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Hertz Global Holdings (NYSE:HTZ)

Q2 2013 Earnings Call

July 29, 2013 9:30 am ET

Executives

Leslie Hunziker - Staff Vice President of Investor Relations

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

Elyse Douglas - Chief Financial Officer and Senior Executive Vice President

Scott P. Sider - Group President of Rent A Car - Americas Region

Analysts

Brian Arthur Johnson - Barclays Capital, Research Division

Michael Millman - Millman Research Associates

Christopher Agnew - MKM Partners LLC, Research Division

Adam Jonas - Morgan Stanley, Research Division

Afua Ahwoi - Goldman Sachs Group Inc., Research Division

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

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

John M. Healy - Northcoast Research

Operator

Welcome to the Hertz Global Holdings Second 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 statement informed -- relayed on this call speaks only as of this date, and the company undertakes no obligations to update the information to reflect changed circumstances.

Additional information concerning these statements is contained in the company's press release regarding its second quarter results issued this morning and in the Risk Factors of the Forward-Looking Statements section of the company's 2012 Form 10-K and the 2013 Form 10-Q quarterly reports. 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 August 12, 2013.

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

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 on the Investor Relations page.

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 the Hertz Global Holdings, Inc., the publicly-traded 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 Citigroup Industrial Conference on September 18 in Boston, the MKM Leisure Conference on September 26 in New York City and the Deutsche Bank Leveraged Finance Conference on October 1 in Scottsdale, Arizona.

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, Group President of Rent-A-Car International; and Lois Boyd, Group President of Hertz Equipment Rental Corporation. They'll 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. Hertz once again delivered record quarterly results across the board. As you can see on Slide 5, consolidated adjusted pretax income and margin were the highest of any second quarter in our history, increasing 35% and 110 basis points year-over-year, respectively, on a 22% revenue gain.

On Slide 6, key top line drivers include: The addition of Dollar Thrifty revenue; 12% revenue growth in U.S. off-airport rental car; 16% growth in Donlen revenue to $134 million; and 17% more equipment rental revenue in North America, excluding FX year-over-year.

Supporting the earnings flow-through, on Slide 7, was: Consolidated cost savings of $50 million from continuous improvement programs; 6% and 8% increases in employee productivity for global car and equipment rental, respectively; installation of 70 video kiosks, bringing the total to 438 worldwide; a 230 basis points improvement in North American equipment rental time ute; and integration actions that are tracking ahead of plan.

Now let me run through the highlights by business unit, starting with U.S. rental car on Slide 8. Total revenues grew 34% year-over-year, driven by 30% higher volume and a 3% increase in total revenue per day. Total revenue per day, which includes all ancillary items, increased both on- and off-airport, as you can see on Slide 9.

For the Hertz brand, commercial pricing was up 1.8% in the second quarter, while airport leisure total RPD was up 4.4%.

In the off-airport segment, total RPD was up 1.3%, driving total revenues 11.6% higher. Within the off-airport, replacement revenues represented 33% of the total and 17% more revenue year-over-year due to the expansion of existing accounts and 44 net new locations. Off-airport is a key growth opportunity for us, with currently only a 13% market share.

On Slide 10, fleet efficiency was 79% in the second quarter, which is down from last year because we no longer have Advantage. We've lost the efficiency that came from sharing the fleet. Remember that Advantage was fully streamlined with the Hertz fleet, counter systems and facilities enabling us to optimize utilization. With Dollar Thrifty, that part of the integration won't be completed until the end of the first quarter next year. As a result of that acquisition, we have roughly 41% more vehicles, which temporarily impacts utilization as we work to integrate that incremental fleet. However, we're already capturing synergies as evidenced by the fact that Dollar Thrifty's utilization has increased every single month since it was acquired by Hertz.

For all brands in total, we expect to begin seeing utilization improvement by year end.

On Slide 11, U.S. monthly depreciation per unit was $218, compared with $213 a year ago, primarily due to a tough car sales comp. In the 2012 second quarter, we reported a gain on fleet sales of $44 million due to record high residual values. This year, residuals are coming off their historic peak, as the number of off-lease vehicles is increasing faster than expected, as the automakers offer their customers buyback incentives.

Also, the industry has more risk cars to sell. For Hertz, our risk mix was 95% in the second quarter, compared with 75% last year. The Manheim Index declined 4.4% on average year-over-year versus Moody's forecast of a 2.2% decline.

On Slide 12, the good news is that while auction values were the hardest hit in the second quarter, retail values held flat, so we shifted as much supply into the Rent2Buy in our car sales lots as possible. In the end, we sold 44% more units through retail this year compared with the similar quarter last year. Another good sign is that residual values have improved sequentially since May. And this month, we saw auction inventories tighten again.

Overall, direct operating and SG&A expenses as a percent of revenue were down 60 basis points in U.S. rental car in the latest second quarter. Adjusted pretax income was up 35% versus last year. In total, it was a strong quarter across all segments of U.S. Rent-A-Car.

Moving to Slide 13. For Hertz, things are improving in Europe. If you exclude our 2012 second quarter Switzerland revenue as if it were already franchised, total European rental car revenue was up almost 4% year-over-year, excluding the impact of currency. This represents a stabilization after almost 2 years of decline. Volume was up 3% and pricing increased nearly 1%. If you also exclude the discounted Firefly rentals, total pricing was an improvement of 3.3% year-over-year.

In the second quarter, we opened 137 co-branded Thrifty locations in France, Spain and Benelux. Our goal is to open an additional 20 Thrifty locations by year end. We'll also be opening another 5 Firefly locations to address the higher demand in the deep-value segment, bringing that network to 38 corporate and 7 franchise locations by year end. And we recently acquired CCL Vehicle Rentals in the U.K., which provides us with an entry point into the $1.5 billion insurance replacement market.

Now let's talk about the equipment rental business on Slide 14. Its string of year-over-year double-digit growth continued, with rental revenues up 17.4% in North America, excluding FX, and 16.7% in the U.S. in the second quarter. North America represented 93% of total equipment rental revenue. Based on the equipment rental market's projected 7% growth rate this year, according to the American Rental Association, we continue to significantly outperform the North American market's growth rate. The top line increase is being driven by continued strength in oil and gas, industrial and specialty markets, and the early beginnings of the construction recovery.

Our North American construction revenue was up 21% in the second quarter. The Architectural Billings Index continues to trend well, a positive sign for our business. And the construction loan pipeline continues to show positive momentum. In fact, construction loan commitments at March 31, which is the latest data available, were up about 30% year-over-year. We're well-positioned to take advantage of the construction upturn and the fleet investments we made last year and in the 2013 first half.

In the second quarter, total pricing in North America increased 4%, with noncontracted pricing up 4.5%. National accounts represented 53% of second quarter rental revenue. The 18% higher volume in North America benefited from greater overall rental penetration, as more companies turned to renting versus buying equipment.

Having the newest fleet in the industry and entry into new markets and geographies through small strategic acquisitions is also driving the revenue growth and better fleet utilization. In the quarter, time ute improved by 230 basis points in North America, while dollar ute increased by 120 basis points.

Overall, for the company in total, our second quarter results were in line with our expectations, keeping us on track to deliver on our 2013 financial goals. In a minute, I'll give you some thoughts on operating trends for the back half of the year.

But first, let me turn it over to Elyse to provide more detail on our financial performance.

Elyse Douglas

Thanks, Mark, and good morning, everyone. Let's start on Slide 16. For the second quarter of 2013, we achieved record second quarter earnings per share on both a GAAP and adjusted basis. GAAP earnings were $0.27 per share, an improvement of $0.06 versus the 2012 second quarter. Strong revenue growth was a major contributor.

Worldwide rental car revenue was up 23%, driven by the addition of Dollar Thrifty, strong volume growth and overall better pricing. And revenue for the equipment rental business grew 14.7% worldwide, driven by a strong North America performance.

For the consolidated company, total expenses as a percent of revenue decreased 60 basis points. Driving this improvement was an 80-basis-point decline in operating expenses as a percent of revenues, reflecting the continued improvements in pricing, employee productivity and synergy realization. Lower depreciation expense also contributed to the lower cost base.

Worldwide rental car depreciation per unit was down 1.8%, excluding FX. And depreciation as a percent of worldwide equipment rental revenue was down 70 basis points on 12% more fleet.

As a result, worldwide corporate EBITDA improved 33% to a second quarter record of $540 million, equally driven by rental car and equipment rental. Margin improved 160 basis points over the prior year period.

Turning to Slide 17. Corporate EBITDA margin for worldwide equipment rental increased 470 basis points to 43.1%. Corporate EBITDA flow-through for equipment rental was 80% in the latest quarter, primarily due to onetime items that were a disadvantage last year. You may remember in the second quarter of 2012, we were impacted by legal settlement costs. Not having those costs this year added about 12 percentage points to flow-through. In addition, year-to-date earnings benefited from a greater amount of new fleet. About 2/3 of this year's equipment order was received in the first half, as well as our decision to push some first half spending into the second half.

For the full year, we now expect flow-through to be 60% to 65%, as we continue to add sales force, open new greenfield locations to support our clients and markets, improve technology to drive customer satisfaction and invest in development programs for employees.

For the company in total, adjusted pretax income improved 34.5% in the quarter, and adjusted earnings per share marked a second quarter record of $0.45, up $0.10 or 30% over last year's results.

Moving to Slide 18. The second quarter consolidated net interest expense was flat as a percent of revenue, but up $30 million year-over-year. This increase is due to the incremental debt related to the Dollar Thrifty acquisition, which also drives the cash interest expense increase of $32 million year-over-year. For the full year, we expect cash interest to increase by approximately $100 million over 212 (sic) [2012]

, slightly below our earlier estimate.

Now I want to take a minute on Slide 19 to address the potential impact to Hertz from rising interest rates. We've been getting a lot of questions on this topic recently. The bottom line is that we don't anticipate a negative impact for at least the next couple of years and here's why: Of the $1.2 billion of fixed-rate U.S. fleet debt that matures between now and the end of 2014, the interest rates range from 2.8% to 5.4%. This is significantly higher than the 1.8% current indicative rates for 3-year term ABS notes. At the indicative rate, annual refinancing savings would be approximately $18 million on a pretax basis.

Additionally, we have the opportunity to call and refinance our 8.5% secured euro notes at an indicative rate around 5.25%. This lower rate translates into $17 million per year in interest savings. We're currently evaluating whether it makes sense to pay the call premium today or wait until the bonds are callable at par next summer.

And finally, with respect to our maturing floating rate debt, short-term rates have not increased. The current market consensus is that the Fed and ECB will not increase them until late 2014 at the earliest.

Now let me talk about cash flow on Slide 21. For those of you that are new to our story, we implemented a new cash flow format in the first quarter. Basically, this format highlights our key operating and investment items that drive free cash flow, which we define as cash available for us to pay down debt, make acquisitions or return to shareholders.

Starting in the middle of the slide, year-to-date operating cash flow was $264 million. This represents a year-over-year improvement of $84 million, driven by strong earnings growth, partially offset by higher working capital requirements.

Net investments of $669 million were $303 million higher than the same 6-month period last year. This increase was due to seasonal fleet growth for Dollar Thrifty, which we did not have last year. Additionally, we increased equipment rental fleet growth in the first 6 months this year over last year and we made incremental nonfleet investments to fund technology initiatives and rental car facility upgrades.

As is typical, cash flow will begin to build with the third quarter rental car defleeting. And by year end, we expect to have generated free cash flow of $500 million to $600 million for 2013.

Moving to Slide 22. We purchased $425 million of fleet for our equipment rental business in the first half of 2013. For the full year, we expect our growth spend on equipment rental fleet to be between $650 million to $700 million, and our net spend to be between $450 million to $500 million.

On Slide 23, our net corporate debt to corporate EBITDA leverage ratio was 3.7x. However, if you include a full year of EBITDA for Dollar Thrifty, the pro forma ratio would be 3.4x, and the leverage ratio drops to 3.1x using the full run rate cost synergies.

Finally, our liquidity position remains strong at $840 million at the end of the quarter.

With that, I'll turn it back to Mark.

Mark P. Frissora

Thanks, Elyse. Let's move to Slide 25. In U.S. rental car, demand signals are mixed, our off-airport volume is up 14% month-to-date, while airport demand continues to track at a low single-digit rate. The airport demand is being impacted by the sequester, and we believe airline capacity constraints and the associated higher fares. Moreover, on the residual front, Moody's is projecting the Manheim Index will decline 1.9% in the third quarter and 2.9% in the last 6 months of 2013, compared with the similar period last year. Fortunately, Dollar Thrifty revenue synergies from partners like AAA, JetBlue and Marriott are already making a contribution, and we're leveraging the flexibility of our model and capitalizing on the diverse initiatives we've undertaken to drive incremental revenue and profit stability.

For example, our key top line drivers continue to generate double-digit growth. In rental car, rising fleet costs are manageable, as we capitalize on a favorable mix shift and consumer direct resale channels to capture the highest returns. We now have 43 retail car sales lots, up from 14 at this time last year, and we're planning to add 57 more by year end.

In addition, the Dollar Thrifty integration is tracking ahead of plan. Our initial technology rollout in the U.S. is generally -- generating favorable reviews. The equipment rental recovery continues at a steady pace and we believe that there is some nonresidential construction momentum building. And our cost saving should exceed our target of $300 million at the current run rate.

As a result, our full year guidance, as outlined on Slide 26, stands. However, we remain cautious about the economy. We recognize the leverage on this business is large, as you can see on Slide 27. But you have to remember that sensitivities work both ways, so we'll continue to be prudent in our assumptions.

Finally, I want to give you an update on the rollout of our 24/7 technology. As of June 30, we've installed now 35,000 vehicles in our U.S. fleet with our patented Telematics system. That puts us on track to meet our goal of having 70,000 cars available for self-service rentals off-airport by year end.

With that, let's go ahead and open up the call for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Brian Johnson from Barclays.

Brian Arthur Johnson - Barclays Capital, Research Division

Just want to drill down with 2 questions on fleet costs. If we look at the difference between your prior guide of minus 4% to 5% and your new guide of down 2% to 3%, what portion of that headwind is relative to where you were earlier? Is DTG related, auction related, perhaps slower ramp of retail lots? And then the second question is on housekeeping. Can you remind us of the gains on sale in 3Q and 4Q of 2012, of last year, so we can get a finer, sharper pencil in modeling year-over-year fleet costs in those quarters.

Mark P. Frissora

Okay. Well, on the fleet cost issue, going from 4% to 5% to 2% to 3%, I think the only issue is that the residuals that we saw, the drop if you will, that we saw in kind of the April-May time period was more than we thought it would be. However, the good news is the residuals on the, what we call, retail side, have pretty much stayed flat. So we've been accelerating our plans at retail to obviously take advantage of that strong market. The year-over-year hurdle for us in the second quarter is fairly large. I think that we made -- someone tell me here in the room, what did we make last year in the -- we made $44 million in car sale gains last year in the second quarter. And this year, we generated, how many in losses total? $11 million?

Elyse Douglas

About $10 million.

Mark P. Frissora

Ten? Roughly about $10 million. So it's about a $54 million year-over-year hurdle to overcome. And obviously, we overcame it and still had significant, what I call, significant earnings improvement year-over-year. That's the toughest comp for the whole year, Brian. We're not going to have anything like that in the third or fourth quarter. So we just thought it was prudent for us to take the net depreciation per unit to 2% to 3% versus the 4% to 5% that we had based on what we saw was a drop. It was a little bit more than we anticipated in the second quarter. So that's why we took it down, just to be prudent.

Brian Arthur Johnson - Barclays Capital, Research Division

Okay. And you don't benefit from the better pricing and rental residual?

Mark P. Frissora

Can you speak up a little bit, Brian? I'm having trouble hearing you.

Brian Arthur Johnson - Barclays Capital, Research Division

Yes. Do you benefit at all -- it looked like the Manheim numbers continue to diverge between rental consignments and overall market. Isn't that providing somewhat of an offset to the headline Manheim?

Mark P. Frissora

No. That does not -- I mean, not for us, no. I mean, again, we're not -- again, I don't think -- everyone's like worried about this 4% to 5% to 2% to 3%. It's like -- it's all in the rounding error here. I mean, we could come in at 4% to 5%. I'm just -- we took it down just because we saw them being a little weaker, but they've actually stabilized since then. So I'm not -- again, it's something that we're not concerned about, but we thought it was prudent to bring it down, given that it was a little weaker. We've seen signs that it has stabilized for the cars that we sell. So in order to offset anything, we've decided to sell more cars at retail in the second half of the year, so we did accelerate some plans. But again, we feel -- overall, we feel pretty good about the residual market.

Operator

Our next question is from Michael Millman from Millman Research.

Michael Millman - Millman Research Associates

You mentioned that you expect volumes to be softer than expected, you gave some reasons. Related to that, are you expecting to reduce your fleet? Do you see the industry reducing fleet in line with that? And my other question relates to, to what extent is there any prohibition against you buying a discount brand or making a capital expenditure of some other brand in the U.S.?

Mark P. Frissora

So in terms of the first question around the fleet, we certainly are tightening our fleet and always do so if we see any kind of a volume softening in the environment. So yes, we're definitely tightening our fleet and always try to do so if we feel there's any softness in volume. In terms of the other question, I can't comment on any kind of acquisitions. It's just pretty much against our company policy to do so.

Michael Millman - Millman Research Associates

Well, the question wasn't whether or not you're making it. It is, is there any prohibition, an FTC-type prohibition, for example?

Mark P. Frissora

I think the FTC prohibition on making any other buy, there is none. In other words, we don't have any prohibition on making other acquisitions. But if we were to make an acquisition over $50 million, I think that's the threshold that the FTC has and roughly, roughly, that doesn't require FTC review. So acquisitions over $50 million do require FTC review for the most part so -- but we have no prohibition after making the Dollar Thrifty acquisition at all.

Michael Millman - Millman Research Associates

And how much are you tightening the fleet?

Mark P. Frissora

I'm not going to talk about operating statistics with you, Michael. So I mean, we tighten the fleet based on where we see, by market, demand. So the issue is that the overall retail environment right now and leisure environment for consumers has softened. That's pretty consistent with everything you will see and hear in the retail environment. So I think there's a lot of retail statistics to support the notion that consumers are a little tighter right now. And the sequester impact has been fairly significant in the commercial sector. Anything that's related to the government, as well as the government business itself, has been weaker. Those accounts that are tied to the government are traveling a lot less, and so overall, that's -- those are the primary drivers. It's more of a economy; it has nothing to do with Hertz. We're not losing share or anything. So it's the overall economic environment that we're seeing right now.

Operator

And our next question is from Chris Agnew from MKM Partners.

Christopher Agnew - MKM Partners LLC, Research Division

Wanted to ask, with guidance maintained, but fleet costs worse, a little bit worse, what is the offset in your assumptions? And also, why are you still not baking much pricing into guidance, given that worldwide pricing was up 1.2% in the second quarter and 2.6% in the first quarter. Are you seeing a deceleration into the second half of the year?

Mark P. Frissora

Well, I think that when I talked about the softness versus where we thought it would be in the first half, we talked about 2 things: One was volume-related and the other one was fleet cost, right? And our costs are down year-over-year. Just to make sure, I repeat that to everyone. They are down year-over-year. So -- but they're not down quite as much maybe as what we thought. But we don't know that, for sure, right? These are all estimates. The point that I'm making is that the offsets to that are everything that we kind of talked about. Pricing is one of those offsets. Obviously, pricing helps us offset a little bit of an increase in fleet cost. And then the same thing, it helps us offset any volume softness. So that's kind of the primary offsetting factor. And then the other things are around the synergies that we have from Dollar Thrifty. Those are coming in ahead of plan. I mentioned that earlier. So pricing, certainly, in equipment rental sector is better than we anticipated as well. So that helps us offset some of the softness we're seeing on that side as well.

Christopher Agnew - MKM Partners LLC, Research Division

And maybe just one little follow-up. I'm not sure if this is just a pro forma calculation, but if I look at your 6 months year-over-year pricing metrics, they seem to be hard to calculate given the first 2 quarters. So for example, you're up 1.2% and 2.6% worldwide pricing, but your 6-month metrics are 0.3%. Is that just some sort of pro forma adjustment?

Mark P. Frissora

I don't know. I guess we're checking. There may be an error in the math. We'll correct it if there is. So we're investigating that right now. We just got the question 0.5 hour ago. So we're checking into it and we'll make sure that we give communication out on that.

Operator

And our next question is from Adam Jonas from Morgan Stanley.

Adam Jonas - Morgan Stanley, Research Division

Just to follow up on that pricing math. Let's -- if you assume that the -- that we are up around 2% year-to-date, which would be the individual -- taking individually first quarter and second quarter RPD numbers for U.S., it does suggest that leaving your pricing flat assumption on Page 27 of the presentation that -- are you -- is this conservatism in the second half or otherwise mathematically, we would have to have some at least clearly negative pricing. Is that part -- is this difficult comps, is there any kind of message there?

Mark P. Frissora

No, not at all. We don't have any, I guess, assumptions that pricing is going to be down in the second half, although that would suggest that. Again, we're just being consistent with our guidance and didn't change it, if you will. Although there could be upside, obviously, I think there's conservatism built in that. And it was just a plug and it was conservative. So I guess, that's the way to explain it.

Adam Jonas - Morgan Stanley, Research Division

That's a very good explanation. And just a follow-up, can you comment on the average age of your U.S. car rental fleet in months, terms, roughly and maybe where we were a year ago, kind of where that is versus normal or -- I know you gave the data for the equipment side, but for car rental would be helpful.

Mark P. Frissora

I don't know if we have it. Let's see, for U.S., they're giving it to me right now. Right now, the average is about 9.3, we think. And last year in 2012 overall was 8.8 -- on months. These are months, right?

Adam Jonas - Morgan Stanley, Research Division

9.3 months average and it was -- last year again was what?

Mark P. Frissora

8.8.

Adam Jonas - Morgan Stanley, Research Division

8.8. And any way to contextualize that?

Mark P. Frissora

Yes. Dollar Thrifty's fleet was a lot older than ours, so that's one thing. So when you look at Dollar Thrifty fleet, when we got that, inherited that fleet, it was an older fleet than our fleet was. That was part of it.

Scott P. Sider

Right. Our risk cars year-over-year are actually younger. They're 9.4 months old versus 9.5 last year. We don't have the nonrisk cars, which are much younger in life. But our risk fleet is actually a little bit younger than last year.

Mark P. Frissora

Yes, you got that, Adam? So the risk cars are now 95% of the total mix. And so when you life those versus the program cars, it'll give you a longer life.

Operator

Our next question is from Afua Ahwoi from Goldman Sachs.

Afua Ahwoi - Goldman Sachs Group Inc., Research Division

Two questions from me. First on the U.S. Rent-A-Car side, I noticed that the airport rental length was negative this quarter. We haven't seen that for a while. And so I was wondering if maybe you could speak to what is driving the negative rental length. I know for a while that had been a positive tailwind. And then separately in Europe, can you describe maybe which market you're seeing the strength out of? Is it commercial or leisure? Is it Northern Europe versus the Med? And any color on maybe the pockets of strength or if it's more broad-based?

Mark P. Frissora

Yes, I'll answer the second question first and we'll research the first one for you. But on the second question, in Europe overall, we're seeing very strong leisure growth. In Spain, very dramatic growth there. Italy, very dramatic growth. The only area that's probably still very tepid in terms of its recovery is France. Germany is fairly, I guess, stable is the way I'd put in. But France is the only country where we're seeing some tepid growth. Everywhere else is growing. And then in leisure markets, we're growing very, very nicely in those markets, double-digit type growth. Everywhere else, kind of low single digits. And with France, kind of neutral right now, I think. I think we're pretty flat. Then on the first part of the question, I'm asking my team here. I'm looking at them. Guys, where do you think the length, could have been something that -- this is just the length on the airport or is it off-airport and airport combined?

Afua Ahwoi - Goldman Sachs Group Inc., Research Division

It's on the airport side. So on your slide, the slide which where you have the airport at Dollar Thrifty and then the off-airport, those bars.

Scott P. Sider

When you look at the airport, it's not even 1%. I mean, it's a rounding.

Mark P. Frissora

It's a rounding error, so it's really essentially almost flat?

Scott P. Sider

Yes, and then Easter moving to the first quarter, Easter being earlier hurt the life a little bit in April. So it's roughly flat year-over-year, the life at the airport.

Mark P. Frissora

So did you hear that on the seasonality piece?

Afua Ahwoi - Goldman Sachs Group Inc., Research Division

Yes, yes, I did. And actually, I had one follow-up on your answers to Europe. Those double-digit increases you're talking about, is that on a same sort same -- is that on a like-for-like or is it because you're also expanding the Thrifty locations?

Mark P. Frissora

On the double-digit increase in what?

Afua Ahwoi - Goldman Sachs Group Inc., Research Division

In leisure in Europe that you talked about. Is that a like-for-like or is that benefiting positively from the Thrifty?

Mark P. Frissora

I think that's it's primarily -- Dollar Thrifty has not kicked in yet, really. I mean, it started to a little bit in June but not much. Primarily, it's driven by some of our Firefly -- we opened up new -- we had Advantage last year and we switched it to Firefly. Those Firefly locations year-over-year are actually up a lot on a same-store basis even. They're up double digits. That's probably driving most of the growth in the leisure segments in countries like Italy and Spain. It's driven by this increase in that segment that was Advantage and now it's Firefly, okay?

Operator

Our next question is from the line of Rich Kwas from Wells Fargo.

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

So Mark, I know there's some moving parts within the guidance here. But it seems to me that there's not much material change in terms of the businesses here. So is that true what you're seeing here, not much of a material negative change, I should say, versus what you had been expecting. And I realize you called out a couple of different things here, but is that a fair comment to make?

Mark P. Frissora

Yes, I think the only thing that gives us any pause for caution is the volume side, the softness. And obviously, that's what I've called out here in the script and what we've been talking about. That's the only thing and we think we've got offsets to all of that. But volume was up significantly in the first quarter. And the Hertz Classic brand was up like 7-plus percent. In the second quarter, it dropped down to 4-plus percent. And third quarter, it's less than that. So it's low single digits. So the point is this volume level, we think, will improve. There's been some issues around it, but it's still an area that gives us a little bit of caution, be prudent with our guidance and be prudent with how we forecast our earnings. Now that was all airport I was giving you, airport Hertz Classic brand numbers. So we feel like that caution is something we should have in our guidance going forward. Yes, no surprises. Pretty much everything was in line. That's the only thing that we're a little cautious about, is the volume levels right now, the demand levels.

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

And that excludes all the Dollar synergies or revenue synergies, right?

Mark P. Frissora

That's correct. That's exactly right. It excludes all of that.

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

Okay. Just as a follow-up on the utilization. So I know you've got this headwind with Advantage, still comping against Advantage from last year and still integrating Dollar. And you said this will be fully complete by the first quarter next year. But progressively, as we move through the back half of the year, is there improvement on that front? How much improvement do you expect on kind of utilization from being further along with the Dollar integration or is that just not -- could that be room for upside or how should we think about that?

Mark P. Frissora

I don't -- for me, we're pretty well confident that in the fourth quarter we'll experience year-over-year improvement on utilization. We continue to work on that hard so -- but I don't want to predict in the third quarter improvement. We really want to wait until the fourth quarter to say we'll have solid improvement on utilization. And whether or not that's upside or not is yet to be determined.

Operator

Our next question is from Fred Lowrance from Avondale Partners.

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

Just on the first half pricing data that's in the release in Table 4. The biggest issue I see is suddenly 1.3 million domestic rental days have [ph] materialized in the first quarter that weren't reported. So that would look very odd on a year-over-year volume basis based on what's been going on with your business. So that's the big confusion on pricing, which has everybody so confused with how your pricing guidance can remain flat for the year. But I don't know if you had any explanation of that since you've been doing your research. But the second question I had was just based on the Moody's data that you're looking at for forecasting the Manheim, the down 1.9% in Q3, the down 2.9% in second half, has that been recently revised or is that something they came out with at the beginning of the year? Just trying to figure out if they're baking in maybe the little bit softer-than-expected performance here in the first half?

Scott P. Sider

It's the latest update.

Mark P. Frissora

It's the latest update that we have, the latest update that we have.

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

And then just on the volumes that would be implied by your first half numbers here in Table 4 of your release. Have you all been able to track down what that issue, because obviously that takes your pricing from about 1.8% for the first half to 0.3%.

Elyse Douglas

Yes -- no, no. We're researching it. As soon as we get to the bottom of it, we'll send something out.

Mark P. Frissora

Today, we'll send something out, okay. So after the call. The one thing that I will mention is that we really didn't talk about this on the call, but in terms of fleet cost, the cap cost of the cars themselves, we expect the buy for next year will be down year-over-year. I'm seeing signals of that. So we think that's a positive as it relates to net depreciation per vehicle. So I want to make sure that people know that and that's happening. And we feel like there's an opportunity here because residuals have softened. At the same time, there's a high correlation when that happens, that fleet costs go down, the actual cap cost. And that's exactly what we're seeing. So that is the buffer, if you will, to when residuals do soften. Fleet costs always go down and that is what we're experiencing right now.

Operator

And our final question will come from John Healy from Northcoast Research.

John M. Healy - Northcoast Research

Mark, I wanted to ask a little bit about the insurance replacement business. It continued to put up a really great quarter in terms of growth there. Can you give us some sources of where that volume growth continues to come from and for how long it can keep going at this rate? And then a question on, I don't know if you mentioned it, I might have missed it, but can you give some commentary about how leisure U.S. pricing fared in July on a year-over-year basis?

Mark P. Frissora

Yes. Well, I don't think we've been prepared to talk about July on leisure pricing. But in terms of -- I think, it's overall going to be positive, I will say that. So -- but in terms of our volume growth, we expect, through 2015, to have double-digit growth in off-airport. Our 24/7 technology we think will accelerate off-airport growth. And in addition to the off-airport, Donlen is increasing significantly double digit. We expect that to continue. Hertz certainly will be double digit, we think, for the foreseeable future. We've not hit, if you will, the peak nonres construction business. That nonres construction business is big for us. So we think there's big upside there. In terms of looking at the overall leisure space, with Dollar Thrifty getting turned on to all of our travel relationships, we think Dollar Thrifty has the potential also to be in a double-digit kind of environment over the next couple of years. So those are kind of our big growth drivers, the big chunks of them. In terms of pricing, overall, for discretionary or leisure business at the airports, we can say month-to-date, looks like that's up about 3%. So there's a little data on July, okay?

John M. Healy - Northcoast Research

Great. And then just one question on holding costs. I know you mentioned the average age of the fleet. But when you think about the length of hold, can you give some color on where your plan -- how long you're planning on holding these cars and if that assumption's changed relative to the beginning of the year?

Mark P. Frissora

I don't think there's been any assumption changes. I think we're in pretty good shape on length in terms of how long we're holding cars.

Elyse Douglas

The Firefly, we're extending the life...

Mark P. Frissora

Yes, the only thing, as we launch Firefly in Europe, we are extending the length of the car there. So if we get into the spartan segment, obviously, if we did that in the U.S., we would extend the length. So other than that, that's pretty much it on the aging. Okay. All right?

Operator

There are no other questions. Please go ahead with your closing remarks.

Mark P. Frissora

All right. Well, listen, with that, thank you all for attending this morning's session, and look forward to giving you progress reports in the future.

Operator

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

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Source: Hertz Global Holdings Management Discusses Q2 2013 Results - Earnings Call Transcript

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