Hertz Global Holdings Management Discusses Q3 2013 Results - Earnings Call Transcript

| About: Hertz Global (HTZ)

Hertz Global Holdings (NYSE:HTZ)

Q3 2013 Earnings Call

November 05, 2013 10:00 am ET

Executives

Leslie Hunziker - Staff Vice President of Investor Relations

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

David J. Rosenberg - Interim Chief Financial Officer

J. Jeffrey Zimmerman - Chief Compliance Officer, Executive Vice President, General Counsel and Secretary

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

Analysts

Christopher Agnew - MKM Partners LLC, Research Division

Michael Millman - Millman Research Associates

Afua Ahwoi - Goldman Sachs Group Inc., Research Division

Adam Jonas - Morgan Stanley, Research Division

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

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

John M. Healy - Northcoast Research

Brian Arthur Johnson - Barclays Capital, Research Division

Operator

Ladies and gentlemen, welcome to the Hertz Global Holdings Third Quarter 2013 Earnings Conference Call.

The company has asked me to remind you that certain statements made in 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 third quarter results issued yesterday and in the Risk Factors and Forward-Looking Statements section of the company's 2012 Form 10-K and 2013 Form 10-Q quarterly results. 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 and running through November 18, 2013.

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

Leslie Hunziker

Good morning. You should have all received 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 Hertz Global Holdings Inc., the publicly traded company. Results for the Hertz Corporation differed only slightly, as explained in our press release.

You've probably already noticed our new segment reporting, which is included in our press release tables. We changed our segment reporting primarily to increase the transparency of our U.S. rental car business, which has grown faster than any other unit, especially in light of the recent Dollar Thrifty acquisition. The new segments are U.S. rental car, which includes U.S. airport and off-airport businesses and Dollar Thrifty; international rental car, which includes Canada, Europe, Latin and South America, Caribbean, Australia and New Zealand; worldwide equipment rental; and then other operations, which includes Donlen Leasing and other business activities like our third-party claims management services.

With regard to the Investor Relations calendar, we'll close out the year presenting at the Barclays Auto Conference on November 12 in New York and the Bank of America Merrill Lynch Leveraged Finance Conference in Florida on December 3.

This morning, in addition to Mark Frissora, Hertz's Chairman and CEO; and David Rosenberg, our interim 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. I'm going to start on Slide 6. During the third quarter, we continued to see good progress from the strategic initiatives that will ultimately drive the long-term success of the company. Our U.S. off-airport operations generated 11% revenue growth, driven in part by 92 net new locations and a 14% top line increase in the insurance replacement business.

The rollout of our 24/7 technology is underway. We installed our proprietary Telematics package in 11,500 more cars in the third quarter. Donlen Leasing delivered another quarter of double-digit growth, increasing revenue roughly 10% in the latest period to $133 million. This was driven by a combination of new account wins and continued strong order activity from our core customers.

The equipment rental tuck-in acquisitions are allowing us to incrementally capitalize on the industrial recovery. HERC North American rental revenue grew 12.3% in the third quarter year-over-year, excluding currency. And the integration of Dollar Thrifty is on track, which I'll talk about in just a minute.

Finally, on Slide 7, from a structural cost perspective, our Lean/Six Sigma programs generated an incremental $89 million of efficiencies in the third quarter, bringing the year-to-date savings to $237 million.

Let me walk you through the business segment performance. If you turn to Slide 8, for the third quarter, U.S. rental car total revenue grew 33% year-over-year, driven by 28% higher volume and a 2% increase in pricing. Total rental car transaction days benefited from acquired and incremental Dollar Thrifty volume, as well as a 10.6% increase in overall off-airport rental demand. Longer rental transactions in our fastest-growing leisure and insurance replacement businesses resulted in more than a 3% expansion in average rental length.

Despite this strong overall performance, as you know, we ran into some unexpected volume headwinds in the U.S. rental car airport business in the third quarter. This had a domino effect on fleet efficiency and ultimately, consolidated earnings. For these reasons, we revised full year guidance in late September.

As you can see on Slide 9, for the Hertz brand only, total U.S. revenue at the airport, which excludes the Advantage sublease revenue, was essentially flat year-over-year on a 2.5% increase in total revenue per day. While pricing remains strong, airport volume fell short of our expectations. Transaction days for our largest business unit declined nearly 3% year-over-year in the third quarter versus our internal forecast of a 4% increase. That's a 7% negative variance in demand planning.

So what happened? Historic trends and economic forecast are the tools we use to estimate volume and set fleet levels. Last year, our third quarter 2012 airport volume was up roughly 3% year-over-year on a less than 1% increase in fleet as we tried to drive price. In hindsight, the customer demand was there for even more volume if we had, had the fleet to accommodate it.

Another data point we use to support our growth forecast is estimated GDP, which was projected to expand by about 2% for 2013. We typically grow rental car revenue 2x GDP, so 4% volume growth was reasonable. And as always, the third quarter fleet levels were based on the demand projection.

The negative 7% swing in forecasted airport volume year-over-year adversely impacted our revenue plan by more than $60 million. Since we were expecting higher volume and fleeted and staffed accordingly, most of the $60 million impact actually flowed through to pretax income.

Fleet efficiency in the quarter declined by about 300 basis points, primarily as a result of the excess fleet associated with the volume shortfall. Also contributing to the year-over-year decline were the loss of fleet-sharing efficiencies for Hertz due to the divestiture of Advantage, as well as an unusually high amount of fleet subjected to manufacturer recalls in the quarter. In Q3, we had 39,800 cars recalled versus 9,700 for the quarter last year.

The good news for the quarter is that pricing held up despite the excess fleet. Total revenue per day increased both on- and off-airport. For the Hertz brand, total airport commercial pricing was flat in the third quarter, while airport leisure total RPD was up 4%.

Pricing continues to move directionally with fleet costs, reflecting historical trends and reinforcing the high correlation between these metrics. Overall fleet costs for the industry are rising in general due to higher prices being charged by automakers last year and a correction in residual values due to a growing supply of used risk vehicles and the return of off-lease fleet.

While industry fleet costs are rising, Hertz' monthly depreciation per vehicle has declined year-to-date. This dichotomy led to some questions about our depreciation forecasting. So on Slide 10, let me explain how we set residual values for our risk fleet, which is consistent with how we've always done it.

For nonprogram or risk cars, we set depreciation rates by model and manufacturer with a goal of breaking-even when we dispose of the vehicle at the end of its expected holding period. These depreciation rates are straight-line to expense the holding costs evenly between the time of purchase and the expected time of disposal.

Depreciation rates are benchmarked against Black Book's estimated future values and our current and historical experience for the same or similar models. The depreciation rates can vary based on the negotiated discounts on the capital cost for manufacturers, the expected holding periods, the trim level of the vehicles, where the particular model is in its life cycle, which disposal channel is used, when and where the sales occurs and so forth.

Each quarter, we benchmark the entire fleet against changes in our fleet rotation, expecting holding periods and Black Book future value. And then we adjust our depreciation rates prospectively to ensure a breakeven position on the vehicles ultimately dispose off. This has been and will continue to be our depreciating -- depreciation accounting policy.

Note that there have been instances when we make decisions to dispose the fleet opportunistically to take advantage of a short supply situation in the used car market. This occurred, for example, in 2011 and 2012, when we generated total gains on sale of roughly $100 million in each of those years. There are also instances where we may have to dispose a fleet ahead of schedule because of a slowdown in demand, similar to what we saw in the latest third quarter. In early-out situations like these, when we need to right-size the fleet, we typically experience losses on vehicle sales. I'll talk more about how that's impacting the fourth quarter in my outlook.

But if you take a look at Slide 11, you'll see that in addition to methodology, from a high level, we outlined the many variables that also impact depreciation results such as resale strategy; average holding period; fleet rotation and fleet qualities, like the mix of premium versus economy cars and risk versus program vehicles; as well as the levels of trim packages and the benefits of purchasing power. Changes or differences in any one of these variables would account for higher or lower average monthly depreciation per unit between periods or even between competitors.

Now before I turn it over to David, let me give you some color on international Rent-A-Car, our integration initiatives for Dollar Thrifty and a quick update on equipment rental.

Moving to Slide 13, let's start with international Rent-A-Car, which excludes our fourth quarter 2012 franchised Switzerland operations, generated 11% higher revenue and a 30% higher adjusted pretax income year-over-year. Adjusted pretax margin for this segment expanded by 265 basis points.

Our newly defined international business segment is made up of about 145 countries. Among them are Canada, Australia, New Zealand and Brazil, as well as European countries. Europe represented 73% of our total international revenue in the latest third quarter.

If you exclude our 2012 third quarter Switzerland revenue as if it were already franchised, total European rental car revenue was up more than 9% year-over-year, excluding the impact of currency. Excluding revenue from the CCL acquisition, total European revenue would have been up 7.5%. Transactions days volume was up 6.4%, and pricing increased nearly 3%. If you exclude the discounted Firefly rentals, in total, pricing was an improvement of 3.4% year-over-year.

In the third quarter, we opened 6 co-branded Thrifty locations in France, Spain and Benelux, bringing the total to 143 counters. Our goal is to open up an additional 20 corporate Thrifty locations by year end. We'll also be opening 3 more Firefly locations to address the higher demand in the deep-value segment, bringing that network to 35 corporate and 9 franchise locations this year. And our June 2013 acquisition of CCL Vehicle Rentals in the U.K., which provides us an entry point into the $1.5 billion insurance replacement market, generated $9.6 million of incremental revenue in the latest third quarter. The higher revenue, coupled with the improved fleet and employee efficiency, drove European adjusted pretax income up 32% in the third quarter versus a year ago, representing a 280 basis point margin improvement.

Now let me give you some detail on the rental car integration activities. Take a look at Slide 14. As we've stated, we have identified $300 million of revenue synergies and another $300 million of cost synergies worldwide as a result of the Dollar Thrifty acquisition. We expect to capture the entire amount by the end of 2015.

Here's where we are. In terms of the top line synergies, year-to-date, we've realized about $100 million in incremental revenue worldwide, on track with our target of $120 million by year end. Adding Dollar and Thrifty to our partnership agreements beginning in May represents about half of the benefit from the first 9 months. Opening 143 corporate locations -- Thrifty locations throughout Europe and a variety of new product and service offerings makes up the balance. We expect the remaining $180 million of targeted synergies to be split 65%-35% between 2014 and 2015, respectively.

Cost synergies realized to date equal about $95 million and are ramping up sufficiently to meet our 2013 target of $114 million -- $140 million. At this point, the biggest drivers of cost synergies have been related to fleet and operation initiatives, including fleet-sharing between brands, facility consolidations, corporate overhead and marketing programs. We expect the remaining $160 million of targeted synergies also to be split 65%-35% over the next 2 years. The majority of the fleet synergies will be realized in 2014 and 2015 based on purchasing power and consolidated counter systems.

Finally, let's talk about the equipment rental business on Slide 15. Its string of year-over-year double-digit growth continued, with total revenues up 12.3% in North America, excluding foreign exchange, versus the market's projected 7% growth rate this year, according to the American Rental Association. North America represented 93% of total equipment rental revenue. 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 rental revenue was up 16% in the third 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 for the quarter ended June 30, which is the latest data available, were up about 29% year-over-year. Hertz is well positioned to take advantage of the construction upturn with the fleet investments we made last year and in 2013 first half.

In the third quarter, total pricing in North America increased 3.1%, with non-contracted pricing up 4.2%. National accounts represent 51% of the third quarter rental revenue. The 15% 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 a minute, I'll give you some thoughts on operating trends for the last quarter of the year, but first, let me turn it over to David to provide more detail on our financial performance.

David J. Rosenberg

Thanks, Mark, and good morning, everyone. Let's start on Slide 17. For the third quarter of 2013, GAAP earnings of $0.47 per share were lower year-over-year, impacted by a $39 million charge associated with exchanging 82% of the convertible senior notes to shares; expenses associated with the Dollar Thrifty integration, including the corporate relocation to Florida; and a charge of $44 million primarily associated with the expected losses on the sale of vehicles subleased as part of our divestiture of the Advantage brand.

As I'm sure you are aware by now, over the weekend, we terminated our sublease with Advantage. Under the terms of the agreement, we leased a fleet of cars to Advantage in connection with the divestiture required by the FTC when we bought Dollar Thrifty. Advantage called us in early October to inform us that it was having liquidity issues. Among other things, Advantage was unable to make payments owed under the sublease. We have been working with Advantage since then to try and restructure our commercial arrangement. Our goal during the last 3 weeks was to find a mutually acceptable solution to the liquidity issues that Advantage has been encountering. To that end, after we and our advisors discussed this matter extensively with them, we were unable to agree on a suitable alternative and determined that it was not in Hertz's best interest to make the requested changes. Details of the charges are outlined in today's press release.

This morning, Advantage issued a press release stating that it is planning on filing for U.S. bankruptcy protection maybe as early as today. Advantage also made some allegation about Hertz's involvement in their liquidity issues, and all I can say about those is that Hertz believes they are without merit. We will vigorously defend them and look forward to the full truth coming out in the appropriate venue.

This matter continues to be very fluid, and given the nature of the issues, we can't give you any further details on what happened or what course we may take going forward. Otherwise, since this matter involves issues that may potentially be litigated, on the advice of counsel, I can't say anything more. If and when appropriate, we'll make a public statement updating you with any material developments.

Now let's get back to our results for the quarter. When you adjust for the onetime charges, we achieved record earnings per diluted share of $0.73 for the 2013 third quarter, a 16% increase from a year ago. This was driven by double-digit revenue growth and the fact that we held consolidated adjusted direct operating and SG&A expenses as a percentage of revenue essentially flat year-over-year, which led to a 22.3% improvement in adjusted pretax income for the company. Consolidated adjusted pretax margin was down slightly due to the fleet inefficiencies in U.S. RAC that Mark spoke of.

Now in terms of specific division operating performance, since Mark gave you a pretty detailed review of the Rent-A-Car segments, I'm just going to make a few additional comments on worldwide equipment rental.

Turning to Slide 18, worldwide equipment rental corporate EBITDA increased 10.5% over the same period last year on higher revenue. Flow-through of 45% in the quarter reflects continued utilization expansion, higher productivity and Lean Sigma process improvements, partially offset by our footprint expansion, sales and technology investments and activity to improve fleet availability, which drove the improved utilization. For the full year, we still expect equipment rental corporate EBITDA flow-through to be between 60% to 65%.

Moving to Slide 19. Third quarter consolidated net interest expense were up year-over-year due to incremental debt related to the Dollar Thrifty acquisition, as well as fleet expansion, declined 30 basis points as a percent of revenue. For the full year, we now expect cash interest expense to increase by only about $90 million over 2012, $10 million lower than our previous estimate.

Now let me talk about cash flow on Slide 21. Year-to-date operating cash flow, excluding fleet depreciation, increased 68% to just over $1 billion, driven by strong earnings growth and improved working capital performance.

Year-to-date, net investments of $991 million were $105 million higher than the same 9-month period last year. This increase was due to fleet growth associated with Dollar Thrifty, which we did not have last year, and incremental non-fleet investments to fund technology initiatives and rental car facility upgrades.

Free cash flow in the third quarter was $418.5 million, and we expect fourth quarter to be even stronger than the third quarter as we continue the rental car de-fleeting process. For the full year, we expect free cash flow to be between $500 million and $600 million.

Moving to Slide 22. We purchased $553 million of fleet for our equipment rental business in the first 9 months of 2013. For the full year, we still expect our gross purchases on equipment rental fleet to be between $650 million to $700 million and our net purchases to be between $450 million to $500 million.

On Slide 23, our net corporate debt-to-corporate EBITDA leverage ratio was 3.0. However, if we include a full year of EBITDA for Dollar Thrifty and the full run rate plus synergies, the leverage ratio drops to 2.7. Finally, our liquidity position increased to $1.3 billion at the end of the quarter.

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

Mark P. Frissora

Thanks, David. Let's move to Slide 25. Overall, our businesses have a lot of moving pieces going into the fourth quarter, some positive, some less positive. For equipment rental, we expect continued year-over-year price and volume improvement. However, we do face a tough volume comparison this quarter due to share gains last year as we brought in new fleet and the slower recovery in non-res construction. For the full year, we expect revenue stats to be in line with our guidance for worldwide equipment rental revenue.

In Europe, in the fourth quarter, volume and pricing trends remain positive. We continue to expand our brand network, opening Thrifty corporate and franchise locations in multiple countries and growing Firefly corporate locations. Our European team continues to focus on cost control, driving expenses lower as a percent of revenue.

As the fourth quarter develops in U.S. rental car, we're encouraged by improving airport volumes for our Hertz brand, which are now running at more normalized mid-single-digit growth since the government shutdown ended in mid-October. Additionally, we saw positive airport pricing last month.

However, as we move into November and December, we will experience more difficult comps due to the spike in rental demand during the recovery efforts related to Hurricane Sandy last year. But right now, it's too early to estimate where total RPD for the current quarter will be.

In terms of fleet in the fourth quarter, efficiency will be impacted by an additional 26,000 recalled vehicles, which we expect to have repaired by the middle of November, as well as the excess fleet we've been dealing with. We still believe we can have the right -- the fleet rightsized by the end of March 2014.

Moving to Slide 26. We're trying to be opportunistic when we sell cars due to the seasonality of the market. As I've pointed out on Slide 11, the rotation cycle is an important driver of vehicle depreciation. We're at a seasonal low point for car sales right now, which puts residuals under pressure. February and March are much stronger demand periods for used cars and, therefore, will allow us to de-fleet at more favorable rates. In the meantime, we expect to have 75 retail car lots opened by year end, and we're pushing for greater sell-through in this more stable channel to support near-term fleet reduction.

Regardless, selling fleets ahead of its maturity target has caused us to take some losses that are driving monthly depreciation per unit up. As a result, we now expect it will be up 1% to 2% for the full year instead of down 2% to 3%.

I'm sure it's obvious that 2013 is a transition year for Hertz as we integrate Dollar Thrifty systems and fleet, manage our largest-ever risk fleet, introduce new brands and continue developing our retail sales network. It goes without saying that this has been a learning year for us. This is on Slide 27. We've had to dispose of a lot more cars than ever before, which has created challenges for our fleet management organization. Our transition continues into 2014, but fleet efficiencies will gradually improve as Dollar Thrifty fleet synergies come onstream.

In an effort to help investors model future depreciation levels, let me give you some insight into where we think these expenses will level out. As we see it today, U.S. Rent-A-Car monthly depreciation per vehicle will be between $250 and $260 for 2014. Approximately 1/3 of the increase includes overcoming a onetime benefit in 2013 of revaluing Dollar Thrifty's fleet at the time of acquisition. The rest comes from the continued early disposal of excess fleet through the first quarter and expected weakness in market residuals as off-lease supply expands.

I want to point out the improving fleet efficiency next year will help offset some of these higher fleet costs. Other offsets include spot fleet buys, increased retail channel sales, DTG synergies accelerated and using more fleet in our fast-growing discount brand, which uses less expensive fleet. And of course, at the end of the day, pricing will be a key area of focus for us in 2014.

As we work through these short-term issues, we remain focused on the big picture, and there, nothing has changed. Our strategic initiatives continue to drive value for this company that are unrivaled in the market: the off-airport's double-digit expansion, our game-changing rental car technology, Donlen Leasing's market-surpassed growth, the equipment rental recovery, our development of retail car sales channels and a new deep-value rental car brand in the U.S. and the long-term benefits of the Dollar Thrifty acquisition.

The fact that our shares were undervalued to begin with, in our opinion, coupled with the recent selloff, made it easy for our board to approve a share repurchase program of up to $300 million. The weakness in the stock and the exceptional growth outlook certainly make it a good time for us to buy Hertz.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Chris Agnew with MKM Partners.

Christopher Agnew - MKM Partners LLC, Research Division

I was wondering if on the fleet cost guidance for 2014, I think you mentioned some seasonality. I wonder if you could give us any more details. I think you talked about first quarter being higher.

Mark P. Frissora

No. I mean, I pretty much gave you all the details we have at this point. We're going to be working on -- as we announce fourth quarter and as we get into the year, into 2014, we'll have more information as to what the depreciation rates firm up as and what -- where we are on the status of de-fleeting. Right now, we're being opportunistic in the market. So we think that in January and February, the 2 months -- actually, January is a little, I would call it a flat month. February and March end up being better months, and we're hopeful that we can accelerate the whole schedule of being over-fleeted. What we've built into this number was the fact that we would assume to take some losses in order to accelerate that de-fleeting. So that's kind of built into the numbers, as well as, obviously, a residual decline overall in the total market. So I wanted to make sure that we got ahead of investors on this, so we didn't surprise them and -- but in terms of giving you more information, it's hard to do so right now until we kind of finish out the next 3 months and see where -- see the world -- where the world is in January and February.

Christopher Agnew - MKM Partners LLC, Research Division

And can I have one more follow-up on, Mark, the Hertz brand and market share in the quarter? With volumes down 3% on airport, was there some share shift to DTG? Did you lose market share? And I'm just wondering, is that a process you manage, and how should we think about that trending into 2014?

Mark P. Frissora

Yes, in terms of share shift, if there's a share shift in a given month or a quarter, we usually try to regain it, obviously, if we lose some. Any given month, you never know what's going to happen. I know that we talked to investors, we looked at July, we were pretty much flat to up a little bit. Year-to-date, if we look at where we stand year-to-date kind of through August, I think our share overall year-to-date is about flat on all brands. So we're trying to manage that share to kind of a flat number for all 3 brands. If that happens, then we know we don't have cannibalization of one brand over the other one, Hertz shifting to Dollar Thrifty. But on a year-to-date basis, we feel pretty good that we've been able to achieve a goal of flat share growth. And as the rest of that continues to come in, we'll know more. But yes, we adjust that every single month and adjust our strategies, so we keep that share flat between all 3 brands.

Operator

Our next question comes from the line of Michael Millman with Millman Research.

Michael Millman - Millman Research Associates

Can you talk a bit about what you're seeing out in the marketplaces as you check availability, but kind of broken down between premier and value and discount?

Mark P. Frissora

I think that when you look in the overall market, there are probably, I don't know, let's just say 15, kind of 20 top leisure markets where there is a deep-value discount brand. In those markets, we see the deep-value brands growing more rapidly than a premium or midsize brand. But as you know, Michael, the overall share of the deep-value segments is around 4%. But in those markets, it could be anywhere from 8% to 12% or 13%. So in those markets, they're obviously growing a little bit more rapidly than in -- than the other brands. In other markets that are outside of what we call the really highly sought-after leisure markets, the ones that -- where you have a lot of tour business, as well as a lot of travel by vacationers, everything is pretty much stable. We don't see a whole lot of change there. The only real change we see is maybe the deep-value segment and those core leisure markets where rates end up being a little bit more competitive due to the number of competitors in those markets.

Michael Millman - Millman Research Associates

I think I was more aiming towards when you do surveys and looking at fleeting in these different categories in the coming months.

Mark P. Frissora

I'm not sure I understand your question.

Michael Millman - Millman Research Associates

Put another way, it seems like we've had some industry over-fleeting. I was wondering if you're seeing that continue or if you're seeing that improving?

Mark P. Frissora

I think that -- I mean, obviously, we've had an over-fleeting situation because we planned for more volume growth. I think that was -- in Florida, I would say we started the summer in an over-fleeted situation, but we ended the summer and into October under-fleeted. So there seemed to be a significant change in Florida that we saw in terms of the way the demand built. So again, very quick change in the Florida market. We see the Florida market pretty strong right now, and we've fleeted up accordingly. So that's the biggest change, I would say, that I've seen. Northeast has been generally weaker in terms of volume growth we've seen versus the fleet we have there. So we were a little bit over-fleeted in the Northeast. In terms of the rest of the country, pretty much right where it needed to be. So I'd say Northeast and Florida were the biggest fleet challenges that we saw in terms of demand shifts and then being right-fleeted in those markets.

Operator

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

Afua Ahwoi - Goldman Sachs Group Inc., Research Division

Two questions for me. First, can you help us reconcile the difference in your Hertz brand volume growth versus your public peers? Because they're down sort of 3% versus -- I think they look for up -- about 3.5% would seem more in line with what you are planning for, so maybe help us bridge that gap. And then on the fleet costs, I was just wondering, the decision to accelerate sort of the sales in -- excess fleet sales in 4Q, is that different from when you sort of gave the updated guidance in September? Because at that point, you obviously did not update the fleet cost guidance, so just curious. And if it is an updated view, what factors drove that?

Mark P. Frissora

In terms of competitors, I'm not sure what you're talking about. I guess Avis -- I don't know if we reported the Avis brand only. I don't remember that exactly. But to try to reconcile between Avis and Hertz is like apples to oranges, right? We have a lot different other pieces. Our off-airport piece is growing really rapidly. So overall, on the Hertz brand, I think our actual volume growth was the same overall in the Hertz brand. When you look at Avis brand only at airport, I don't know what their number is. I'm giving you Hertz brand on-airport only, so you can't really compare apples and oranges here. And our volume, remember, is to our expectation. Our volume is to our expectation, and our expectation was to have more growth. And again, I've told the share numbers year-to-date. Year-to-date through August, we're pretty much flat on share. We have, on a volume basis, seen a big recovery, which the good news is we're seeing mid-single-digits kind of growth. But we seem to have taken a hit in the government sequester more than our competitors, maybe because we have a very high share in commercial business that's associated with government businesses. There are a lot of businesses that serve the government, and we have that corporate business. And it's fairly -- we have fairly high share in it, and so there was some impact on that, that might have been greater than our competitors. But other than that, it's just hard to speculate given that I don't have an understanding of Avis's numbers only on-airport. I just don't have that understanding, so I hate to comment on it. Your other question had to do with fleet, and I'm not sure if I understood the question. Could you repeat it for me?

Afua Ahwoi - Goldman Sachs Group Inc., Research Division

Sure. I was saying the -- you indicated that you decided to accelerate some of the sales of excess fleet in the fourth quarter, which obviously drove up your fleet costs number. But in your update in September -- is that different from the update you provided in September? Because obviously, you didn't change the fleet cost guidance then. So I'm just wondering what changed, if anything at all.

Mark P. Frissora

The only thing that has changed is as we move into each coming month, we have more visibility. I mean, I get experience and so as I get more experience, I feel more confident in giving you numbers on where I think they're going to end up, right? So we moved up the early sale of some of these vehicles in order to make an economic decision. So we look at does it make sense to hold the fleet for a longer period of time and try to drive for volume growth, or does it make sense to sell it. And we make those trade-off decisions every week. So it's a very fluid model that we use to make fleet decisions. So nothing's really changed since September, I mean, other than the fact I've got more granularity. I'm able to predict fleet costs better into the quarter than I could in September.

Operator

Our next question comes from the line of Adam Jonas with Morgan Stanley.

Adam Jonas - Morgan Stanley, Research Division

Mark, could you describe any changes to your assumptions for the market of used prices or whether it's the Manheim or whether it's the Moody's outlook that you sometimes reference into 2014 that you could say contributed to the revised or the, say, the weaker depreciation outlook for next year?

Mark P. Frissora

We assume that there's going to be a reduction, obviously, in residual values next year. And we use Black Book as our biggest guidepost, I guess. That's what we use as kind of our anchor for setting those depreciation rates. So again, you've got Black Book just like I do, so we're kind of looking at that and looking at where that's going. And I think there's 2% roughly kind of a deterioration planned in Black Book. And then we look at our vehicles and the way we sell our vehicles by make and model. We're going to lay that against an overall number because there's certain, as you know, make and models that sell at higher prices and others at lower prices. So my -- it's hard for me to generalize because -- I went through those slides with you. On Slide 11, for example, you could see all the moving pieces. Those moving pieces allow us to outperform the market or in some cases, to make the wrong decision and underperform the market, depending on what your fleet rotation is. And it's about the best thing I can tell you.

Adam Jonas - Morgan Stanley, Research Division

That's clear. So it doesn't sound like you -- the market assumption didn't change underlying. If I can ask a follow-up, Mark, given that you're partially attributing the weakness in the fleet costs outlook to the selling of excess fleet as a big driver short term, does that mean that this impact is kind of onetime in nature and that we could see a return to the $220 or $230 depreciation per month level once we get past this hump of $250, $260? Or is $250, $260 kind of the new normal that we launch on when we think about our models beyond 2014?

Mark P. Frissora

Yes, I think it's really difficult for me to answer that question based on what happens to residuals in 2015, also based on the ramp up of our car sales network. Our goal is that -- and I'm just going to give you at a broad level, we sell, let's say, on average, 16,000 cars a month, and that's kind of an average month for us. We'd like to get half of those car sales into the retail channel. That's a long-term goal. That may take us a couple of years to execute. When we can get half of our car sales into retail channel, we typically always make money at retail, $1,100 a car to $1,500 a car depending on the market. The other half of those cars that we have to sell at wholesale, if the wholesale market is, in fact, under pressure, normally, you don't take much more than $1,000 to $1,500 car loss. So if I can get the pipe at retail to be as large as the pipe I need to sell at wholesale, I've really mitigated the risk of the residual market. So what we're trying to do, our clear strategy is to build that retail model so that we can get 6,000 to 8,000 cars, I'll put it in that kind of a range, that we could sell every single month at retail. And we think based on our own modeling and stuff, we can get that accomplished. We're already at 3,000 today, maybe 3,200. So we think we can get to 6,000 to 8,000 over the next, I'll say, 18 months to 2 years. And that would allow us to mitigate the risk of residuals and be more stable, if you will, in our prediction of what car costs are going to be.

Operator

Our next question comes from the line of Fred Lowrance with Avondale Partners.

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

I was wondering if you could explain the accounting thought process, the methodology used when you decided to count the Advantage fleet as a onetime impairment rather than flowing that through to your P&L sort of over the next couple of quarters as you sell those cars. And kind of along those lines, if I do the math, impairment divided by the number of cars that you're stuck with, the unit losses on those cars are very similar to the level of losses that Advantage is alleging they're taking on each of their cars that they're selling. So does that not lend support to some of those allegations that maybe the book values you had on your cars were too high to begin with? I just wonder if you could address those couple of things.

J. Jeffrey Zimmerman

This is Jeff Zimmerman. As we said in David's scripted remarks, this is a matter that we've been working very carefully with Advantage on for now going on close to a month. And in their public announcement this morning regarding their bankruptcy, they signaled that they intend to commence litigation. And given that, I have instructed our team to take no questions today on the Advantage proposed bankruptcy or along the lines that you're asking. So unfortunately, we can't go there on this call.

Mark P. Frissora

But on the first part of your question, which doesn't have anything to do with the dispute, the way we took the actual charge just estimated the number of vehicles that they had and what we thought the mark-to-market fair value would be on some of those cars. And the longer the time is before we get the cars, the greater the loss. So if we got the cars in 2 weeks, the loss would be less than it would be if we got it in 2 months. And so it's just a straight math calculation. There's nothing disingenuous about it. It is what it is. And so we put in the investor presentation, as well as in our earnings announcement, the fact that it could be between -- in the neighborhood of $50 million to $70 million. And that's just based on what we know the fleet was valued at when they initially got it and where we think the market is today, and that's about it. So there wasn't -- the way you were presenting it, we don't have possession of those cars. And we don't know when we'll get those. It will be based on the bankruptcy court judge's decision on how we have access to it.

Operator

Our next question comes from the line of Rich Kwas with Wells Fargo Securities.

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

Two questions. Mark, on the $250 to $260 next year, you said about 2/3 came from lower residuals and then the disposition of the excess fleet. How's the breakup? If you look at that 2/3 is it -- what's the split between the residual impact and then the excess disposition?

Mark P. Frissora

I haven't -- honestly, Rich, I haven't broken it down that way, but if I were to hazard a guess, I don't know if it would be half and half. I'm not positive, maybe 2/3 of it from the losses and the other 1/3 of it from the weaker residuals. But that's just a wild guess for me. I'd have to get back to you on it, but we didn't break it down in that level of detail yet.

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

But it's fair to say there's a piece of that that's not sustainable, correct, in terms of an increase?

Mark P. Frissora

Right, right, yes. We are, again, doing everything we can to offset that forecast, and we'll continue to do everything we can. And it's based on market assumptions and a rotation schedule that, we think, on car sales, we can achieve. And if we can beat our car sales assumptions on retail, that helps it. If we can get better car deals next year, that helps it. A lot of things can help it, but the reality is those are all, on the common, we need to be able to demonstrate improvement to the numbers we're rolling up to right now.

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

Okay. And then just a quick follow-up on commercial pricing that was flat. Are you seeing any signs that, that could be a positive in '14? I know those negotiations are kind of annual or they're not -- they're kind of piecemeal, but what are you seeing in that market right now?

Mark P. Frissora

I guess it's hard to predict the future. 75% right now of our corporate contracts negotiated have been flat to up so far this year. So that's kind of good news versus where we've been historically. And we're not going after share in terms of trying to drive, if you will, commercial volume. We're trying to just maintain the existing share that we have. It's heading in the right direction the way we look at it.

Operator

Our next question comes from the line of John Healy with Northcoast Research.

John M. Healy - Northcoast Research

Mark, I wanted to try to get a little bit more clarification on the guidance for fiscal '13. When I look at the Slide 29, it looks like the guidance is the same as on the 26th of September, when you updated things. So with car costs going higher than you originally thought at that time frame, as well as the impact of the government in October, is it likely that we're tracking at the low end of guidance? Is there something that maybe we haven't talked about on the call that's maybe upside to where you thought? And I'm just trying to understand how all the numbers fit together given those 2 moving parts.

Mark P. Frissora

Yes. I mean, we gave you a balanced message, and every comment was weighted. So best thing I can tell you is it is what it is. What I gave you is -- there's no conservative. There's no aggression. It's kind of where we see the lay of the land right now.

John M. Healy - Northcoast Research

All right. And I wanted to ask about, from a disposition standpoint, you've got these cars that are coming back to you from recall. You may or may not have the Advantage cars coming to you. What is the absolute number of units you think you need to move by the end of March of next year that kind of need to flush itself out in terms of the market? And how does that compare to what you normally sell seasonally?

Mark P. Frissora

Yes. So I just wanted to make sure -- on the Advantage units were not -- those aren't coming into our fleet for the most part. We'll just sell those mark-to-market, and that's what we have. So that's not a fleeting issue for us in the future. I don't want you to think it is, all right? And then the second piece of your question, Scott, you want to answer it?

Scott P. Sider

Yes. So I wouldn't worry about that. If you look at -- when we've done our rotation in order to rightsize the fleet, we'll be selling less cars in the first quarter than we did last year. So we feel confident that we can rightsize the fleet, and that will be putting less pressure on the market because we'll be selling less vehicles on a year-over-year basis.

John M. Healy - Northcoast Research

Is there any -- and that $250 to $260 guide, is there any material change in your program risk car assumptions for next year?

Scott P. Sider

We will have more non-risk cars next year in our fleet, and that will help us with flexibility in the fleet, which puts less pressure on car sales.

John M. Healy - Northcoast Research

And any thoughts what that will represent?

Mark P. Frissora

No. We won't -- we have an idea, yes, but we're not prepared to talk about that until we finalize our fleet plans moving into the next year.

Operator

Our last question comes from the line of Brian Johnson with Barclays.

Brian Arthur Johnson - Barclays Capital, Research Division

Just a couple of questions around depreciation and impact on 2015. First, can you maybe clarify a bit about the 1/3 of the year-over-year headwind, I could call it, normalizing depreciation from the benefit of the DTG fleet and why that's rolling off? And then second, what does this all mean for your Investor Day 2015 guidance range that you had put out?

Mark P. Frissora

Yes, so I don't know what to clarify. I mean, I said it about as clearly as I could say it. We have a fair value benefit by combining the Dollar Thrifty fleet with the Hertz fleet, and that's a onetime benefit that doesn't repeat itself in 2014. So that just becomes a hurdle, if you will, for depreciation and we built that in. And then in terms of 2015 and what this all does, again, we have not done our -- we're not ready for Investor Day. I'll just put it that way. Investor Day, when it comes, we'll be ready and we'll be able to discuss that. So I don't want to give you information that were not fully baked on yet. And when we get there, we'll be clear about the impact of this and other macros on our business model going forward.

Brian Arthur Johnson - Barclays Capital, Research Division

And is the fair value benefit that you essentially bought used cars when you bought DTG, and hence, the monthly run rate depreciation on them would have been lower?

Mark P. Frissora

Correct.

Operator

That was our final question. Speakers, please continue.

Mark P. Frissora

All right. Well, listen. Thank you, everyone, for attending our call. We look forward to talking about the Hertz story as it positively unfolds over the next 4 months. Thank you.

Operator

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

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