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Hertz Global Holdings, Inc. (NYSE:HTZ)

Q4 2009 Earnings Call Transcript

February 24, 2010 10:00 am ET

Executives

Leslie Hunziker – Staff VP, IR

Mark Frissora – Chairman and CEO

Elyse Douglas – EVP and CFO

Gerald Plescia – EVP and President, HERC

Michel Taride – EVP and President, Hertz Europe Limited

Analysts

Rich Kwas – Wells Fargo Securities

Chris Agnew – MKM Partners

Ryan Brinkman – JP Morgan

Emily Shanks – Barclays Capital

James Ellman – Seacliff Capital

Todd Hallowitz [ph] – Philadelphia Financial

Mike Millman – Millman Research Associates

Chris Doherty – Oppenheimer & Co.

Jay Leopold – Legg Mason

Stephanie Renegar – JP Morgan

Operator

Welcome to the Hertz Global Holdings' 2009 fourth quarter and full-year conference call. The company has asked me to remind you that certain statements made on this call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are not guarantees of performance and by their nature are subject to inherent uncertainties. Actual results may differ materially. Any forward-looking information relayed on this call speaks only as of this date and the company undertakes no obligation to update that information to reflect changed circumstances.

Additional information concerning these statements is contained in the company's press release regarding its fourth quarter and full year results issued yesterday and in the Risk Factors and Forward-Looking Statements section of the company's 2008 Form 10-K and third quarter 2009 Form 10-Q. Copies of this filing 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 at 12.30 p.m. Eastern Time today and running through March 12th, 2010.

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

Leslie Hunziker

Good morning and welcome to Hertz Global Holdings' 2009 fourth quarter and full year conference call. You should all have our press release and associated financial information. We've also provided slides to accompany our conference call, which can be accessed on our website at www.hertz.com/investorrelations. In a minute, I'll turn the call over to Mark Frissora, Hertz's Chairman and CEO. Also speaking today is Elyse Douglas, our Chief Financial Officer.

In addition, we have Scott Sider, Executive Vice President and President of Vehicle Rental and Leasing, The Americas; Michel Taride, Executive Vice President and President, Hertz International; and Gerry Plescia, Executive Vice President and President of Hertz Equipment Rental. They'll all be on hand for the Q&A session.

Today, we will 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, the publicly traded company. Results for the Hertz Corporation differed only slightly as explained in our press release.

Now, I'll turn the call over to Mark Frissora.

Mark Frissora

Good morning, everyone and thanks for joining us. Let's start on slide number six – page six. At Hertz, we have a comprehensive plan to improve operating efficiencies, restore financial strength and position the company for future growth. Last year, we gained significant momentum on all fronts.

Our confidence that Hertz had the ability to manage effectively in response to changing market conditions proved true in 2009. We emerged from a very difficult year leaner, more focused, and better positioned to take advantage of growth opportunities and improving economic trends.

During 2009, we increased operating efficiency through a comprehensive cost management effort, generating savings of $760 million, well in excess of our $620 million goal. We demonstrated the agility of our car rental, car business by quickly adjusting our labor and fleet network to match the dramatic change in demand. Specifically, worldwide rent-a-car fleet was down 9.7%, while transaction days in 2009 were down 8%.

And we added the Advantage value brand to our portfolio to capture a greater share of the growing Leisure segment. Since our acquisition of Advantage in April, it has already gained a full point of U.S. airport market share. Along the way, we also made several small strategic acquisitions to expand our Equipment Rental presence in the less cyclical industrial market.

And we continue to invest in technology by acquiring Eileo, the world's leader in telematics to advance our leadership by taking the customer experience to the next level. We were also extremely successful in refinancing $3.2 billion of U.S. fleet debt one year ahead of schedule with pricing on par with our 2005 rates. And we raised $990 million of capital through a successful convertible debt and equity transaction. Both operational and financial results exceeded our expectations in our worldwide rent-a-car customer satisfaction. Score is up more than 20% for 2009.

Now, before I get into the details of the fourth quarter, I thought I'd address the Toyota recall, which caused us to temporarily take a portion of our Toyota fleet out of service and how that could impact our results in the first quarter. The best news is that it was only a two-week issue that occurred during our seasonally weakest quarter for demand and if there was ever a good time to be tight on fleet; it’s in the first quarter. Furthermore, less than half of our Toyota inventory are only about 13% of our total U.S. fleet, was affected by the recall. So it wasn't all encompassing.

As Toyota's largest U.S. customer, we received priority status for the replacement parts and today, all of those vehicles are back in service. In the grand scheme of things, the impact was relatively small based on our relationship with Toyota and the tender of our discussions were confident that any and all financial impact will be fully compensated. As such, we expect no overall impact to our pretax performance this year. Moreover, the strength of January's rental car business and what's shaping up to be a strong March should help to make up any of the February revenue shortfall.

It's too early right now to accurately gauge the impact of the recall on Toyota's residual values. But most experts believe that if the solution Toyota puts in place for the affected vehicles solves the problem, any impact would be short-lived. In terms of those Toyotas not subject to the recall, they are actually selling at higher prices than before the recall based on shortage of supply.

In any event, we always have the ability to manage short-term fluctuations in residual values of certain mix and models if necessary. We can always hold fleet and age it a little further, while adjusting our fleet rotation planning of the overall portfolio to ensure our fleet remains aligned with demand.

I've never been more proud of how our employees handled a difficult situation. They were quick, analytical and strategic and acted with an absolute sense of urgency. Our team is a well-oiled machine with all departments working together toward the same goal. From supply chain and its fleet group to operations to communications to legal, everyone immediately took action, a plan was developed, other OEM risk cars targeted per se were kept in service, new cars on order were brought in early, our regional field managers supported one another by sharing fleet, and our communication with Toyota was open and ongoing.

Hertz's culture of execution with discipline and customer service priority set the stage for a positive outcome. In fact, our customer service scores during those two weeks were equal to our scores in the fourth quarter.

Now, let's take a step back and review the fourth quarter, starting on slide seven, and the favorable trends we saw as we closed out 2009. In the fourth quarter, we experienced strong Christmas Leisure rentals, recovering business rental transactions, growing demand for off-airport monthly and replacement rentals and weak, but stable volumes in the Equipment Rental, which helped slow the pace of the revenue decline to just 2.7% year-over-year. This compares with the sequential 2009 third quarter's 15.7% year-over-year revenue decline. Positive revenue in rental car was offset by the continued weakness in Equipment Rental.

And through lean six sigma projects like strategic fleet management, back-office reengineering, and organizational redesign, we continue to lead the industry in cost management. Cost savings of $224 million were delivered in the fourth quarter, reducing in part adjusted direct operating expenses by 430 basis points and adjusted SG&A by 860 basis points year-over-year. Both metrics were also lower as a percent of revenue. Included in the expense improvement was a double-digit decrease in worldwide net depreciation per vehicle.

These accomplishments drove the quarter's 2.3% adjusted pretax margin, which is a nice turnaround from last year's negative outcome. Consolidated corporate EBITDA was $221 million in the fourth quarter and the margin was 12.7%, up from 6.5% last year. The U.S. rental car business is clearly the catalyst behind the company's progress as seen on slide eight.

In the U.S., rental rate revenue was up 2.5% in the quarter compared with last year, driven by a 7.1% increase in off-airport rental revenue. I'm happy to report that revenue from our corporate airport business has been improving sequentially since August from levels as low as negative 26% during the year. In the fourth quarter, corporate revenue was down just 7% year over prior year. But in December, revenue actually turned positive year-over-year, reflecting the continuing favorable trend.

Revenue per day or RPD, which encompasses both price and mix, was up 1.8% over the prior year. Importantly, in our largest airport segment, which is Leisure, we increased RPD by 9.6%. This was partially offset by volume growth and new volumes in the lower RPD off-airport and Advantage businesses, respectively.

In terms of mix, airport transaction days or volume were down 2.6%, while off-airport volume, where longer-length rentals drive lower RPD, improved 8%. Our U.S. fleet is right-sized and more productive than ever as evidenced by the 1.1% revenue per vehicle increase achieved in the fourth quarter. Our average fleet size in the quarter was proportionate to the increase in transaction days. Monthly depreciation per vehicle was 14% lower than the 2008 fourth quarter's level.

And on the used car front, residual values remain at normal seasonal levels, which we expect will continue throughout 2010. U.S. rental cars generated a 10.7 percentage point increase in adjusted pretax margin in the fourth quarter, reversing last year's negative margin. The 2009 quarter's margin came within 0.5 percentage point of 2007 fourth quarter margin, despite 11.5% decline in revenue over that period.

For corporate EBITDA, we achieved a double-digit margin improvement, benefiting from better-than-expected U.S. Leisure demand, recovering corporate volumes, and disciplined cost management.

The European rent-a-car business on slide 10 continues to lag the US' rebound as overseas economy struggled to improve. Irrespective of this, our European business achieved positive adjusted pretax income even in the base of a 7.2% decline in rental rate revenue. Notably, European RPD for commercial accounts was positive year-over-year for the first time in 2009. The adjusted pretax margin improvement was 15.8 percentage points better than the prior year's fourth quarter pretax loss.

The benefits of our European restructuring program, targeted streamlining and consolidating regional operations, centralizing work and de-layering the organization continued to flow in. This brought adjusted direct operating and SG&A expenses down 9.9% in the quarter, while generating a 17.5% improvement in monthly net depreciation per vehicle, in part, due to stabilizing residual values across the continent.

On the next slide, in our Equipment Rental business, the volume decline is moderating. In the fourth quarter, Equipment Rental volume was down 24.2%, an improvement from the 2009 third quarter's negative 28.7%. Pricing is still a concern, declining 9.5% in the fourth quarter. We were optimistic at the end of the year when we saw a long-awaited sign of rational pricing behavior in the market. Unfortunately, in January the desperate pricing tactics of a couple of competitors returned in full force.

We are pushing back on all fronts, managing rates through our national accounts initiative, and being selective in the business we participate in as governed by our new yield management system. Our focus is solely on maintaining market share with the accounts and business activities that give us the best return. Our recently modified incentive programs are going a long way to reinforce disciplined pricing throughout our sales force.

Geographically, there are pockets of recovery. For example, in Florida, one of the first markets to enter the recession, Equipment Rental volume is beginning to actually turn positive year-over-year. And in Canada, we are benefiting from stable oil prices and the resumption of various plant refurbishment projects. Recently, we announced a joint venture with Dayim Holdings, based in Saudi Arabia. The Equipment Rental market there is strong as commercial construction and petro-chem projects continue to grow.

As a balance to pursuing new top line strategies in industrial and entertainment markets, we are further tightening Hertz's cost structure by rationalizing locations and implementing long-term process improvements. Through this two-pronged approach, we achieved a corporate EBITDA margin of 40.5% for Equipment Rental in the fourth quarter. Adjusted pretax profit margin was 9.4%, by far the best in the industry. This business is typically the strongest contributor to total company profit.

Our Equipment Rental division has the ability to create a dramatic change in the company's profitability on just a small amount of revenue growth, especially now, given its excess fleet. As today's negative volumes continue moving in the right direction, we could see some of that growth by the second half of 2010 as year-over-year comparisons gets much easier and the industrial markets continues its recovery.

Our diversification of businesses, markets, and products is a long-term competitive advantage for Hertz that will protect us from the economic shocks to a single business product or market. As you can see on slide 12, Hertz is a growth company with initiatives to serve every type of customer in the mobility market including hourly renters, value-conscious travelers, business accounts, multi-month renters, and off-airport insurance replacement customers. Let me give you an update on a few of the initiatives we are implementing to address these customer groups before turning the call over to Elyse for a detailed financial review.

For the urban hourly renters, we continue to expand Connect by Hertz, opening new locations in Madrid and Berlin in the fourth quarter. And as we added five new universities to our car sharing program including the University of North Carolina and Illinois State University, bringing now the total to 17 schools, our Connect membership now encompasses 13,000 subscribers worldwide.

For the value-conscious traveler, our U.S. prepaid rental program continued to build momentum, generating $18.2 million of revenue in the fourth quarter. After launching in December of '08, this program delivered $81.9 million in revenue in 2009.

Our Advantage value Leisure offering, which we acquired in April of 2009, has surpassed our expectations for market share, margin, and volume. For 2009, we achieved an annual run rate for revenue of just over $100 million. Today, Advantage is profitable with 25 airport locations, encompassing every major Leisure destination in the U.S. You will recall that when we purchased this brand last spring, there were only four locations in operation.

In the fourth quarter, demand for Advantage was strong, especially during the holidays and after only eight months in operation; Advantage has already captured 1% of the U.S. airport market share. In 2010, we will continue to advance our Leisure brand strategy with plans to have 50 airport locations open by year-end.

In the $10 billion off-airport market, we have 11% share today with huge opportunities to capture a greater stake over the next two to three years. Off-airport is made up of insurance replacement rentals, Leisure, and local business rentals and monthly or multi-month rentals. These rentals are typically discounted due to the high utilization achieved, but with a much lower cost structure than airport rentals. They generate equally profitable growth of mature markets for us.

Our U.S. multi-month rental offering, which is being promoted as a monthly lease alternative, generated 24% higher revenue in the fourth quarter versus the prior year, a 14.4% increase for all of 2009. Insurance replacement revenue, which makes up about a quarter of our off-airport revenue was up 9.7% in the fourth quarter. Off-airport Leisure demand continues at a stable pace as airlines cut capacity and consumers opt to drive to their Leisure or local business destinations.

Finally, as I mentioned last quarter, another growth area for us is ancillary product sales. We are increasing our efforts to upsell car classes and market additional products like insurance, child seats, ski racks, and DVD players. This is a big area of opportunity for us, especially on airport where we have new programs and training in place. In the fourth quarter in the U.S., revenue from ancillary items increased 15% year-over-year. We expect strong returns from this revitalized initiative throughout 2010.

In concert with building on our upselling expertise at the airports, we are implementing the new programs at our off-airport locations beginning this quarter. In the meantime, we continue to be strategic with our marketing initiatives and innovative with our product offerings. We are already seeing our service scores climb and the plans we have in place for growth will position us to deliver even more for our customers.

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

Elyse Douglas

Thanks, Mark and good morning, everyone. Let me begin by summarizing the consolidated results for the fourth quarter and full year, starting on slide 13.

In the fourth quarter, while consolidated revenue declined 2.7% over the prior-year period, our profitability improved significantly. We earned $39.2 million in adjusted pretax income, which was an increase of $142.9 million or 137.8% over last year. The quarter's 2.3% adjusted pretax margin was an improvement of more than 800 basis points. And we delivered $221 million of corporate EBITDA at 12.7% margin. This is almost double the previous year’s levels in both dollars and as a percent of revenue.

These improvements are due to the strength in the rent-a-car business, which is offsetting the challenges faced in equipment rental and our continued focus on costs. Evidence of this is the 4.3% and 8.6% decline in adjusted direct operating and SG&A expenses respectively in the fourth quarter year over year.

Consolidated expenses also were down as a percentage of revenue due to a number of factors, including aligning operations to market conditions; 25% lower damage costs in worldwide rent-a-car; reduced corporate overhead through process efficiencies that drove an 8% reduction in corporate staffing levels; a 4.2% increase in labor productivity as measured by total company rental revenue per employee; and a value added tax refund in Europe, which reduced direct operating and net interest expense by $8.2 million and $10.3 million, respectively.

And even with additional shares outstanding due to the May equity offering, we delivered adjusted EPS of $0.06 versus an adjusted net loss of $0.22 per share a year earlier.

For 2009, outlined on slide 14, consolidated revenue declined $1.4 billion, but adjusted pre-tax fell by only $38.3 million. Adjusted diluted earnings per share was $0.29 for the year which exceeded our guidance as a result of better-than-expected US rent-a-car performance in the fourth quarter offsetting the expected weakness in equipment rental.

Now let’s review the performance trends by business unit. On slide 16, in the fourth quarter, worldwide rent-a-car revenue increased 3.4%. Total adjusted direct operating and SG&A expenses were 1% lower than last year’s level. And we reduced fleet depreciation and interest by 17.6% from the 2008 fourth quarter. All of this led to a 6.6% worldwide adjusted pre-tax profit margin and a $163.6 million improvement in adjusted pre-tax income over the prior year. Similarly, the 8% corporate EBITDA margin generated by worldwide rent-a-car was $153.2 million increase in profit year over year.

For the year, worldwide rent-a-car revenues decreased 12.8%. Total adjusted direct operating and SG&A expenses were down and even greater, 14.3%. And fleet depreciation and interest expense declined by 18.9% in 2009. So while revenue declined by $879.2 million, adjusted pre-tax profit increased by $176.2 million. Corporate EBITDA improved a $157.3 million year over year, driving a corporate EBITDA 9.4% margin for worldwide rent-a-car.

Now on slide 17, you can see our worldwide rent-a-car fleet efficiency held steady at 75.3% in the fourth quarter, but improved by 140 basis points to 78.4% for the full year. As we managed through the uncertain economy this year with a goal to preserve liquidity and cash flow, we were very conservative with the fleet rotation in the first half of 2009, which together with our lean initiatives led to better fleet efficiency. This, however, resulted in an aged fleet with fewer premium features to meet demand, particularly from the corporate customer perspective.

So during the third quarter, as the economy improved, we took advantage of favorable OEM deals and in the fourth quarter began refreshing our fleets. The result was improved car costs and a richer fleet mix. This coupled with an increase in corporate transactions, which are characteristically shorter in rental length, stabilized utilization levels at year end.

There is still a lot of opportunity to further improve fleet efficiency in 2010. One area where we are particularly focused is on more profitable car sales. For example, we’ve increased dealer-direct sales as a percent of total US car sales to 18% in 2009 from less than 2% in 2007. Our use of the auction channel with its higher service fees and wholesale pricing has declined to 67% in 2009 from 85% in 2007. We will continue to pursue more profitable re-marketing channels, like dealer-direct, retail and online auctions.

Retail through our rent-to-buy online offering and the online auctions enable us to keep our cars on rent up until the day they’re purchased, allowing for better utilization and lower holding costs.

Let’s talk for a minute about car costs or monthly net fleet depreciation per unit. Worldwide rent-a-car costs were 10.1% lower in the last quarter and 3% lower on a full-year basis. In the US, we reduced total car costs 14% compared with 2008 fourth quarter. As you can see on slide 18, our domestic monthly depreciation costs have been decreasing sequentially since December of 2008 when used car residual values were at a historic low. The improvements in car costs since then are attributable to strategic fleet buying, a better portfolio mix, and the improvement in the domestic used car market.

For the full-year 2009, the US monthly depreciation per unit was down 4.3%. We anticipate that these improvements will continue throughout 2010 as we add new cars into the fleet at a lower initial cost, continue to optimize car class mix serve customer preferences, and pursue the higher return used car sales channels.

In Europe, monthly net depreciation per unit improved dramatically in the fourth quarter with the 17.5% decline versus 2008’s fourth quarter. However, for the full year, monthly depreciation per unit was up 6.7% due to the slower economic recovery overseas and government incentives for new-car purchasing programs, which pressured used car residual value. We do, however, expect monthly depreciation per unit in Europe to improve this year as the incentive programs wind down and the benefits from strategic buying in our latest round of fleet negotiations are realized.

On a worldwide basis, our fleet at year-end 2009 was 68% risk with an average overall fleet age of 9.2 months, which is slightly younger than our average overall fleet age at the end of 2008.

At December 31, 2009, risk cars in our US fleet represented 67% of the domestic fleet and the average age of the overall US fleet was 8.5 months compared with 9.7 months at December 31, 2008. US risk cars at the time of sale currently average 21 months.

Now turning to equipment rental on slide 19; HERC generated revenue of $274 million in the quarter, down 26.1% year over year, but an improvement from the third quarter’s 35.2 % decline. As Mark mentioned, while the decline in volumes has lessened industry pricing continues to be under pressure due to excess industry fleet and significant competitor discounting. Yet even facing these challenges all year, HERC was able to report solid margin improvement achieved through continued aggressive cost actions.

Since the third quarter of 2008, we’ve aligned our labor and network footprint with the decline in demand. HERC’s worldwide headcount in down approximately 20% since the end of 2008 and more than 35% since the end of 2007. Work hours in many locations have been reduced and furloughs were mandated. Additionally, we’ve closed or consolidated a net 23 underperforming locations last year.

One the next slide, you can see that for the fourth quarter, our fleet was down year over year, as measured by the average acquisition cost of the equipment, and relatively flat versus the third quarter as we sold very little fleet in the last three months of the year. What we did sell, we sold predominantly to retail customers.

Residuals at auction have improved since mid-year but continue to be at historically weak levels. Fourth quarter equipment fleet purchases needed to satisfy new business and growth in new markets were $29.5 million versus disposals on a first cost basis of $56.4 million. This compares to additions in disposals on a first cost basis of $25.8 million and $196.5 million, respectively in the fourth quarter of 2008 when we were aggressively selling into stronger auction conditions.

For the full-year 2009, our equipment rental business delivered an adjusted pre-tax margin of 6.9% and a corporate EBITDA margin of 41.3% despite a 33% decline in revenues. We were able to offset more than half of the negative effects of price and volume through lean six sigma process improvements allowing us to operate effectively with fewer employees in a smaller number of locations.

At December 31, our worldwide equipment fleet age was 45 months, a 2.5-month increase from the end of the third quarter. We are comfortable holding our fleet longer as we increase our mix of industrial equipment which tends to have longer useful life than our declining mix of construction equipment. Furthermore, with lower utilization rates, the fleet is not experiencing as much wear and tear, therefore extending its useful life even if the absolute age increases; having said that, we expect to accelerate the purchase of new equipment in the back half of 2010 in line with our expectation of an improving commercial construction market.

For 2009, on slide 21, our equipment rental fleet was down 10.2% and 16.3% year over year on a first cost and a net book value basis, respectively. Full-year equipment sales on a first cost basis of $399.4 million exceeded additions of $88.6 million at actual [ph] FX rates. This compares with first cost disposals of $591.5 million and additions of $267.3 million in 2008.

Now let us move to slide 22 to touch on where we are with the rent-a-car fleet refinancing. As Mark mentioned, in 2009, we completed several financings to renew our expiring US fleet debt at favorable terms and conditions. We are now in the midst of negotiating financing for the international fleet debt which comes due in December of this year. For this piece, our plan is to optimize the refinancing by utilizing various financing vehicles including asset-backed securitization, private placement bond offerings, revolving asset-backed loan facilities and leasing structures.

We are in discussions with multiple banks in various countries working to secure favorable transaction terms. Based on our conversations, we remain confident that we will be as successful overseas as we were in the US.

As a result of the refinancing and expected growth in rent-a-car fleet, I think it is worthwhile to spend a few minutes on interest expense on slide 23. In the fourth quarter, net fleet interest expense was $99.9 million versus a $148.4 million a year earlier. The lower fleet interest expense is due to a number of factors; first, fleet levels are down 1.3% worldwide; secondly, LIBOR rates are at historic low levels impacting primarily European fleet debt, which is floating; and thirdly, we utilized a portion of the proceeds from the May equity offering to repay fleet debt. These factors were partially offset by a $7.5 million of interest expense related to prefunding the ABS notes in advance of the 2010 maturity date.

Corporate net interest expense which consists of the ABL revolving credit, a term loan, high-yield notes and the new convertible debt with $70.3 million compared with $80 million in the 2008 fourth quarter. This decrease resulted from lower borrowings under the ABL due to a smaller equipment rental fleet year over year, the buyback of our high-yield notes earlier in the year, lower LIBOR rates, and interest received related to the VAT refund. All of this was primarily offset by the amount of convertible debt proceeds used to repay fleet debts.

Total interest expense, net of interest income declined 25.5% for the quarter and 21.4% for the full year. For this year, we expect total cash interest expense to be $90 million to $110 million higher than in 2009, reflecting an increase in rates as we refinance the balance of the fleet debt, a full year’s interest impact from our May convertible debt issuance, higher fleet debt to fund growth in the rent-a-car fleet to meet expected demand, and an increase in floating based rates such as LIBOR. It is important to note that as we fully transition through our fleet refinancing, our global blended advance rates at the end of 2010 will be approximately 9 points lower than at the end of 2009.

On the next slide, restructuring and restructuring related charges in the fourth quarter was $34.5 million of which $26.1 million was cash. The recent charges mainly were due to severance expense, facility closing costs, and losses on the sales of surplus equipment. For the full year, restructuring and restructuring related charges were $153.3 million compared with a $142.5 million in 2008. With the bulk of our restructuring efforts behind us, we anticipate less than $50 million in restructuring in 2010.

Cash taxes paid in Q409 was $10.6 million compared with $10.8 million paid in the prior year’s fourth quarter. The effective tax rate for the 2009 full year was 34.9%. Cash taxes paid were $31.3 million in 2009 compared with $33.4 million paid in the prior year. For modeling, the 2010 effective tax rate on an adjusted basis, a tax rate of 34% is used to reflect a more normalized tax rate over the long term. Cash taxes are expected to be $40 million to $47 million in 2010, the increase being driven by improved profits.

Now if you turn to slide 25, I will give you an update on our financial covenants. At year end, our corporate consolidated leverage ratio was 3.85 times, well below the sealing of five times. The corporate interest coverage ratio was 3.16 times, comfortably above the minimum requirement of 2.25 times. As a reminder, the convertible debt issued by Hertz Global Holdings in May is not accounted in these covenant calculations since the covenants only apply to the Hertz Corporation results.

Now let’s look at our cash and debt position on slide 26. Levered cash flow, which is cash available to pay down corporate debt, was a source of $5.3 million for the last quarter of 2009 compared with a source of $430.5 million a year earlier. The decline was driven by the fleet actions I discussed earlier to meet improving demands compared to aggressive de-fleeting actions taken in Q4 of 2008.

On a full year basis, levered cash flow generated was $183.4 million, a $15.7 million improvement over 2008 due to proceeds generated in the capital market transactions, including the equity offering, partially offset by lower earnings and 4.6 point deterioration in advance rates.

At December 31, 2009, we had total net corporate debt of $3.6 billion, down 4.8% from 2008. Total net fleet debt was 7.7% lower at $5.4 billion. And we had $985 million of unrestricted cash on our balance sheet. Based on the financing actions taken this year, we continue to maintain more than $1.9 billion of corporate liquidity.

With that I will turn it back to Mark.

Mark Frissora

Thanks, Elyse. Let us move on to the next slide if we can. The global economy is in the early stages of recovery following the sharpest contractions since the Great Depression the progress in uneven. Some regions of the world are already seeing a revival while others continue to struggle.

The worst appears to be over for the US economy. The International Monetary Fund expects 2010 to be a year of transition and modest growth, reflecting a 3% gain in GDP. In the European economy, although signs of improvement have appeared recently, recovery remains uncertain and fragile. The IMF forecasts less than 1% growth in Europe for 2010, though, in a few countries, notably Ireland, Greece and Spain, the recession is expected to continue.

Within the confines of this global environment, we are focused on doing everything we can to drive the top line and ensure we operate as efficiently as possible. Innovation, lean business practices and a strong commitment to marketing our brands are the cornerstone of our efforts.

In 2010, we will pursue targeted growth initiatives and reinvest in our business to support future expansion. We also plan to further develop our global presence for rent-a-car and equipment rental in India, China and the Middle East. We will continue to evaluate acquisition opportunities and have sufficient cash and access to capital if opportunities become available at attractive valuations.

The scope of our business model is unique. It allows us to look at a rental market opportunity very broadly. Going forward, we will build on past accomplishments by capitalizing on the operating leverage of our global network by maintaining disciplined pricing practices and by leveraging the power of our brand.

In 2010, our plan calls for a profit improvement of at least 28% driven by our expectation for slightly higher rates of underlying growth in the US and European rent-a-car markets. The economic recovery should be gradual, and in the second half we should benefit from easier year-over-year comps for equipment rental as well as the renewal of demand for industrial equipment as deferred projects reinitiated.

Now let me review our guidance for 2010 on slide 28, and the assumptions behind our projections. On revenue, we expect to generate consolidated revenue between $7.4 billion and $7.6 billion which is a 4.2% to 7.0% growth rate. In the rent-a-car segment, revenue should increase at a rate of two times GDP growth with the US improving a little more than Europe.

For our equipment rental, the first quarter of 2010 will be its most challenging period since the recession began due to a difficult comp and continued pricing pressure. You will remember that the equipment rental business wasn’t [ph] significantly impacted by the economic downturn until the second quarter of 2009. We expect HERC volumes to improve on a sequential quarterly basis throughout the year with the potential for year-over-year growth in the second half.

Moving on to our adjusted pre-tax income expectation of growth between 26% and 33% or $250 million to $265 million, driven by higher revenue and better cost management will help us improve over 2009.

There are puts and takes that I should point out. Let’s start with a good guy, we expect that our 2010 US monthly net fleet depreciation per unit will be 4% to 5% lower than in 2009 and notably lower as the percent of revenue, despite the fact that we believe we have the most appealing richest mix of vehicles in our industry.

Next I mentioned earlier, we have a goal of delivering an incremental $300 million in cost savings this year, which should help offset one-time compensation costs that were eliminated last year as we managed through the recession as well as an increase in marketing spending to support our brands in particular. We’ve restored across-the-board wage reductions taken in the beginning of the second quarter last year. This represents about $18 million of incremental cost in 2010 given the timing of the reductions in the restorations.

Our 401(k) matching contribution and tuition reimbursement benefits were also reinstated at the beginning of 2010 and merit increases are expected to resume sometime in the second quarter after having frozen salaries for about 16,440 employees last year. Raises are typically in line with inflation. So this would represent about $16.2 million of incremental cost over the last three quarters of 2010.

Global marketing expenses will be up about 35% this year, which as a percent of revenue is roughly 1.9% compared with 2009’s 1.6% level and 2008 1.9% ratio. As we carefully managed cash last year, we had to cut our advertising and marketing budget significantly. Now with the economy improving and as we continue to grow our brands and product portfolio, marketing will be critical to our success. We have a new TV campaign launching in March called Journey On. You should look for it and let us know what you think.

Finally, another item to be offset is the $90 million to $110 million of higher incremental interest expense in this year primarily as a result of refinancings and fleet growth, which Elyse just walked you through. Despite the added cost, adjusted pre-tax operating margins should increase for 2010 as a result of the flow through from the $1.1 billion in cost savings we generated since the end of 2006.

With improved revenue and lower operating expenses, we expect to generate adjusted corporate EBITDA in the range of $1.045 billion to $1.060 billion this year. And with an expected full-year diluted share count of about 410 million for 2010, we project adjusted earnings per share to be in the range of $0.37 to $0.39, an increase year over year of 28% to 36%.

On the next slide, while we don’t give specific cash flow guidance, let me run through our plans with you. In 2010, our philosophy of guiding the use of cash flow remains unchanged. Our first priority is to reinvest in the business, after that we would expect to pay down debt balances as part of our global goal of becoming an investment grade company.

In light of the improving US economy and our growth trajectory, we have a non-fleet capital investment plan in the range of $240 million to $290 million this year, the majority allocated to US Rent-A-Car and Europe Rent-A-Car. We believe that this capital plan provides prudent reinvestment in the areas that provide the most benefit to our operating companies and that produce the greatest returns.

This year, in addition to investing in fleet, we are completely revamping our top US airport locations, 20 top US airport locations, which represent 50% of our total rental car revenue. In Europe, we are also modernizing our largest facilities. Our airport locations are the primary gateway to our brand and we want to make sure our facilities reflect Hertz’s quality and dedication to customer satisfaction.

The planned improvements to the exteriors of locations include a new more modern logo, new #1 Club Gold signage and gold boards for our most loyal members, some new fuel efficient buses, more efficient instant return areas and contemporary signage to facilitate the rental car process. Interior enhancements will include the modernization of the lobbies with new seating areas, improved lighting, state-of-the-art plasma TVs and counters designed for an ease customer interaction. Innovation and growth are all about challenging the status quo, something we are doing by enhancing brands and service experiences.

We are confident that investments like these will enable us to serve more consumers in more parts of the world more completely. Overall, we have taken a very conservative approach to guidance. With the economy, if anyone’s guess what could happen, and as you know there are a lot of guesses out there. Despite the IMF outlook I cited earlier, the pace and degree of the recovery is debatable among economy experts.

As such, there could easily be upside to our guidance. Take a look at slide 29 where we put together a sensitivity analysis for you. Based on a 1% improvement in pricing, volume, net depreciation per unit and cost efficiencies, we could have an opportunity of nearly a $152 million of pre-tax profit on top of our current forecast. Our best opportunity for upside comes from higher volume and pricing in worldwide Rent-A-Car, based on a better-than-expected economic recovery, and by capitalizing on our fleet management expertise.

There could also be incremental cost efficiency benefits to consider our track record for operational excellence and the growing number of lean projects in the pipeline. As you can see in the equipment rental, we are more cautious. It is still difficult to get a good read on the macro drivers there, until we have more visibility we don’t expect much more upside on this business until the second half of the year; all in all, a much better operating environment for the company versus 2009.

With that let’s open up to questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) Our first question is from the line of Rich Kwas from Wells Fargo Securities. Please go ahead.

Rich Kwas – Wells Fargo Securities

Hi, good morning. Mark, I know in light of the sensitivity here, first of all, how should we think about – it is pretty tight range here, $0.37 to $0.39 for 2010. What are really the major risks aside from macro issues there that you are seeing in the industry right now?

Mark Frissora

On the rent-a-car side, we feel pretty good about US rent-a-car, obviously I said that. We see probably more upside in that business than any of the other two. In Europe, we have got the recovery of the European economy, and again that’s anyone’s guess, but feel like our assumptions build in there are fairly good in terms of the way we provide guidance and then on the HERC side, visibility in the second half of the year is very cloudy as you know. So until we really get in to it, it is really hard to provide any upside on that business based on the assumptions we build in.

So we try to give you what the assumptions were or we try to show you what the upside was and what areas. And on costs, we always seem to over-deliver on that. So I feel confident that the team always finds a way to hit their and exceed their cost targets. So I feel that there could be some upside there. So that’s just kind of stating where I just said I guess maybe in a little bit more of a colloquial fashion, but we feel like the operating environment is poor, about half the company is very positive. We have seen rental demand mid-week for US up significantly kind of to mid-double digits; so in the neighborhood of 15% to 20% on Tuesday through Thursday. Those are big numbers.

Now we don’t know if that’s going to continue to hold through the rest of the year, but certainly if it does, then that’s a big upside right. So maybe that gives you a little flavor, but there is a pretty strong operating environment in the US right now. We are finding business travel is up significantly in our top 20 accounts and that’s really what drove a lot of our RPD issues in the back half and in the front half of last year.

So we feel leisure pricing, frankly, in January – I will say this – in January, our on-airport leisure pricing was up and leisure is our biggest segment, Rich, on airport, and leisure pricing was up I think – what was it Mike? 6.9% in on-airport. So we feel pretty good about that. So again I guess the risks that we have would be competitive behavior on the equipment rental side. I think that’s our number one risk; competitive behavior on the equipment rental side.

Rich Kwas – Wells Fargo Securities

Okay. Then just on the business or corporate account, you talked about volume getting better. What’s going on with pricing? I think you are facing relatively benign comp versus 2009. How should we think about the assumption for corporate account pricing for 2010?

Mark Frissora

I think in general, we hope it to be flat to positive. So that’s kind of what we’ve said and we still feel that way. It may be slightly up.

Rich Kwas – Wells Fargo Securities

What are you seeing right now – I know that negotiations are ongoing and each moth there is new ones happening, but what are the trends there right now?

Mark Frissora

In the quarter, corporate was up 0.60%, so that’s an actual for fourth quarter. So that gives you the best indicator that I have right now as a fact.

Rich Kwas – Wells Fargo Securities

Okay. And you were down – I think for all 2009, you were down 5% in corporate pricing?

Mark Frissora

I think, the overall corporate pricing was down about 3%, 2.7% to be exact.

Rich Kwas – Wells Fargo Securities

Okay, great. And then last question in terms of HERC. Just going back to that, it looks like you are looking for flat pricing for the year, volume down a little bit, first quarter is going to be the toughest, and what does that imply for the second half of the year in terms of pricing? It seems to imply that there is an uptick positive growth in the second half of 2010. Is that fair and how substantial of an increase on a year-over-year basis?

Mark Frissora

The assumption was that pricing would turn positive in the back half of the year, slightly more in the fourth quarter than the third quarter and was built on the notion that volume will actually start to improve. Right now everyone has got excess equipment. We think that’s what’s driving some of the irrational behavior we see from competitors. We are in a protect-share mode. So we’ve got to respond accordingly. The bottom line is the industry has the capacity to improve pricing quickly if in fact people started acting in a rational manner.

Rich Kwas – Wells Fargo Securities

Okay, great. I’ll jump off. I will get back in the queue. Thanks.

Operator

Thank you. We now go to the line of Chris Agnew from MKM Partners. Please go ahead.

Chris Agnew – MKM Partners

Thank you, good morning. Could you provide a little context around pre-tax margins? I guess I was a little bit surprised to see only 50 basis points or 70 basis points improvement on 4% to 7% growth. You used to have I think 10% to 12% pre-tax margin targets, and you've since taken out 1.2 billion in costs. Is there anything structurally different about the profitability of the new products and services that you are not currently growing? Thanks.

Mark Frissora

Are you talking about US rent-a-car, worldwide rent-a-car margins or what you’re looking at?

Chris Agnew – MKM Partners

Just the full company, the overall organization. I mean, am I incorrect in saying that?

Mark Frissora

Are you talking about guidance for the year, though? Is that what you are talking about?

Chris Agnew – MKM Partners

I guess, I am just trying to ask to put into context your pre-tax margin guidance, which is I think indicating 3.3% to 3.5% pre-tax margin. You used to have 10% to 12% pre-tax margin goal. So to put into some context then, is there anything structurally different about the new products and services that you're offering that keep it lower.

Mark Frissora

Chris, the best way to answer it, I would say HERC’s pre-tax margin is down year over year. So that is driving the issue. While we don't have more improvement – we're showing improvement obviously, significant improvement year over year; your question is why is it not up more. I think structurally the difference is HERC’s pre-tax margin ends up actually being down year over year, not on a dollar basis, pre-tax margins actually improve – pre-tax dollars improve, but the margins actually are down. And that would be the best answer to give you. The other one to tell you is that if you look at the upside that would improve the margins as well. We have a very – we have about 300 basis points lower fixed-cost basis. So the revenues we do get provide upside on pre-tax margins. I try to explain to people that the guidance is conservative, tried to show you what the upside would be a 1 point basis of improvement in those categories on that last slide. And I think if you were to take those and then look at the pre-tax margins, accordingly you’d see a more robust pre-tax margin, right?

Chris Agnew – MKM Partners

Okay. On the volume that you are looking for, how much – can you break that out with expectation for just your more traditional core on airport business?

Mark Frissora

Say that again. Repeat it if you would, I am sorry. It broke up a little bit in this room.

Chris Agnew – MKM Partners

Apologies. The volume guidance, approximately guidance assumption that you provided, can you just break that out for your core on airport business?

Mark Frissora

I don’t have it broken out for you. We could probably do that later. I don't know if anyone has got it handy. Airport would be what? 6.2% on airport – US. That's what I've got here in the room. That's what's built into the guidance right now.

Chris Agnew – MKM Partners

Thank you very much.

Operator

Thank you. We now go to the line of Himanshu Patel from JP Morgan. Please go ahead.

Ryan Brinkman – JP Morgan

Hi, this is Ryan Brinkman for Himanshu Patel. You mentioned that there is potential upside to the $300 million cost savings. But I would just like to know in the $0.37 to $0.39 EPS guidance, does that assume the $300 million cost, is it fully offset by the return of costs that were cut in previous year; there is a net benefit there?

Mark Frissora

In the slide the details that you can see is not the $300 million of cost reduction, obviously some of them flows through to the bottom line, but there were some one-offs that don’t, right? And we talked about the SG&A as one of those. We talked about the interest expense as another. Those were the two primary drivers.

Ryan Brinkman – JP Morgan

Right. But the cost increase is less than $300 million; I mean you said 35% increase. Okay.

Mark Frissora

Absolutely. Yes.

Ryan Brinkman – JP Morgan

And then also in regards to monthly VAT [ph] provision for vehicle, given the sequential flattening used vehicle prices, is $316 per month, is that a decent rate to use going forward? Or is there any reason why that should trend differently than used vehicle prices.

Mark Frissora

Well, we’ve said it’s going to go down 4% to 5%.

Ryan Brinkman – JP Morgan

Okay.

Mark Frissora

So that’s what we told you that it will go down at least 4% to 5%. If you notice, it’s also on our upside slide on page 29, I think it is.

Ryan Brinkman – JP Morgan

Okay. Then in regards to the $1.7 billion of fleet volumes in, I guess, international, are you still looking at doing some of the more creative things that you discussed in early 2009 or would it just be the more amend-and-extend potential ABS deals?

Elyse Douglas

No. I think it’s a number of different things. I am not sure what you are referring to when you said creative things. The ABS structure, there is a piece of it that is amend-and-extend and then there is some new structures. I wouldn’t say they are particularly unique. Bond offering is what we said on page 22 in the presentation. It’s really just a combination of the asset-backed securitization, which is an amend-and-extend of bond offering. We are looking at some asset-based loan structures and some leasing structures. It’s really a combination of those four things.

Ryan Brinkman – JP Morgan

Okay. Thank you very much.

Operator

Thank you. We now go to the line of Emily Shanks from Barclays Capital. Please go ahead.

Emily Shanks – Barclays Capital

Good morning. Thanks for all the details. I had a question around the HERC business, and apologies if I missed this. What is the industrial piece of it makeup now, what’s that mix?

Gerald Plescia

Industrial, I think, is up to, let’s say, 24%.

Emily Shanks – Barclays Capital

Okay. It looks to me like at least on a year over year basis you outperformed your peers in that particular segment. I want to get a sense from you what you attribute that to and specifically do you think that you are taking market share?

Gerald Plescia

When we look at the revenue growth, we are slightly better than one of our competitors and not as good as another one. But I think that primarily our better cost management through yield management systems that we put in place, discipline around our sales organization, our revenues per branch are much higher. So we're able to I guess collect a lot of our costs on what we call regional fleets and we share a lot of our fleets with each other. So I’d just say SG&A management coupled with direct operating expense management, all combined, plus we have a national account base that’s probably second to none in the industry, and we believe that that corporate structure provides more efficiency and better pricing than let’s just say small little one-offs in local communities.

Emily Shanks – Barclays Capital

Then my final question is for Elyse, as we look at the revolver which is maturing at the end of this year. How should we think about that or can you comment on what your plans are around potential amend-and-extend?

Elyse Douglas

The corporate revolver, that's in 2012 maturity?

Emily Shanks – Barclays Capital

I thought the term loan was 2012 and the revolver itself was due December 21, 2010. Is that wrong?

Elyse Douglas

They are both 2012. And we are looking at amend-and-extend strategies, but we have no plans to do anything right now.

Emily Shanks – Barclays Capital

Okay. Thank you.

Operator

Thank you. We now move to the line of James Ellman from Seacliff Capital. Please go ahead.

James Ellman – Seacliff Capital

I guess, could you tell us a little bit about demand that you are seeing in HERC certainly in terms of pricing and demand? We're seeing something a bit more conservative coming from RSC. Could you comment on where is your business different and why would you be a bit more optimistic about the back half of the year? And then finally, if you could just comment on the irrational pricing you are mentioning, is this pricing irrational in light of potentially some customers liquidating their fleets. Thank you.

Mark Frissora

I think RSD from what I’ve read in their transcripts said the same thing we did, second half improves year over year. There is potential to improve in the second half of the year. In terms of volume levels by region, our strongest areas right now, believe it or not, are Florida and the western half of Canada. And that’s due to the fact that Florida was first into the recession. We think it's first out and we are doing some really good things there as well. We put in a much better – we have a much better industrial base than we used to have. But beyond that, we’ve been focusing on power generation and a better mix of equipment.

So again, we are actually seeing Florida be up year over year. And that is one of our biggest markets for non-res. However western – what we call our western region which is California even going up to the northwest, that region still is under a lot of pressure. So we haven’t really seen any improvement there, but we’ve seen improvement everywhere else. And the biggest I guess positive is as the weather starts to get a little warmer we’ve seen some nice activity again in Florida and some of the Midwest and northeast as well. So that gives you contextually what we're seeing today. And why it gives us some confidence that that could be based, again, very weak comps, some improvement year over year in the third and fourth quarter.

In terms of the irrational pricing activities, not a whole much more I can say about that, right? So we are all governed by the same antitrust issues. So I'm not going to signal at all, it’s just to say that competitors continue to really be predatory [ph] we think in large extent. They will go after business and try to gain market share in environment where no one is going to give up market share. Everyone is fighting for the same market share because we all have extra equipment. So to have pricing levels that would be below the marketplace seem to be a stupid strategy. So that’s the best way I can put it. So I have been surprised by the stupidity by a lot of competitors.

James Ellman – Seacliff Capital

All right. If we could switch gears just for moment to the retail business, could you comment on Simply Wheelz, since that was relatively big initiative last year and we didn’t hear anything about it yet today? And also could you just comment on when you are talking about ancillary rental equipment for the GPS, I would imagine that most people have a GPS on their smart phone now. What's happening to the trends there and what sort of depreciation rate do you take on that equipment?

Mark Frissora

Okay. So, the Advantage brand – we basically folded Simply Wheelz right into the Advantage brand. We've I think announced that on a previous call. So there is not a whole lot to talk about Simply Wheelz because it’s part of Advantage now. It didn’t make sense to have two different Leisure brands, so we immediately consolidated it.

In terms of – your other question was? What was it?

James Ellman – Seacliff Capital

Just GPS equipment, NeverLost equipment that you have in terms of people having GPS built into their smart phone now, potentially leading to a decline of demand there. Is that taking place in line with your expectations and what sort of depreciation you have built into that equipment?

Mark Frissora

We got a three-year depreciation life built into the equipment. In terms of what trends are, when you look at GPS, right, ours are hardwired into the car, right? So you don't have to worry about signals when it first starts up. It's a satellite system, but everything is hardwired. So you don't have sticky things slipping all over the place. I mean, it's a very – NeverLost is considered a very strong brand and we own – we were a joint venture partner with Magellan on that, about 65% ownership by Hertz. That business has always grown.

Now, it's flattened out in the recession because of people deselecting what they thought was an $11-a-day feature, right? So corporate customers had to actually – they were given directions that they couldn’t upgrade to NeverLost in some cases. So in general, it's also been an area where we haven't focused strongly enough on ancillary revenues.

So we don't look at NeverLost as being something that's going to be a big decline for us. We've been seeing it to be more flattish and we expect to get it growing again, because we've introduced three new versions – a new version that is a touch screen, very similar to what you would get on the most – PDAs today. It's a touch screen, it's online trip planning, it has weather and flight information immediately available to you.

So you are going to actually put in the thing, whatever your flight number is and know on a real-time basis what your flight is. So we've actually increased the functionality of it, invested some money in it, and we think it's the best-in-class in the industry right now. So we believe people will continue to upgrade to that as things move forward.

So we are not seeing any pressure at this point. It had been increasing double digit every year up until the recession and now it's a little bit more flattish. So I don't know if that answers your question, but we feel pretty decent about it being something that will continue to be ancillary revenue upside for us.

James Ellman – Seacliff Capital

Mark, thanks for the color and I appreciate it. Take care.

Operator

Thank you. We now go to the line of Todd Hallowitz [ph] with Philadelphia Financial. Please go ahead.

Todd Hallowitz – Philadelphia Financial

Thank you. I just want to commend you guys on the slide 29, it's very helpful. On the pricing, can you just break out U.S. versus corporate if you don't mind for your assumptions for rental car for this year in just the U.S. actually?

Mark Frissora

Todd, I doubt we'll do that. I do – we never have done that and that's a very detailed breakout, right? So we –

Todd Hallowitz – Philadelphia Financial

Well, you said the U.S. in the quarter was up 9% in Leisure and down 6% in corporate. So you did it in the quarter.

Mark Frissora

No, no. I said that we were up 9.6% on airport in Leisure.

Todd Hallowitz – Philadelphia Financial

That's what I'm asking with the same assumptions for this year.

Mark Frissora

Yes, but we don't give that. I mean, we will give it to you as it occurs, but I don't give guidance on that. So – and I'm not going to. I mean, we went a long way on page 29 to giving you what our pricing – 1-point pricing improvement is. We gave you the exact pretax opportunity on it. So – but we are not going to give segment guidance, if you will, on pricing.

Todd Hallowitz – Philadelphia Financial

That's reasonable. Let me ask the question then this way. If you look at the year-over-year price increases, they really started last February and March and have been pretty stable since then. So you have had year – good year-over-year price growth, it's now anniversarying in February and March. Do you think that there would still be price increases post the February-March time frame this year? In other words, when you look out your six to eight weeks, do you still see U.S. domestic Leisure price increases?

Mark Frissora

I would – let me – let me answer that question this way. We believe that the pricing environment continues to be positive because of tight fleets and that the industry is still very tightly fleeted, many of our competitors are tightly fleeted and continue to act very rational. So – and we a have a period of increasing demand with tighter fleets which yields better pricing opportunities. So I – the answer is the industry today in the U.S., and even we are seeing some pretty good pricing dynamics in Europe, it continues to be favorable for as far as we can see it.

Todd Hallowitz – Philadelphia Financial

Okay. And my other question is you are using options less and less, which I commend you on. You guys save what, about $500 by not using options and if we look out three or four years into the future, what percent of your costs would you hope not to go through option?

Mark Frissora

Yes, it's $400 to $500 we save and bigger opportunity for us is to sell more cars, obviously direct to dealers, as well as direct to consumers and we are actually building up a capability of that. And for me to forecast where we are going to be would be probably erroneous at this point, but I would say it's fair to say we'd like to get some number, about half – less than half of our cars would go through option.

Todd Hallowitz – Philadelphia Financial

Okay. And you are going to open more of your own dealerships as well?

Mark Frissora

Do what?

Todd Hallowitz – Philadelphia Financial

Are you going to open more of your own dealerships?

Mark Frissora

No. No, no. We are not going to do that. I mean –

Todd Hallowitz – Philadelphia Financial

Well, you have a couple now.

Mark Frissora

Yes. No, I know. We have – we have about eight stores and what we are really trying to do rather than do it through stores, we are trying to do it through Internet, we have a program called Rent-to-Buy and we are now licensed in 13 states. And that program, we have to gain scale and capability in it, so we need more cars in it. So as we get more states and we gain more capability and experience, we will be advertising that more to the consumer and marketing it more and we are hopeful that that grows to be a significant percentage of our overall marketing efforts.

We are also, you should know, adding a lot of people in the field, as well as at headquarters to sell cars. You have to have the people that are good and experienced at it and our average profit per car hasn't been as great in some cases as our competitors, because we haven't sold direct to the consumer, direct to the dealers and we have not had the infrastructure.

We've been building that infrastructure in 2009 and we continue to make a big investment in it in 2010 and we actually believe as we shift that, we are going to – our depreciation per vehicle actually – net depreciation per vehicle, which is a composite of both the acquisition, price, as well as the selling price, that's going to improve and that's upside potential for us.

Todd Hallowitz – Philadelphia Financial

And what was the dollar gains on vehicle sales in the quarter? You said it was very small. Can you give the exact number? I know it's in the Q.

Elyse Douglas

In the U.S., it's $12 million.

Todd Hallowitz – Philadelphia Financial

And what was on the Equipment Rental side?

Elyse Douglas

For the quarter – for the fourth quarter.

Mark Frissora

For the fourth quarter, it was $12 million.

Elyse Douglas

In the U.S.

Mark Frissora

In the U.S.

Elyse Douglas

On a consolidated basis, it will be slightly negative.

Mark Frissora

It will be slightly negative on a consolidated basis.

Todd Hallowitz – Philadelphia Financial

And then on the Equipment Rental side, what was the gain from selling used equipment?

Mark Frissora

I don't know. Do you guys have that? I'm asking one of the guys in the room here if they –

Elyse Douglas

I think it was $3.6 million

Mark Frissora

$3 million.

Elyse Douglas

$3 million.

Todd Hallowitz – Philadelphia Financial

Thank you, guys. Thank you again. That's a much better disclosure, thank you.

Mark Frissora

Thank you.

Operator

Thank you. We now go to the line of Mick Millman from Millman Research Associates. Please go ahead.

Mike Millman – Millman Research Associates

Thank you. It's Mike. Sort of on the same vein, in the fourth quarter, you indicated 9.6% Leisure airport pricing. Was that basically price, was that basically mix? And I was curious –

Mark Frissora

That's RPD. That would be RPD increase of 9.6%, which is both price and mix combined, right? So I mean, it's – we didn’t have a favorable mix. So it would have been higher – probably a little bit higher if – but 9.6% was the actual RPD number.

Mike Millman – Millman Research Associates

And could you talk about – the Leisure price was higher than the business price, which I think is unusual?

Mark Frissora

No. I mean, in terms of what happens for us, Leisure pricing has always been a very good mix of our business, right? You are able to price it up at the airport much better than you could do it maybe in an off-airport location, but again, we've always had fairly high RPD on Leisure. If I were to look at the last 10 years, you would see numbers that are – at the corporate level, are higher most of the time.

Mike Millman – Millman Research Associates

Higher than the business?

Mark Frissora

That's correct.

Mike Millman – Millman Research Associates

And that number –

Mark Frissora

On the airport, Mike. I mean, remember, everything I'm qualifying is at the airport.

Mike Millman – Millman Research Associates

Yes, at the airport. And did that 9.6% include Advantage?

Mark Frissora

No. No, no. It does not include Advantage. We report Advantage separately.

Mike Millman – Millman Research Associates

And can you give us what that number was?

Mark Frissora

I don't know. Do you have the RPD for Advantage? It was averaging around 29 bucks a day. Yes. So I guess with – it's about $30. Advantage on airport was $30.

Mike Millman – Millman Research Associates

And you said that on airport Leisure in January was 6.9% and I think you said that March was looking even better.

Mark Frissora

No, I didn’t say that. I just told you what January was, but I did tell you that March volume looks good and I did say that in a week, we are getting very nice spikes in demand, driven by business travel, as well as Leisure being fairly strong. And as – and over the Tuesday through Thursday businesses where we peak up on demand because of business travel and in those peak periods, what I did say was that we were having 15% to 20% increases in volume the last couple of weeks with that – in that peak period. And that's very encouraging for us, that's much higher than we thought it would be.

Mike Millman – Millman Research Associates

And is it fair to say that when you have higher volume, it gives you an opportunity to have – increase your price on the Leisure? Could you have less Leisure cars?

Mark Frissora

Absolutely.

Mike Millman – Millman Research Associates

And your full-year guidance of 0.6% seems a little bit out of joint with volume going up 7.4%. It would seem to suggest squeeze the volume a bit and raise the price a bit.

Mark Frissora

Yes, this is why we gave you the upside on the – that last chart, on page 29 I think it was, if I remember right. Yes, it's page 29. We say that pricing has an opportunity. In fact, we improve our pricing by 1 point, it's $50 million of pretax. So absolutely, an opportunity for us. And again, this is based on the competitive reaction. We can't predict to some extent what's going to occur.

Mike Millman – Millman Research Associates

But you are predicting you would be up 7.4% in volume. Do you see the industry being up 7.4%?

Mark Frissora

Still no. I have no idea, I don't have – this is again the – this is for obviously worldwide rent-a-car, which includes Europe as well. And we predicted based on kind of a two times GDP growth rate, right? We think the volume, again, in days is conservatively set.

Mike Millman – Millman Research Associates

And getting back to Advantage, so I'm – in the resources suggesting that Advantage pricing seems to be off below at times competing with tertiary pricing as opposed to value pricing. Could you talk about your pricing strategy with Advantage?

Mark Frissora

I think the only thing I can tell you – I can't comment on pricing strategy, I can tell you that we – what we've historically done with Advantage's price on top of what we consider to be one of the lower competitors on airport and we don't try to go below that lower competitor, we try to stay right on top of that lower competitor.

Mike Millman – Millman Research Associates

And with –

Mark Frissora

That is – I've said that before and I'll say it again. That's what – that's what our strategy is, to price kind of on top of what we consider to be the lower competitor on airport.

Mike Millman – Millman Research Associates

And I think in the past you've suggested that was enterprise?

Mark Frissora

I don't know if I suggested that or not.

Mike Millman – Millman Research Associates

Well, assuming enterprise for example, it would seem the reverse, that enterprise is reaching down to meet Advantage.

Mark Frissora

Mike, we can't get into a pricing discussion.

Mike Millman – Millman Research Associates

Okay.

Mark Frissora

You know the very reasons why we cannot get into a pricing discussion. Our strategy has been to price on top of the lower competitor, all right? That’s it, period. And that's all I can say on that.

Mike Millman – Millman Research Associates

On Toyota, looking out, is it conservative to assume that residual prices will continue to be where they were?

Mark Frissora

Okay. On Toyota, in terms of residuals, we see very little impact to our profit plan this year due to the Toyota recall. That's what I can say. I can't get into a lot of detail on this, but the bottom line is we see very little residual impact at all. And in fact, residuals on those vehicles are up right now because of the shortage of supply on those vehicles. So if it goes down further, it goes down further.

All I can tell you is that we will adjust and age those vehicles. We will trade in for those vehicles with making them maybe a program car versus a risk car. There are a lot of different tools that we have, it's a small group of vehicles for us. It was 13% vehicles we had in the fleet at that time, we've already made a lot of actions on those now. So we feel pretty good, I mean we don't feel like it's any risk, if you will, to our mix and our profit impact for the year.

Mike Millman – Millman Research Associates

Great. Thank you.

Operator

Thank you. We now go to the line of Chris Doherty from Oppenheimer & Co. Please go ahead.

Chris Doherty – Oppenheimer & Co.

Good morning. In terms of the HERC, I'm just trying to understand the comment that you expect to accelerate CapEx in the back half of the year. If you look at where volume was for the quarter, it was down 24%, yet your fleet actually was only down 10%. I mean, that would say that your time utilization was probably down. I mean – I guess, what is your time utilization and is the pickup in CapEx more of a mix issue in that you have to rejigger the mix for the difference in cycles?

Mark Frissora

I guess – first of all, we are not going to accelerate, okay? We are not going to buy any equipment unless we have demand for it. We have a very strict capital plan on the Equipment Rental. We do have aging of fleet though. And so once your fleet gets to a certain age, you don't want to have it if you are going to use it, because the maintenance is way too high.

So what we do do is with new equipment, we've been able to trade our old fleet for new fleet. But we will be very prudent on fleet CapEx for the back half of the year. We built a little bit into the plan and we are hopeful that to bounce. That's not to say that it will. If it doesn't, we will not buy, I promise you. We are very prudent on the way we manage our equipment and in the way we buy our equipment. So it will only be there if in fact the demand is there for it.

Chris Doherty – Oppenheimer & Co.

The plan is not to –

Mark Frissora

Should I get more clear or?

Chris Doherty – Oppenheimer & Co.

No, I just – that's – your just comment of increased CapEx in the back half is more just you replace some stuff, that's understandable.

Mark Frissora

That's right. That's exactly what I –

Chris Doherty – Oppenheimer & Co.

That's understandable. And then in terms of the utilization on rack, you talked about how you've gotten deals at the end of this quarter. I mean, where should we think about a target utilization for that? I mean, you've – you've gone over 80% recently. I mean, is it high-70s, low-80s and what's the variability between quarters?

Mark Frissora

Yes. I mean, in the rent-a-car space, we are kind of planning that this year we might be up a point for the overall – for our overall worldwide rent-a-car. So you could – if you want to plan for something, I’d say we plan for a 1-point improvement. We had a big increase, as you know, in 2009. And so we are still planning on some slight improvement this year.

Chris Doherty – Oppenheimer & Co.

Okay, thank you.

Operator

Thank you. Our next question is from the line of Jay Leopold from Legg Mason. Please go ahead.

Jay Leopold – Legg Mason

Good morning. I appreciate your patience in answering all these questions this morning. Chris Agnew asked a series of questions earlier and I think one of them slipped through the cracks that I was very interested in asking myself.

Mark Frissora

Okay.

Jay Leopold – Legg Mason

And that is the 10% to 12% pretax margin goal you've talked about for years. I understand that we have – we've gone through a very horrible recession. But I'm wondering what pieces you have of the puzzle to continue to move around to achieve that? Or I guess a more simple question is, is that still an achievable goal in a reasonable time frame?

Mark Frissora

Yes, I think that if we get back to 2006, 2007, either one of those, volume and price levels will definitely exceed those goals. So we have about 300 basis points of fixed costs renewing [ph] out versus where we were in '07. So I feel very comfortable, if we get to normalized revenues of about $8.5 billion, we will easily exceed those goals. Okay?

Jay Leopold – Legg Mason

And the change in your balance sheet, the higher interest expenses won't affect your ability to hit that goal?

Mark Frissora

No, because our cost reduction programs layover achieve that interest expense, right, increase. We talked to you on the call about a $300 million number we committed to. We typically always over-deliver on that and the interest expense condition this year is about as best as it's going to get, between $90 million and $110 million number, right?

So we feel pretty confident that – again, we really have a lot of efficiency initiatives yet to play out this year and as part of our culture, we are building into the DNA of the company and we've got plenty of room for improvement there and that there is still a lot of profit improvement after the interest expense increase due to cost reduction and revenue growth.

Jay Leopold – Legg Mason

Great. So going from $7.5 billion revenue guidance this year to $8.5 billion is going to get you a fairly significant pretax profit improvement?

Mark Frissora

Yes. Yes, it would. And the one thing that you should – I mean, as you look at the numbers, right, of the – of HERC, Equipment Rental versus rent-a-car, one of the things that should jump out at you that is in '07, we had a $1.7 billion business in the Equipment Rental and that business was very profitable, 47% EBITDA margins, EBIT margins were 25%. And then in two years, that business is off 55%, we are now a $1 billion business and the EBITDA went from about let's say $940 million, $930 million in the Equipment Rental side to $450 million. So it's literally cut in half in a period of less than two years.

And so when that business turns again, the pretax and EBITDA, earnings potential or margin improvement potential is very large and we think we have a tremendous operating leverage when that happens. Now, rent-a-car is performing at historically high levels already, the high levels in '07. And now, they are almost back to '07 levels on volumes that are down 14% to 15%. So on pretax margins, they are almost at '07 levels, I want to say that again, and volume is down 15%.

So we are very confident that – again, as revenues turn on Equipment Rental, that's the big – that will be a big mobilizer, right? And as they continue to improve on rent-a-car, we will be able to achieve those pretax margin goals that we talked about.

Jay Leopold – Legg Mason

Great. Thank you. That's a good answer.

Operator

Thank you. We now go to the line of Stephanie Renegar from JP Morgan. Please go ahead.

Stephanie Renegar – JP Morgan

Hi, Stephanie Renegar from JP Morgan. Just a couple of very quick questions for you. You said that the advance rates next year are going to be about 9 points lower than 2009. I just wondered if you could update us on what the weighted average advance rates for 2009 were as of year-end. And also just for the depreciation that you are expecting in 2010, I was hoping that you could break out your thoughts on the depreciation trends per unit for Europe versus the U.S. And that's it from me.

Elyse Douglas

Okay. So let me start with the first question. You wanted to know what the advance rates were. At the end of 2009, our advance rate was around 72%.

Stephanie Renegar – JP Morgan

Okay.

Elyse Douglas

And then as I said – so we are expecting that to be somewhere in the 63% range. And again, that's an estimate based on what we are seeing today.

Stephanie Renegar – JP Morgan

Okay.

Elyse Douglas

And what was the second question? Can you repeat the second one?

Stephanie Renegar – JP Morgan

Second question was on the depreciation rates per unit. Just wanted to know what the split was between U.S. versus international, particularly in Europe, your outlook.

Elyse Douglas

Well, we said in the U.S., the outlook is a 4% to 5% improvement. And if you give me a minute, I guess –

Michel Taride

In Europe, it is – this is Michel speaking.

Elyse Douglas

Yes, a little bit higher in Europe, 6% to 7%.

Stephanie Renegar – JP Morgan

A fall, because of an improvement in residual values?

Elyse Douglas

Correct. Because the European market is later to improve, we've seen a lot of the benefit to date in the US and we haven't yet seen as much in Europe.

Stephanie Renegar – JP Morgan

Okay.

Elyse Douglas

But we do expect that to accelerate.

Stephanie Renegar – JP Morgan

Okay. And this is an – I'm sorry, and this is a – just the contracts that you have that are on buyback are non-risk vehicles. Are you seeing any increase in depreciation per unit there?

Elyse Douglas

No.

Mark Frissora

No.

Stephanie Renegar – JP Morgan

Okay.

Mark Frissora

Okay.

Stephanie Renegar – JP Morgan

Thank you.

Mark Frissora

Thank you.

Stephanie Renegar – JP Morgan

Thank you.

Mark Frissora

Operator, we will take one more question.

Operator

Wonderful. We have a follow-up from the line of Rich Kwas from Wells Fargo Securities. Please go ahead.

Rich Kwas – Wells Fargo Securities

Hey, Mark. Just on HERC, the 9.5% decline in pricing, it sounds like it gets worse in Q1 and then it gets better. Is that the way to think about it?

Mark Frissora

I think that's fair. Yes, I think that's fair. Maybe flat to little worse.

Rich Kwas – Wells Fargo Securities

Okay. All right. And then last question. European restructuring, where are you with that? I know you launched it middle last year. Where are you in terms of taking the costs out and when will you be done?

Mark Frissora

We will be done with the European restructuring this year, obviously, complete it. I think that probably another six months of stuff where we are moving pieces around to our headquarters in Dublin where we had things in country. We have a regional operating center in Geneva that – there is some movement going on there, but in general, it should be done over the next six months, provide for good year-over-year comparisons all year. But we are pretty much done with the European restructuring. Just some changes yet to be implemented, small changes over the next six months.

Michel Taride is on the call. Michel, is that accurate?

Michel Taride

Yes, Mark. That's accurate, I would say, 85% is completed. As much – an example would be we are setting planning functions in this operating center we have in Geneva. But we now have two regional – it's a regional organization in Europe and the savings we announced, which I think were about $30 million annualized are materializing in fact, but as Mark said, the full-year effect will start in second half. In June, we will be 100% complete.

Rich Kwas – Wells Fargo Securities

Okay, great. Thanks.

Mark Frissora

All right. Thanks a lot. Okay, operator?

Operator

Thank you. Would you like to make any closing comments?

Mark Frissora

Yes, just thanks for attending the conference call. We look forward to a great 2010 and talk to you next time.

Operator

Thank you. That does conclude our conference for today. Thank you for using AT&T Executive Teleconference. You may now disconnect.

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Source: Hertz Global Holdings, Inc. Q4 2009 Earnings Call Transcript
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