates cash. We’ve been buying less fleet at HERC, which has been, you know, generating incremental free cash flow on a year-over-year basis.

But then also we’ve been improving in some cases depreciation. So it’s helped in that sense as well. Residual values have improved significantly. So I’m just trying to give you the moving pieces. In general the company was generating probably before the recession, you know, a free cash flow on a base of $400 million a year. We think it’ll be improved from that once we get out of this recession, we get to normalized volumes, but that was kind of the steady stay, free cash flow business model before we started seeing a recession.

Operator

Your next question comes from [Myra Lee – Frese].

[Myra Lee – Frese]

One of my questions has been answered but my other question has to do with can you give more color on the business volume? You said it’s stabilized. Are you going to maybe use price to maybe regain some more business or just kind of wait it out?

Mark P. Frissora

Well again in terms of business volume, and again did you talk rent a car or HERC?

[Myra Lee – Frese]

Oh. Sorry. Rent a car.

Mark P. Frissora

On rent a car? Well again on business volume, my best way of explaining it I guess without giving a forecast of revenues other than what we’ve already given out there is to tell you that the fleet is going to be less down in the fourth quarter. It’s down 15% now and in the U.S. transaction days were down. They were down minus 10.8, minus 11, okay? So transaction days are what you use to calibrate your fleet. Right? They were down, transaction days which are a good measurement of volume, were down almost 11 and our fleet was down 15. So if you do the math, if our fleet’s going to be down 5 to 8 that means that, you know, transaction days are going to be down accordingly as probably keep that correlation the same. You know because we have about 350 basis points of fleet efficiency we think will continue to bleed into the numbers going forward on rent a car.

Operator

Your next question comes from Ryan Brinkman - J.P. Morgan.

Ryan Brinkman - J.P. Morgan

In regards to the $361 million in cost savings year-to-date that has allowed the profit retention to perform as well as it has, how should we think about this performance going forward as revenue begins to return? For example, can you help us think about what portion of this cost reduction, especially in SG&A, relates to the permanent removal of fixed costs?

Mark P. Frissora

We probably believe that, you know, we have around 700 basis points of cost reduction right now. And our breakeven’s probably 6 to 700 basis points lower than it used to be. I guess in terms of actual fixed costs, my guess is about 300 basis points of fixed costs have been eliminated. However, I’d hazard a guess. Now I haven’t done the math on it because we haven’t taken all of our cost structure and identified what’s variable, semi-variable, fixed and semi-fixed and done the mathematical calculation there, so I don’t want you to.

But about 300 basis points at least of fixed costs have probably come out of this business. So we feel pretty good about our operating leverage going forward on increased volume. I mean you’re seeing margin expansion on 15% reduced sales in the rent a car business. Actual margin expansion. I mean that’s significant. So you can imagine that once we get to normalized volume levels like we had in ’07, you know, there’s going to be significant margin expansion because of the fixed costs take out that we’ve had.

Ryan Brinkman - J.P. Morgan

Okay. Thanks. I appreciate that.

Mark P. Frissora

[inaudible] a lot better at controlling our variable costs as well. You know, a much more fast way. So to flex up and down we’re fine. Okay?

Ryan Brinkman - J.P. Morgan

Great. Thank you.

Operator

Your next question comes from Yilma Abebe - J.P. Morgan.

Yilma Abebe - J.P. Morgan

One housekeeping item. What was the amount of spending both LC’s and then borrowings on the ABL? Is that current?

Elyse Douglas

I think that letters of credit were about $200 million plus and there’s no outstanding at quarter end under the ABL.

Mark P. Frissora

I think that’s all the questions. Operator?

Operator

Okay.

Mark P. Frissora

All right. So thank you all for attending the conference call. We look forward to giving you future news. Thank you all.

Operator

Okay 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.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!