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Hertz Global Holdings, Inc. (NYSE:HTZ)

Q1 2010 Earnings Call

April 26, 2010 10:00 am ET

Executives

Leslie Hunziker – Investor Relations

Mark P. Frissora – Chairman and Chief Executive Officer

Elyse Douglas –Chief Financial Officer

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

Scott Sider - Executive Vice President and President of Vehicle Rental and Leasing, The Americas

Jeffrey Zimmerman - Senior Vice President, General Counsel & Secretary

Analysts

Brian Johnson - Barclays Capital

Himanshu Patel - JPMorgan

Emily Shanks – Barclays Capital

Richard Kwas - Wells Fargo Securities

Christopher Agnew - MKM Partners LLC

John Healy – Northcoast Research

Sachin Shah - Capstone Global Markets

JJ Berney - Citadel Global Equities

Michael Millman - Millman Research

Bob McAdoo - Avondale Partners

Jordan Hymowitz – Philadelphia Financial

Operator

Ladies and gentlemen, thank you for standing by and welcome to Hertz Global Holdings first quarter 2010 earnings 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 their 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 first quarter results issued this morning and in the risk factors and forward-looking statement section of the company's 2009 Form 10-K. This filing is 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 Wednesday at 9:00 am Eastern, and running through May 10, 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 2010 first quarter conference call. You should all have our press release and associated financial information. We 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 be on hand for the Q&A session.

Today we'll use certain non-GAAP financial measures, all of which are reconciled with GAAP numbers in our press release and at the back of the slide presentation, both of which are posted on our website. We believe that our profitability and performance is better demonstrated using these non-GAAP metrics.

Our call today focuses on Hertz Global Holdings, Inc., the publically traded company. Results for the Hertz Corporation differ only slightly, as explained in our press release. Now I'll turn the call over to Mark Frissora.

Mark P. Frissora

Thanks Leslie and good morning everyone. Thanks for joining us. I’m sure all of you have seen our announcement this morning on our acquisition of Dollar Thrifty. I'll talk more about it later in the call. But let me say briefly that this is a very important and strategic transaction for us and that it fills a gap in our product portfolio with a strong mid-tier value offering.

Having Dollar Thrifty under the Hertz family of brands, product and services will allow us to expand our global presence, boost our market position and realize the financial benefits from substantial synergies between the two companies.

Now let's take a quick look at the latest quarter on Slide 6 and then we'll get into the details of the acquisitions later on in the presentation today. 2010 is off to a very promising start. In the US, rental car volumes are exceeding our expectations with strong advanced bookings through the peak summer season. Similarly, Europe's reservations for the summer months are robust as well.

And while Europe rental got off to a slow start, today the rebound we're seeing is well ahead of where we thought it would be at this point in the year. So the momentum in rental car across the globe is very encouraging. We're cautiously optimistic about the return of demand for rental equipment.

In the first quarter we benefited from the industrial market's early recovery in select regions of the world. In terms of worldwide volume, from trough to peak between this January and April, units on rent are up 14.5% and utilization has increased over the same period by 790 basis points. This brought a bit of good news to the challenging market conditions for equipment rental overall.

Seasonal weakness and a tough year-over-year comp were hurdles we were expecting. But the year-over-year revenue increase in our industrial business exceeded our expectations. The only concern we have going forward is whether pricing in the equipment rental market will improve at the same rate as volume.

In addition to the tough conditions in the equipment rental market in the first quarter, we had two unusual hurdles to overcome. The first was the severe winter weather that affected all of our businesses. We incurred loss revenue in the US and in Europe due to rental cancellations resulting from the severe and erratic storms.

We also had incremental costs related to snow removal and rental car utilization was impacted by the volume and eruption as well as redistribution due to an increase in one-way rentals and reduced car sales when some US auctions in the Northeast were negatively impacted by the harsh winter weather.

In February we experienced a second disruption when Toyota issued a recall on its most popular vehicles. Ultimately, the recall turned out to be only a two week event and we've already been fully compensated for the lost sales and their associated costs. However, utilization in the US suffered because in the end we had to ground nearly 13% of our fleet while waiting for details on the specifications of the recall and the resulting repair.

When we first learned about the recall, we had no idea how long our fleet would be out of service. So we immediately stopped [de-fleeting] older cars, and to a smaller extent took early delivery of future orders for some of our other OEM suppliers. This put us about a month behind plan with fleet sales in the quarter. The good news is that here, at the end of April right now, we have the fleet right sized to demand which puts us in great shape heading into the peak summer months.

Overall, I'm really pleased with our financial performance at the beginning of the year. When you exclude the impact of weather conditions and the supplier recall, even our utilization was in line. While I'm on the topic of fleet efficiency, let me take this opportunity on Slide 7 to dispel any notion you may have that we are overfleeting based on inflated demand expectations, and therefore jeopardizing pricing for the sake of share. That's just nonsense.

In the US we have improved fleet efficiencies since 2007. In '07 it was 77.82%, in '08 it was 77.7%, in '09 it was 79.63%. And while the first quarter of 2010 was impacted by unusual situations outside of our control, efficiency so far for April is slightly ahead of last year's level in the similar period. You just can't deliver high utilization if you're overfleeted.

It's important to remember that Hertz is a highly diversified growth company, executing a much different model than our competitors. With that in mind, you understand that we are fleeting appropriately to capture the recovering base demand, including the strong return of the corporate traveler as well as our own expansion into the leisure economy market where we have 25 new Advantage locations under a year old with plans to open an additional 25 locations this year.

The off-airport sector where we're in the process of opening hundreds of locations to service insurance replacement accounts better and the car sharing market, where we're ramping up promotions to convert members into users. Our fleet growth for 2010 is primarily directed at these opportunities, as we are only planning for modest growth in the airport leisure segment.

The bottom line on pricing is that Hertz commands a premium price for our premium service. We will institute price increases as frequently as appropriate, that is when demand is rising and the market is supportive. On the next slide, in the US

In early January, we raised prices on February forward rentals. Unfortunately, these met with competitive resistance and had to be rolled back. In early April we tried again with a price increase nationally for airport leisure rentals beginning in June. This increase has been sustainable because of the strong seller demand. Finally just last week, we raised prices again at about 50% of the US locations.

Coming out of the recession, we're starting to gather momentum. Transaction base and price are equal drivers of growth strategy across every business. As I told you, our model is differentiated from the rest of the market. We have six lines of business which individually have total revenues ranging from $0.5 billion up to $1.8 billion. Each business has a different cadence in its own growth characteristics.

On Slide 9, we have illustrated the expanse of our opportunities in these businesses even if we only get back to the 2007 peak. For example, total rental car revenues in the US from commercial accounts at the airports is down $337 million below 2007 levels.

That means that at the end of 2009 we still had 33% more growth to capture before we're back to peak revenue levels in this business. The good news is, we're on our way. You can see that commercial airport revenues improved 7% in the first quarter and that includes a 17% volume increase in March. Similarly, on a consolidated basis, you can see that there's a huge amount of growth opportunity capitalized on or over the next couple of years. It is significant.

Okay, now let's get into specifics for the first quarter starting on Slide 10. On Q1 consolidated, total company consolidated revenues was up 6.1% in the latest 3 months driven by another strong performance in US rental car as the business traveler returns. The increase in rental car demand more than offset a 15% revenue decline in equipment rental.

Our worldwide rental car satisfaction scores improved nearly 12% in the first quarter as we continued to refresh our fleet, capitalize on our richer mix of car classes, and improved overall service through Lean Six Sigma process initiatives, which are currently being rolled out across our major airport locations in the US and Europe.

We took actions in the first quarter to generate cost savings of $99 million, or 33% of our total 2010 target of savings. You can see our progress on the next slide. Worldwide rental car net depreciation per unit improved 12% due to improved fleet management practices on both the buy and sell side.

All of this helped drive our consolidated adjusted pre-tax margin 330 basis points higher and our consolidated corporate EBITDA margin 140 basis points higher than last year. As I said, the US rental car business continues to be the catalyst behind the company's progress as seen.

Switching to US rental car, in the US, total revenues were up 9.9% in the quarter compared with last year. Other growth, you can see on Slide 12 that airport contributed 45%, Advantage accounted for 33% of the increase, off-airport added another 21.5% of that increase. Ancillary revenues which is included in each business unit's revenue also made a large contribution.

Commercial rentals on airport which are made up of large corporate customers and small business account programs delivered a 7.4% revenue increase over last year on escalating demand for our large business accounts. Our small business accounts which are highly contributory are not yet seeing the same pace of recovery as their Fortune 500 counterparts. As that business ramps up, it will incrementally both volume and pricing.

On Slide 13, revenue per day (RPD) which encompasses both price and mix was up over the prior year. For our Hertz airport operations, excluding Advantage, overall RPD was up 1.2% on 3.1% higher transaction base. In the airport leisure segment, we increased RPD 3.4% despite no change in volume year-over-year.

On the flip side, commercial airport RPD declined 1.4% while it's transaction base were up 7.1%. Switching to off airport, RPD was up 1.9% on 6.5% higher volumes driven by both the leisure [inaudible] vehicle replacement businesses.

On the next slide, US fleet efficiency fell 320 basis points in the first quarter in addition to the Toyota recall and the severe weather conditions. The increase in short-term corporate rentals accounted for the balance of the decline. As I mentioned, utilization is now back on track and up year-over-year.

Monthly depreciation for vehicle was 14.4% lower than the 2009 first quarter's level driven by strategic fleet management actions including lower acquisition costs. US rental car employee productivity improved by 3.7%. Our net promoter score rose 790 basis points in the US or 18%, reflecting the appeal of a newer fleet and the addition of popular new car classes.

On the used car front, residual values are significantly improved from last year when we experienced some of the lowest levels in our history. The US rental car adjusted pre-tax margin was up 410 basis points in the first quarter. For corporate EBIDTA, we achieved a 380 basis point margin improvement benefiting from better than expected US leisure demand, recovering corporate buy-ins and discipline cost management.

Switching to Europe now, the European rental car business on Slide 15 got off to a slow start this year due to adverse weather conditions and an air traffic controller strike in France and a continued revenue decline in our truck and van business there, which typically follows lagging commercial and industrial trends. But things are getting better.

Revenue per transaction was up nearly 2% while direct operating expenses were down about 2% and monthly net depreciation per vehicle favorably declined 10% due to stabilizing residual values across the continent and lower acquisition costs for the 2010 model year vehicles.

Europe's adjusted pre-tax loss improved 25.6% from last year on a nearly 1% decline in revenue. The recovery in select European regions is happening earlier than we had anticipated. We saw surprising upturn in both price and volume beginning in March for corporate and leisure rentals. In fact, March was the first month in 18 consecutive months that we reported rental rate revenue growth in Europe.

We'll have to monitor this against the travel interruption caused by the volcanic activity in Iceland. But based on the advanced reservation build, we believe a more favorable trend is underway way in Europe.

On the next slide, for equipment rental in the first quarter, rental buying was down 14.4% from last year. But sequentially, year-over-year volumes declined at a much slower pace than the 2009 fourth quarter's 24.2% decline. The positive catalyst came from momentum in the industrial sector, primarily from new petro-chem projects in Canada, after oil topped $80 a barrel, and from infrastructure project in the South Eastern United States.

For all of North America, industrial buy-ins were positive year-over-year in the first quarter and pricing was down only about 5%. Worldwide, our pricing in the latest 3 months was down 8%. I’ll note that the year-over-year pricing top was much tougher for Hertz than for some of our competitors as our pricing was down only 4.2% in last year's first quarter. One of our competitors had an 11.5% decline in the first quarter of '09.

In the base of the downturn for the last 10 months, we have been tightening Hertz's cost structure by implementing long-term process improvements, rationalizing locations, and deferring major maintenance projects for under-utilized fleets.

Now we're working to get our equipment overhauled or tuned up in time to capture the early demand in the markets we serve. This requires more substantial investments in maintenance that until recently had been deferred. In the quarter, maintenance costs were equal to last year despite a 15% revenue decline. These factors drove equipment rentals worldwide corporate EBITDA margin down to 33.8%, still online with our expectation.

By the second half of the year, we expect corporate EBITDA margin to return to last year's 40% plus levels. Based on our positive first quarter volume trajectory which continued into April, we believe that the first quarter is the bottom of the seasonal and cyclical [inaudible] and expect to continue to see sequential monthly improvements going forward.

Switching now to revenue opportunities. Our diversification of businesses, markets, and products is a competitive advantage for Hertz. We are extending our Hertz umbrella brand across a range of services allowing us to sell more products to existing customers and reach out to new markets.

Products like Connect by Hertz, off airport insurance replacement, and a multi-month rental offering, will help smooth out the seasonality of our revenue and new brands like Advantage appeal to the most price-conscious segment of travelers where we currently have only a limited share.

In support of the Hertz classic brand, we launched a new national TV campaign in the middle of March called, Journey On, from which we've received very positive feedback and gotten thousands of online reviews. The advertising campaign is next scheduled to launch in France in May in time for the holiday summer booking season.

Now let me give you an update on Slide 17 on a few of our growth initiatives before I turn the call over to Elyse for detailed financial review. For the urban hourly renters, we continue to expand Connect by Hertz, adding 5 new universities to our car sharing program in the first quarter including the University of Kentucky, bringing the total to 38 schools. Our Connect membership now exceeds 15,000 subscribers.

For the value conscious traveler, our US pre-paid rental program continued to build momentum generating $20.7 million of revenue in the first quarter. Since launching in December of 2008, this program has delivered nearly $103 million of revenue. Our Advantage economy leisure offering, which we acquired in April of 2009 has surpassed our expectations for market share margin and volume.

In the first quarter, we're on pace for an annual revenue run-rate of $150 million. Today, Advantage is profitable with 25 airport locations covering major U.S, leisure destinations, including the one recently opened in Texas. The brand already has 1.3% of the US airport revenue, and we have plans to open an additional 25 airport locations by year-end.

In the first quarter, demand for Advantages rentals and it's ancillary [rep] products were strong, especially in advance of Easter. In the $10 billion off airport sector, we opened up 100 net new locations in the first quarter, primarily co-locating with body shops, hotels, and repair facilities to serve the needs of insurance replacement customers.

Off airport rentals, which also includes leisure and local business rentals and monthly or multi-month rentals are typically priced lower than airport rentals due to the higher utilization achieved. But they also have a much lower cost structure than airport rentals, enabling the off airport business to generate equally profitable growth in mature markets.

Off airport leisure and business demand continues at a stable pace as airlines cut capacity and consumers opt to drive to their leisure or local business destinations. Finally, total US ancillary revenue from upselling car classes and marketing additional products like insurance, refueling, child seats, ski racks, and DVD players increased 23% year-over-year in the first quarter, as both airport and off airport locations focus on this revitalized program.

We are investing in our employees, innovating our products offering, and refreshing our fleet. As a result, our service scores are climbing. We're successfully executing a growth plan that is positioning 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:

Let me begin on Slide 18. We are very pleased with the first quarter financial performance. The recovery that began in US rental car late last year continues to build momentum and the turnaround is evident in the results. On a consolidated basis, we generated $1.7 billion of revenue, a 6% or $96 million increase over the same period last year.

As Mark mentioned, worldwide rental car growth more than offset the continued revenue decline in worldwide Hertz. I'll talk more about revenue growth drivers when I discuss results by business units in just a minute. On a GAAP pre tax and an adjusted pre-tax basis, we were able to reduce last year's losses by 24.9% and 40.7% respectively.

The improvement was driven by reductions and depreciation expense and SG&A which was down as a percent of revenue on a GAAP basis by 370 and 50 basis points, respectively. Direct operating expenses remain flat as the percent of sales year-over-year in spite of equivalent rental revenues decline.

Adjusted EPS improved 52% in the quarter, reflecting a $0.12 per share loss in the latest periods, compared with a $0.25 per share loss in the first quarter of 2009. The improvement was driven by higher revenue, efficiency savings, lower depreciation costs, and reduced restructuring expenses.

Diluted earnings per share on a GAAP basis improved by 27% from loss of $0.51 to a loss of $0.37 per share last year. The strength in US rental car operations together with the stabilization of European rental car helped to offset the challenging quarter experienced by our worldwide equipment as it came up against its toughest year-over-year comp since the recession began. Now let me give you some more detail on the performance trends by business unit.

On Slide 19, our worldwide car rental revenue for the quarter of $1.4 billion was up 10.8% year-over-year, or 7% excluding the benefits of foreign currency. US revenue growth was up close to 10% while Europe was essentially flat.

Other international markets saw revenue growth particularly Brazil, Australia, and New Zealand which were up 19%, 4%, and 8% respectively excluding currency effects. Worldwide rental car generated corporate EBITDA of $54.4 million within the quarter, which is seasonally the lowest volume quarter for the company. The reported earnings represent a $65.3 million year-over-year improvement.

This improvement was triggered by revenue growth, lower per-unit depreciation per month, and the realization of cost efficiencies, all contributing to the 450 basis points adjusted pre-tax margin improvement experienced during the quarter.

Turning to worldwide rental car fleet efficiency on Slide 20, as Mark mentioned, the Toyota recall and the unusually harsh weather had a negative effect on fleet utilization in the latest quarter. In the US, in addition to the recall and weather, the return of the corporate traveler whose average rental transaction length is only 2-3 days, had an adverse affect on fleet utilization.

You'll remember that corporate travel volumes were down significantly in 2009, while off airport volumes which have an average transaction length of 6 days were growing. In the 2010 first quarter, 32% of our domestic car deletions were sold through alternative channels and not through traditional wholesale auctions.

As Mark mentioned, this typically reduces cost in sales, improves sales price, and keeps sales [inaudible] cars on rent longer. Now, let's take a close look at rental cars fleet cars measured as monthly, net fleet depreciation per unit. Our year-over-year worldwide car costs were down 12% in the latest quarter. In the US, we've reduced car costs on a per-unit basis by 14.4% from a year earlier.

As you can see on Slide 21, our domestic multi depreciation cost have been decreasing sequentially since the fourth quarter of 2008, when used car residuals were at historic lows. The sequential quarterly improvements in car costs are credited to our execution of disciplined fleet sourcing strategies, better portfolio mix, and continued strength in the domestic used car markets.

We expect lower year-over-year depreciation for the full year of 2010 as we add better priced cars into our fleet and continue to optimize the mix to serve a variety of customer preferences. In Europe, monthly depreciation per car also continued to improve in the first quarter, falling 9.6% from 2009's first quarter on a constant dollar basis.

And just like US rental car, our purchasing terms have improved with our latest round of fleet negotiations, helping to counter the stabilizing but still lower residual values across the continent. For the full year, we expect US and European car costs to be down 5% to 6% and 7% respectively.

On a worldwide basis, our fleet was 66% risk at the end of the first quarter with an average fleet age of 8.2 months, younger by almost 2 months versus last year. At quarter end, risk cars in our US fleet also represented 66% of the total domestic fleet, and the average age of the overall US fleet was 7.7 months, compared with 10.2 months in the first quarter of 2009.

We continue to sell our US risk cars at approximately 20.5 months and bringing in new cars in order to freshen up our fleet to enhance the customer experience. In Europe, we're also refreshing the fleet with a more appealing mix of cars.

Now let's turn to the results of our equivalent rental business on Slides 22 and 23. Hertz first quarter back revenue was $237 million, a decrease of 15.2% year-over-year. Volume declined 14.4% in the latest quarter, with pricing down 8% versus down 4.2% in the 2009 first quarter. Industry fleet capacity remains high, keeping pricing pressure on the entire industry.

In the quarter, we reduced the equipment rentals businesses direct operating and SG&A cost by 6% in the quarter. However, the pace of revenue decline and the increased maintenance costs on an older fleet drove corporate EBITDA margins below 40%. However, we do see demand for industrial and construction equipment beginning and picked up into the second quarter. This is causing us to further increase maintenance spending in order to get underutilized fleet ready for rent as Mark indicated. You can see that our equipment rental fleet on an average acquisition cost basis was down 6.2% year-over-year. Moving to Slide 24, first quarter equipment fleet purchases were $31.9 million, versus disposals on a first cost basis of $88.8 million.

This compares to first quarter 2009, where additions were $31.9 million and disposals were $220 million on a first cost basis. And while there is some improvement in equipment residual values, prices still remain unattractive. Therefore, we currently expect to sell limited amounts of equipment at auction this year.

At March 31st, our worldwide equipment fleet age was 47 months, a two month increase from 2009 year end. Now let's move on to Slide 25 for an update on our $1.7 billion international refinancing. We expect to complete the remaining fleet debt refinancing sometime this summer.

In Europe where the bulk of the refinancing will take place, we are currently negotiating three related financings; a secured revolving credit facility, amending and extending our existing fleet securitization facility and a bond offering. We are in the process of finalizing the terms and conditions of these transactions and expect to close in June.

In Australia we expect to utilize securitization or other secured financing as our primary source of fleet financing, and to continue to opportunistically access operating and capital lease financing that is locally available. Finally, we are going to upsize our Brazilian facility through a syndicated loan process with existing and new lenders.

We continue to be confident that these refinancing will be in place over the course of the summer. We also feel very comfortable with the progress we've made towards completing this refinancing. And we will be providing additional details as each transaction closes.

Net interest expense was $179 million in the quarter, up $15.7 million over last year driven by $11.5 million of interest on our convertible debt that was issued in the second quarter of last year. This is on Slide 26. For the full year there's no change in our estimates. We still expect 2010 interest expense to increase by $90 million to $110 million over the 2009 levels, based on the fleet financing that took place in the US in 2009 and the upcoming international refinancing.

Restructuring and restructuring related charges in the latest quarter was $16 million, of which $15.3 million was cash, compared with $38.4 million in restructuring and related charges in the same period last year. These charges mainly relate to employee reductions, facility closing costs and consulting fee.

We still expect restructuring and restructuring related charges of no more than $50 million for 2010. This excludes any impacts on the acquisitions. For the first quarter, the GAAP effective income tax rate was 7%. Cash income taxes paid in the quarter were $24.6 million.

The GAAP effective income tax rate is lower than the statutory tax rates, primarily due to losses in certain non-US jurisdictions for which no tax benefit is realized. On an adjusted basis we use a rate of 34%, which is a normalized rate over the long term. We estimate cash taxes to be $40 million to $47 million for the full year of 2010.

Now if you turn to Slide 27, you'll see that we comfortably met both of our quarterly corporate financial covenances. In fact, our corporate consolidated leverage ratio was 3.71 times, well below the maximum 4.75 times allowed. And corporate interest coverage ratio was 3.29 times, well above the minimum requirement of 2.25 times.

As a reminder, the convertible debt issued under Hertz Global Holdings in May is not counted in these covenant calculations since the covenants only apply to the Hertz Corporation results. On the next slide let's take a look at cash flow. Cash flow from operations in the quarter was $301.2 million, a 63.3% improvement over the first quarter of 2009 reflecting improving business trends.

The first quarter's levered cash flow, which is cash available to pay down corporate debt, was negative $148.7 million, versus negative $36.7 million in 2009, reflecting the impact of increased investment in fleet. And you are aware at this time in 2009 we were reducing fleet levels and extending the average age of the fleet.

The fleeting patterns this year are significantly different and demand is building, and we are refreshing our fleet with 2010 model year cars and enhancing our mix of higher end vehicles. And last year Hertz was also defleeting aggressively, as demand for equipment dropped off significantly. We've slowed the pace of equipment sales to roughly half the level of deletions we had in the 2009 first quarter sales as used equipment residuals remain low.

I should also note that a more sizeable portion of our US fleet is funded by our recently refinanced domestic fleet debt, which lowered our US advance rate by 7 percentage points year-over-year requiring a higher use of corporate cash flow to acquire fleets. In the second quarter we also expect levered cash flow to be negative as we add rental car fleet to meet peak summer demands.

But those seasonal investments will ultimately provide positive cash flow when we defleet coming out of the peak to adjust for the lower fourth quarter demand. The end of the quarter with a total net corporate debt of $3.8 billion, total net fleet debt of $5.6 billion and $800.7 million of unrestricted cash on our balance sheet. At the end of the quarter we had $1.7 billion of corporate liquidity available to fund our growth initiative. With that I'll turn it back to Mark.

Mark P. Frissora

Thanks Elyse. Let's move to Slide 29 if we can. The strength of the US rental car business continues to dominate our consolidated financial improvement. In the first quarter, corporate rental car transactions were the biggest contributor to the progress we delivered year-over-year. Companies are now saying that their cuts in travel spending are behind them, which supports the continuation of this favorable trend.

The outlook for leisure travel in the peak season gets better each week, with reservations for the third quarter currently up double-digit percentages globally. As we look ahead, right now volume represents the biggest upside in the 2010 guidance we issued in February.

While conditions are still very uncertain as they relate to rental car and equipment rental pricing, and Europe is just recovering from the turbulence in the airline industry sparked by Iceland's recent volcanic eruption, volumes continue to gain momentum. In rental car, even with the recent price increases in the US and Europe, the reservation build continues to be strong.

Additionally, the return of the commercial customers supports upside volume opportunities worldwide. In fact, in the US in March commercial airport volumes were up 17% from a year earlier. And March 2010 also marks the first time since July of '08 that both large corporate accounts and small business accounts reported year-over-year monthly revenue growth.

In the equipment rental business the demand uptick in the industrial markets helped in part by initial stimulus spending encourages us that the trajectory out of the trough could be a bit better than we expected. Industry pricing across both businesses, however, is still a wild card.

But I can tell you with certainty that we will be efficiently fleeted, and as always will capitalize on opportunities to improve pricing. In addition to the volume acceleration, strong fleet management execution on both the buy and sell side is driving depreciation lower, outpacing our earlier projections for the year.

Our strategy to capture a better residual and improve utilization by keeping our cars on rent right up until the point of sale is generating traction as we pursue alternative used car sales channels in the US One of our new products is our rent-to-buy offerings. We now offer our rental cars for sale direct to consumers in 19 states across the country.

On average, since the product launched we've been able to get a much higher price per car than what we would normally get at an auction. And our cost of a direct consumer sale is lower than an auction sale. Since the end of 2009, the number of unique visitors to our website has increased 75%. So we're definitely building awareness.

And we expect recognition and transactions through the site to continue to grow as a result of our recent partnership with Kelley Blue Book, who will provide price comparisons to perspective customers directly from our website. So we're really stepping up our efforts to capture more retail car sales.

As a result of the higher than expected volumes and the declining depreciation costs, as well as the early onset of an economic recovery in Europe, we're updating the guidance we put in place at the beginning of the year to reflect our optimism to the macro environment as well as a greater return on our strategic initiatives.

This guidance, however, does not reflect any benefits from the acquisition. On Slide 30, for the year we now project revenues in between $7.5 billion and $7.7 billion, the higher revenue coupled with the substantial cost savings achieved in just the first quarter leads us to upwardly revise adjusted pre-tax guidance to between $290 million and $305 million, which would be a 46% increase over 2009. Our corporate EBITDA expectation is roughly 10% higher than last year as we get more comfortable with the ease of the year-over-year equipment rental comparison in the second half and as the industrial project pipeline expands.

Using 410 million shares for the full year, that would deliver earnings per diluted share between $0.43 and $0.45, a 48% improvement year-over-year. I’ll remind you that in the second quarter last year, we took salary actions to sustain operations through the most challenging period of the recession. Now that those actions have been reversed, we’ll have a tough comp year-over-year in the current quarter.

For the longer term, one of the things we think people should consider when they think about Hertz is the magnitude of the impact on consolidated profitability when the equipment rental business turns positive. The equipment rental business becomes an unrivaled competitive advantage for us at that point.

Annual adjusted pre-tax margins for equipment rental were 21% at our peak, higher than rental car margins. It has always been an accretive driver of earnings momentum and with our strong cost focus over the last two years, business segment diversification, and global expansion, it should be able to produce even greater profit margins coming out of this cycle.

Now let’s talk a little bit about the acquisition. Starting on Slides 4 and 5 of the Dollar Thrifty acquisition, as you know on Sunday, we signed a tentative agreement under which Hertz will acquire Dollar Thrifty for $41 per share including assumed debt in a mix of cash and Hertz common stock. Post acquisition, Hertz will be a $9.3 billion company with roughly 9,800 locations on 6 continents worldwide.

Our multi brand US market share will expand from 19% today to 24% post deal, making this the second largest rental car provider. We’re excited about the opportunity to further expand our customer reach. This is clearly a strategic acquisition and we believe Dollar Thrifty is an excellent fit for Hertz, as you can see on Slide 6 and Slide 7.

Together we’ll be able to compete even more effectively and efficiently against other multi brand car rental companies, offering customers a full range of rental options between Hertz, Dollar, Thrifty, and Advantage brands.

Financially, on Slide 8, we believe the deal is attractive as it is immediately accretive to earnings and structured to maintain Hertz’s strong credit profile. We have identified at least $180 million of synergies already, primarily in fleet, IT systems, and procurement, enabling the combined company to operate at even a lower cost.

I’ll note that in our assumptions, we have not included any revenue synergies. But there are actually quite a lot of opportunities there. For example, the Thrifty brand in particular has a strong international presence which will help to accelerate our leisure value strategy in Europe and other international markets.

Additionally, Dollar Thrifty has a presence off airport which will support our strategy to build our position in this growing market. Dollar Thrifty’s services, suppliers, and customers compliments Hertz’s business and extends our ability to deliver compelling services to broader based customers.

With that, let’s open it up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Brian Johnson - Barclays Capital.

Brian Johnson - Barclays Capital

Can you give us some sense of how you’re seeing pricing playing out as we go into the summer season, in particular what’s going on in the leisure market, where do the price increases get you? When you say up is it over sequentially or is it year-over-year? What’s the tenor of discussions with corporations, especially as they get their employees back on the road again?

Mark P. Frissora

If we just look at leisure pricing for rental car, in the US again I mentioned in the script that we were able to pull an increase most recently for the summer season going forward in June. We’re attempting to pull another increase now and I’m hopeful that with the strong demand that we’re seeing that other rental car companies we’ll see that as well and the fleets will stay tight enough that the industry can support a modest increase for the summer season.

In Europe we’re seeing much stronger dynamics on pricing where pricing in the summer season actually looks significantly stronger than what I just outlined in the US. Again, due to very strong demand and tighter fleets in the Europe continent.

On the equipment rental side, again, on pricing, you just never know with equipment rental. We expect that as volume continues to improve and as the year-over-year comp becomes easier that pricing will get down to neutral.

As it relates to business travel and our corporate customers we continue to see pressure but nothing like we saw last year. We were seeing 500 to 600 basis points reduction in pricing last year as we went through the recession. Things are still tough. We’re certainly not at 500 or 600 basis points but 100 to 200 basis points kind of pressure we’re seeing with larger customers.

That’s being offset though with smaller customers. We’re able to see a little bit better increases there. So net net, we’re pretty neutral on the pricing environment in business. We think that the number kind of worst case scenario would be 100 to 200 basis points down. Best case scenario, flat to up 1. So gain very difficult because we’re renewing contracts every single month and every single contract is a different competitive set, different --.

Brian Johnson - Barclays Capital

On the on airport leisure, the price increases you’re looking at for June, where would that get the year-over-year number to on the leisure side, what might go in --

Mark P. Frissora

I’m not going to forecast that. I mean if you just look at a straight number. The reason I’m not going to forecast because I don’t know what the competitive response is going to be. We could change that five times in the next three days. Pricing is extremely competitive hour by hour, day by day. So for me to make a forecast is grounded in unreality, I’ll put it that way to you.

But I will tell you this – if it’s stuck and we got everything we’ve put forward to far, we’d get a 200 basis points improvement in the third quarter.

Operator

Your next question comes from Himanshu Patel – JPMorgan.

Himanshu Patel - JPMorgan

First on the earnings for the US rental car commercial pricing, what quarter would you expect that to flip to positive?

Mark P. Frissora

I don’t have an expectation like that. I wish I could tell you one but the best… I think the comps become extremely easy by the fourth quarter of this year so if I were to make a prediction that you can’t count on because I don’t know what competitors are going to do, I would make a prediction of fourth quarter. That’s about the best way I can answer it unfortunately.

Himanshu Patel - JPMorgan

Then I think URI noted that they had started seeing an uptick in used equipment prices. I’m wondering what are you guys seeing out there on used prices for equipment?

Mark P. Frissora

I think similar things. We would echo their remarks and in fact, if you look at cash proceeds on sales for us this quarter, they were $52 million. I think in documents from the other competitors we saw that URI was $35 million and RSC was $27 million so we were at $52 million. We felt pretty good obviously and we’re seeing that improve. So in terms of cash proceeds on sales, you’ll see us continue to sell to right fleet as that market continues to be relatively better than it’s been in the last year or so.

Himanshu Patel - JPMorgan

Historically is that how upturns in that market start?

Mark P. Frissora

Absolutely.

Himanshu Patel - JPMorgan

On the Dollar Thrifty announcement, have you guys had preliminary discussions with the FTC and where are they on sort of antitrust issues here?

Mark P. Frissora

We haven’t had any official discussions with the FTC at this point. We feel pretty good about our position there. We’ve certainly been advised by a great team of lawyers and so has Dollar Thrifty and based on that review that we’ve had, we feel highly confident the transaction will pass muster.

So I think it’s fair to say that we wouldn’t embark on this transaction unless we had a high degree of confidence that this transaction would be approved.

Himanshu Patel - JPMorgan

A couple of small technical questions. The Dollar Thrifty cash dividend, would that be a tax free distribution?

Mark P. Frissora

No it’s not.

Himanshu Patel - JPMorgan

Then the $180 million of synergies, two questions on that. How long would that take to be realized and then can you help us just size that relative to sort of the synergies you were able to realize at Advantage? I know orders of magnitude are totally different here, but how are you looking at it in terms of volumes of the two businesses? Is this a synergy number that we should view as being very reasonable or conservative, aggressive, relative to sort of what you had seen before at Advantage? How should we think of that number?

Mark P. Frissora

Advantage only had four airports so there really weren’t any synergies there. We built Advantage from scratch. We used to have about 50 or 60 airports but those kind of wound down over a 2 year period before bankruptcy so that’s a very difficult comp. I will tell you that we’ve done a lot of work integrating franchisees in other smaller rental car companies. We feel highly confident that the $180 million will be realized.

In fact, that’s a conservative estimate. I bring it up because we have the numbers. We know what it is, it’s not like it hasn’t been identified. We have the concrete hard evidence, the $180 million is the minimum we’ll deliver and that will be over about an 18 month period after closing. When the final deal closes, we would expect to get that in at least 18 months.

It provides about $0.30 a share, about a 25% accretion rate, and again, very positive about that. So I don’t feel like there’s really any issues around it at all. In fact, our number is much higher than that as we initially did our due diligence but we feel confident in giving you a number of $180 million.

Operator

Your next question comes from Emily Shanks – Barclays Capital.

Emily Shanks – Barclays Capital

Can you give us what Dollar Thrifty’s cash balance was as of March 31?

Mark P. Frissora

No, we can’t. They’re going to give you that on their earnings call.

Emily Shanks – Barclays Capital

Around the bond deal for the international financing, can we assume it’s going to be a secured bond deal out of a vehicle related bucket subsidiary?

Elyse Douglas

That is what we’re working toward right now.

Emily Shanks – Barclays Capital

Just a question around off airport generally. We’ve heard some of your competitors it seems like are shuttering their storefronts and was just curious if you view that as an opportunity to take more market share or how you’re viewing that as a growth channel right now?

Mark P. Frissora

This is on the equipment rental, right?

Emily Shanks – Barclays Capital

No, I’m sorry, on the US car rental off airport market.

Mark P. Frissora

Yes, I’m sorry. On off airport, we feel like we’re gaining share right now. We look at it as an opportunity for sure. Scott, you want to talk to that?

Scott Sider

We see that as an opportunity. We’ve had really strong growth off airport, middle double digit growth, and we see that continuing with people closing locations, that’s just more opportunity for us. We opened with over 100 locations the first quarter. We’re going to continue with the growth forecast through the end of the year.

Emily Shanks – Barclays Capital

Can we assume that along with the growth, it remains a profitable business?

Scott Sider

The margins are improving significantly and it is a profitable business.

Mark P. Frissora

The margins actually this year will double from last year and we made money, solid pre-tax margins, last year kind of mid-single digit margins last year, and we expect the margins at a minimum to double. So we feel really good about the profitability of that business model and how it’s contributed to our earnings.

Operator

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

Richard Kwas - Wells Fargo Securities

I guess on the depreciation, I know you gave guidance for year-over-year declines of 5% roughly. Should we expect that sequentially to continue to come down as the year progresses?

Mark P. Frissora

Year-over-year it will go down. I don’t know if I’d say sequentially, no. I don’t think we can say that, but we can say year-over-year it will continue to probably improve a little bit.

Richard Kwas - Wells Fargo Securities

Within the $180 million regarding the synergies with Dollar Thrifty, can you break those out? I know you gave some detail in terms of what buckets they can fall in, but what’s most significant? You talked about potential revenue synergy. How are you thinking about that right now?

Mark P. Frissora

We didn’t put any of those in as you know and I guess where we see the opportunity primarily on the revenue synergy side would be in Europe. Obviously in Europe there’s big opportunity for leisure because we don’t participate in a huge way there and yet there are markets and locations that Dollar Thrifty has and using that brand name we could open up very low cost places if you will with the Thrifty brand and leverage that pretty quickly in Europe.

I don’t want to give you a number at this point just because we’re sizing the opportunity and we’ll be expanding as soon as the deal is closed. We’ll be able to expand that footprint, but it’s significant. In terms of the synergies that we have identified, it’s fair to say that fleet ends up being a big area, probably in the neighborhood of $70 million kind of numbers, fairly easy to get to those, that level.

These are on the conservative side. Information technology probably at least $20 million there. The non-fleet procurement supply chain, we have a fairly large supply chain network and by using the same pricing that we have now with the additional buy that we have with Dollar Thrifty, could yield as much as $25 million, $30 million. So those are the biggest buckets. I’ve got a lot of other one-offs that I won’t go into but those are the biggest drivers right now.

Richard Kwas - Wells Fargo Securities

Final question on equipment rental. In terms of the original guidance you talked about getting to flat revenue performance year-over-year in the middle of the year and then potentially up because of easier comps. You clearly feel more positive on the industrial front. What about non-resi construction? Any improvement, things getting any better there, because that’s such a big piece of your mix still.

Mark P. Frissora

It is and we still feel good about that. Gerry, would you offer up some comments?

Gerald A. Plescia

That portion of our business is now down to 38% of the total business so it is a little bit less but we’re seeing sequential improvement in commercial projects. Still negative year-over-year but warehousing, hotels, and the like are starting to move sequentially month over month. Negatives will get less. That combined with our industrial strength and some more stimulus related water and sewer projects, transportation terminals, when you mix it all together, the non-res will sequentially get better mixed with the industrial. We still feel good about the back half positive revenue return.

Operator

Your next question comes from Christopher Agnew - MKM Partners LLC.

Christopher Agnew - MKM Partners LLC

First question, a little bit of bigger picture question. Can you give us a sense of where you think you are in terms of fleet management and continuing to improve depreciation per unit costs? I think you’ve talked a little bit about vehicle remarketing initiatives, increasing your risk mix, and how does Dollar Thrifty help you to that end?

Mark P. Frissora

On fleet, we’ll talk about it in two different ways. I’ll frame it with and without Dollar Thrifty. Without Dollar Thrifty, we continue to shift our mix in selling cars on a remarketing basis to non-traditional channels like auctions, so our goal is to get to 50% of our sales that would be non-auction. So it would either be dealer direct or through rent to buy.

As that improves, we obviously drive our depreciation down per car because we’re getting $300 more per car on average and that [nets out in that] depreciation number. So we believe the guidance we’ve given so far is conservative and there’s upside. As we get better and better remarketing, there’s upside in terms of our net depreciation per vehicle. In addition to that, the better utilization numbers that you’re going to see versus the first quarter provide upside for us as well.

Then in terms of looking at Dollar Thrifty in combination, as you know, we peak in mid week in terms of demand. Most of our larger cities will experience 92%, 93% plus utilization on Tuesday, Wednesday, and Thursday, then as the weekend approaches, we kind of ramp down to probably 70% roughly. So we have some inefficiencies obviously on those airports. Dollar Thrifty’s demand patterns really match ours so that they supplement and provide a synergy for us.

When we combine the fleets of both companies, we treat them all the same and we’ll be able to pool that fleet on the weekend and that same fleet will end up using rentals on the weekend and provide a much higher utilization. We think our utilization may be as much as 300 basis points just by combining the two fleets.

Christopher Agnew - MKM Partners LLC

A follow up question to earlier. You said you’ve had no official discussions with the FTC. Have you opened a line of communication at all and if there are… How are you going to address areas of potential market concentration? How does it work in terms of seeking to reduce that or counter presence or things like that?

Jeffrey Zimmerman

We have not initiated any formal conversations with the FTC and we’ll do our formal filing in approximately mid May. The merger agreement that we entered into requires that we undertake [inaudible] if the agency were to determine that there was an unacceptable concentration.

Mark mentioned earlier, and I want to reiterate, that we have looked at this very, very carefully with capable counsel on both sides, and remain very, very confident that this deal will be approved.

Mark P. Frissora

The merger agreement itself calls out for a carve out and that carve out we think provides adequate protection for deal certainty on this. It’s a large number as a carve out in the merger agreement and again, that number provides a very, very great deal of certainty. I feel confident that this is a deal that will get done and that the FTC will approve it.

Our market share position at a high level is very low compared to our competitors. I might mention to you that in the slide that we showed you guys on Dollar Thrifty acquisition, of the total rental market in the US, we have about 20% share, Enterprise has about 53% share, and Avis/Budget I believe is number two at approximately 20%?

So post acquisition, we’ll be at 23% compared to Enterprise’s 54%, compared to Avis/Budget’s 20%. So we end up picking up a couple share points against Avis and Enterprise still comes up being over twice our share of the total rental market, so we feel confident given the view of the market that we’ll be in good shape from an anti-trust standpoint.

Operator

Your next question comes from John Healy – Northcoast Research.

John Healy – Northcoast Research

I wanted to talk a little bit about kind of your longer term view on the capital structure of the company. Obviously this deal would help you bring down the leverage ratio of the company. Can you talk a little bit about kind of your goals there and how Dollar Thrifty may fold into Hertz and get you closer to those goals? The second part of that question is obviously the deal increases the percentage of business and profits in the rental car side away from the equipment rental side even further. Your thoughts in terms of the long term vision of Hertz and the portfolio that the business is, how you see that maybe over the next cycle?

Elyse Douglas

Obviously, and I think we showed this to you on Slide 8 of the Dollar Thrifty that we provided. This deal at closing on a pro forma basis does improve our overall leverage. Obviously we’re going to be looking at our liquidity so we may actually issue some but this will clearly be credit positive to credit neutral at a minimum.

We’ve recently gone to the rating agencies and looked out over the next three years and we think we have a clear path to investment grade and that’s clearly one of our objectives. So we’ve got a number of initiatives in addition to the acquisition as well as just growth initiatives in our business and profit improvement. It’s going to drive a lower leverage over the next two years. So our goal is still to remain investment grade and we think we have a clear road map to get there.

With respect to our view of the portfolio, we constantly look at the portfolio and opportunities for us to potentially create shareholder value and will continue to do that. Right now we’re happy with where the portfolio sits between rental car and equipment rental but obviously if the right opportunity comes up to create shareholder value, we’ll certainly take a hard look at it.

John Healy – Northcoast Research

The strong performance out of rent a car this quarter in terms of both rates and volume, can you give some perspective if you feel like you gained market share versus your [inaudible] in the first quarter and maybe how you feel Hertz’s results compared maybe to the market results?

Mark P. Frissora

I think we definitely gained share. You can see it in the January data and the February data as well from the airport authorities. So we know we’ve gained share against our competitors. I guess in terms of how we stack up on growth versus our competitors, I think it will be very favorable and I think it will be driven by the fact that again we have strong business rebound and that business rebound helped us.

But in addition to having, we think the highest share of a Fortune 500 companies, we also have a couple other drivers. One is that off airport growth that’s very strong for us, unlike our competitors, and that’s a big growth driver.

The second thing that’s very big for us is because we have a global network and we have big corporate owned stores and locations in Europe, our inbound business which is in all sectors, it’s inbound on both leisure and business, that business is a big chunk of our US rental car revenues. It’s about $700 million, $800 million a year and inbound is up significantly. So people are traveling more on inbound as well form Europe into the US and from US into Europe and that piece is generating fairly large growth.

Finally, Advantage as you know is up $29.6 million year-over-year so that new leisure brand is driving a lot of growth for us as well. These are all things that are new for Hertz, that our competitors arguably don’t have some of those growth drivers that are helping us differentiate ourselves.

John Healy – Northcoast Research

Last question, kind of a bigger picture one as well. Obviously there’s always been discussion that this industry would consolidate even further to three players over time. I was just hoping to get some color from you on why now and kind of what propelled the deal to come to a head at this point??

Mark P. Frissora

I think we reported that we started this round of discussions probably in November of last year. It’s fair to say that those discussions evolve as the stock price and earnings evolve. We felt that it was a good opportunity for both companies to get together at this time when there’s been a lot of value creation on Dollar Thrifty’s side and when we look at continued future value creation, it would be enhanced by partnering with Hertz because we provide obviously an awful lot of systems support and investment that’s already been made in our company that they would have to make and then of course the synergies the two companies combined because they are such a good fit in each airport where our weakness is on leisure which is their strength.

That combination really helps us be a better player in all segments of the leisure market, whether it’s midrange, the Spartan traveler, or what we call the high end leisure market where Hertz classic brand plays best. So it just really fits all of those and it makes us feel good that now’s the right time as the industry is returning. There’s so much upside. As you know, on the slide I presented on the peak to trough, on all of our segments, there’s just tremendous upside right now and what better time to do a merger when the industry conditions are becoming favorable and have been favorable for a little bit of time?

So we thought it was the right time given the market place conditions and given the fact that Dollar Thrifty’s journey, both companies could really benefit from having each other’s help in achieving a lower cost position in the overall industry by partnering together.

Operator

Your next question comes from Sachin Shah - Capstone Global Markets.

Sachin Shah - Capstone Global Markets

Just to clarify some of the regulatory issues, what regulatory approvals are needed to complete the deal?

Mark P. Frissora

The FTC will review the deal for antitrust purposes. We will also undergo a similar review by Canadian authorities. We’ll initiate that process as I mentioned earlier in mid-May. We cannot predict with any certainty how long it will take but we would expect that this process would be concluded no later than the early part of Q4 and we would move to closing at that point in time.

Sachin Shah - Capstone Global Markets

So you expect the closing of the deal sometime in the fourth quarter of this calendar year?

Mark P. Frissora

It could be sooner than that. It could be a little later. We think most likely somewhere in the fourth quarter. I think that’s the best way to say it. Dealing with the FTC, it’s a variable process depending on what the issues are etc., but sometimes these processes go very quickly if they don’t offer a review and we would hope that would happen, but if it doesn’t happen, and it’s more longer what they call review process, typically it’s fair to say that could be 5 to months or 4 to 6 months, in that range.

Sachin Shah - Capstone Global Markets

4 to 6 months to completion from now?

Mark P. Frissora

Correct.

Sachin Shah - Capstone Global Markets

Just one question about the synergies. You mentioned frequently on the call $180 million in synergies. You also mentioned that it could be slightly higher and then you also mentioned that there are significant revenue synergies so I’m just trying to understand as a numeric amount what number should be referencing because it seems like $180 million is about 7.5% of approximately the deal value. It seems that it could actually be in the 200s if not more.

Mark P. Frissora

I think the deal value and the synergies related to the deal value actually are fairly high. I studied all the deals over the last couple years. Having synergies of $180 million on a deal value of $1.2 million as a percent of revenue is pretty high if you estimate it as a percent of revenue.

Sachin Shah - Capstone Global Markets

I’m actually looking at Enterprise so I’m just trying to … it’s already high, I’m in agreement with you, but it seems that you’re understating the synergy amount. I’m just trying to understand quantitatively how much that is.

Mark P. Frissora

We’re very consistent in the way we try to talk to investors and we always want to give investors a number that they can count on. Certainly when it comes to cost takeout and understanding that, we have a poor competency at that, it hurts now, it’s been developed over the last four years. We feel really good about our ability to be efficient and together with the Dollar Thrifty teams we’ve worked on the synergies and feel very confident in that number.

If I go over that number then confidence starts to dwindle. I want to always be able to hit the number and overdeliver on it so that’s why I said it’s conservative. In terms of revenue synergies, again, those are unknown. I wouldn’t want to give you those until we finally get a much better forecasting process in place after working with Dollar Thrifty and their franchisees around the world to see where the opportunity is there.

Sachin Shah - Capstone Global Markets

Just one last question. The special dividend, is it expected to be paid before the deal is closed? Any timing on the special dividend payout?

Elyse Douglas

It will be pretty much simultaneous with the close, right before.

Operator

Your next question comes from JJ Berney - Citadel Global Equities.

JJ Berney - Citadel Global Equities

Given how attractive this deal is for Hertz and the auto rental industry in general, can you please tell us how much consideration was given to a transaction involving a larger component of stock so that Dollar Thrifty shareholders may participate more fully in value created by this consolidation?

Mark P. Frissora

It was determined basically off of our financing requirements. Just like we have shareholders and we have banks. We looked at the mix as being optimal for our credit profile and at the same time providing value and upside to future shareholders as well, so we thought it was an appropriate mix in terms of discussions. That’s my best answer.

We can’t talk about confidential discussions that we had, whether it be [inaudible] or otherwise, but we feel that this was the best financing that we could come up with and yet preserve some value for shareholders at Dollar Thrifty on the upside.

JJ Berney - Citadel Global Equities

The reason for not providing more equity capital, I can’t imagine the banks would have been averse to that kind of structure where we’ve done with a larger component of equity involved. Particularly given how well the deal was being received today. This looks like you’re paying something along the lines of three times pro forma EBITDA for Dollar Thrifty which seems like a complete steal.

Mark P. Frissora

First of all, that’s not true. I don’t even have a three number on any banker’s statements on either side.

JJ Berney - Citadel Global Equities

Let’s do it this way. If you take the midpoint of the guidance that Dollar Thrifty has provided, and we’ll get a sense of what their numbers are over the next few weeks, and you take a look at the $180 million which is a number that you’ve put out in terms of operating synergies, and you look at the enterprise value of Dollar Thrifty which I believe even on this transaction is about $1 billion in enterprise value. If you run the math and just do one number divided by the other, I think you come up with something that’s in the low threes. Those are using your numbers.

Mark P. Frissora

Do you want to go off the call with me? I totally disagree with you and I’ll take it off the call.

JJ Berney - Citadel Global Equities

I’m more than happy to express my views [inaudible] as well.

Mark P. Frissora

You can express your views all you want. I’m just saying if you want to discuss the details of the valuation of it, I’d be happy to go offline. I don’t think --

JJ Berney - Citadel Global Equities

Great, I appreciate that. I’m just using the numbers that you’ve given us and that Dollar Thrifty has given us and so unless there’s a change in what Dollar Thrifty has said, I presume the numbers and the math that I’ve done is absolutely 100% correct.

Mark P. Frissora

And my numbers are absolutely 100% correct as well and I’m not going to go over them with you on the call right now.

JJ Berney - Citadel Global Equities

Great.

Mark P. Frissora

So we can agree to disagree on it and I’ll use methodology that’s used by any banker or anyone in business as well. I’m not disputing that your numbers are accurate, I’m just saying that the math and how you do the math, there’s a lot of devil in the details. So we need to understand what normalized EBITDA is for Dollar Thrifty, we need to understand what normalized EBITDA is for us, and we need to make sure that we’re all calculating the numbers the same way.

So in terms of the value to both shareholders, it’s excellent, and the synergies are unique to these two companies, so I feel like we’ve generated a transaction that will be a win-win for both companies given what the industry is doing now and what the future holds for it. It sounds like you’re upset about something but I’d love to go offline with you and talk about it.

JJ Berney - Citadel Global Equities

We own both so we’re actually happy today, we’d just rather be happier.

Mark P. Frissora

We’ll see what we can do to make you happy, okay?

Operator

Your next question comes from Michael Millman - Millman Research.

Michael Millman - Millman Research

Starting off on the deal and then going to some other things, could you talk about whether there was a shareholder approval requirement, sort of following up on the last question?

Elyse Douglas

Yes it does require the shareholder approval.

Michael Millman - Millman Research

It seems to me one of the biggest synergies is the ability to price the classic Hertz brand better. You didn’t discuss that at all. Could you give us some idea of what kind of synergies you might envision there over the next couple --

Mark P. Frissora

We didn’t put any pricing into the synergies. To me that’s not a synergy, that’s a marketplace condition and I don’t talk about pricing on calls because of antitrust issues. In general, we think obviously industry consolidation is always good. Having said that, we think it makes it a more competitive universe with all the competitors out there given that we now have… We compare more favorably to other competitors. Every competitor out there has a value brand.

We for the first time bought a small one out of bankruptcy and it’s really at the low end of the leisure segment which is a small piece of it. This allows us to compete in the full leisure segment now. For the first time it allows us to be competitive in the marketplace. We’ve been uncompetitive frankly having only one brand which was the Hertz brand. So we feel this allows us to be more competitive with our competitors in the marketplace. It give us that freedom that way.

In terms of shareholder approval, yes, the deal is contingent upon their shareholders to approve. We feel really good about that. There’s a lot of crossover between shareholders, about a 66%, 67% overlap in terms of their top shareholders and our top shareholders. So that’s a big overlap and that’s also reasons why we feel pretty confident that this will be approved.

Michael Millman - Millman Research

Again it would seem that what you talked about was probably the largest potential, maybe synergy is not a good word for it, I’m not sure if you’re agreeing with that or not.

Elyse Douglas

I think what we said was that these are just [inaudible] is all we’re looking at in this particular --

Michael Millman - Millman Research

Regarding current business, could you talk about the US fleet year-over-year as compared as of April whatever date today is?

Mark P. Frissora

Fleet levels you mean? I think our fleet roughly is up a little over 10% right now. Obviously we’re seeing demand levels higher than that. So we’re actually pretty tight fleeted. If you were to talk to our regional vice presidents in the US, they are all screaming for more fleet right now and we’re not giving it to them right now. We’re being tightly fleeted. We want to drive a tight fleet situation and make sure that there’s an opportunity at least to improve pricing.

Michael Millman - Millman Research

Regarding your cost, could you talk about why I guess you’d call reconciliation items is actually up year-over-year?

Mark P. Frissora

What is? The ancillary revenues?

Michael Millman - Millman Research

No, the reconciliation items. I think what you called corporate expense.

Mark P. Frissora

I don’t have that data here in front of me. Are you looking at one of the attachments that we gave on –

Michael Millman - Millman Research

No, I’m looking at your income statement.

Mark P. Frissora

We’ll take that question offline. We’ll be happy to take your call after this one. I don’t have a ready answer for you but I’d be happy to get into it. Our overall costs are definitely down so we feel pretty good about our ability to manage costs right now.

Michael Millman - Millman Research

Regarding US fleet, it looks like in the first quarter the OEMs sold about twice as much into the fleets as the fleets sold. Is t his something you’re seeing continuing? Is this a concern? Was this Toyota?

Mark P. Frissora

You said it sounds like the OEMs are doing what again? I’m not sure –

Michael Millman - Millman Research

It looked like in the first quarter the OEMs sold about twice as many cars to the rental fleet as the daily rental fleets sold into the residual markets.

Mark P. Frissora

Anything you want to comment on John? I have our fleet Executive Vice President here.

John A. Thomas

I think what you’re seeing in the market is just your normal seasonal fleeting up for the summer season. You see more fleet relatively speaking increase as you go into the summer season. Then as you start to come out of the selling season, you’ll see more aggressive de-fleeting. Just a normal seasonal pattern.

Operator

Your next question comes from Bob McAdoo - Avondale Partners.

Bob McAdoo - Avondale Partners

Just a quick clarification. When you talk about the synergies of the deal, and you talk about consolidating the fleet and what goes on there, the portion of it that you’re talking about there, is that, in terms of your processes in buying and selling and remarketing and whatever, or are you including in that the value of being able to cross-utilize the fleet and maybe actually have less cars on the fleet because of their cars on the weekend?

Mark P. Frissora

All of the above. Each one of those is a distinct, what you mentioned, are all cost reduction opportunities we’ve identified, every one of those.

Bob McAdoo - Avondale Partners

That’s part of that number you gave us?

Mark P. Frissora

That’s correct.

Operator

Your next question comes from Jordan Hymowitz – Philadelphia Financial.

Jordan Hymowitz – Philadelphia Financial

Thanks for all the disclosure on the pricing by the various divisions. It makes it much more helpful to analyze. I really appreciate that. Question on the airport market share on airport, combined, you guys are what, about 42%, 43% at this point?

Mark P. Frissora

No. We’re about 26% share of the airport market share.

Jordan Hymowitz – Philadelphia Financial

26%? And Dollar Thrifty is what, 12%?

Mark P. Frissora

Dollar Thrifty is 11%.

Jordan Hymowitz – Philadelphia Financial

That’s 38% combined, but is there some limit in any region, can you be like 50% in one city or what’s the upper end you think you could be in any one city before you have to start to divest? If the 38% is blended, what’s the high end do you think?

Mark P. Frissora

The various vagaries of HSR and how the FTC will determine what it is that needs to be carved out, if anything, will probably most likely be determined by shares over 40% or 50%, and in addition to that, it would be the total market. Doesn’t necessarily need to be on airport. What they would look at on airport is not only share but they would look at pricing and they would determine how many competitors would be on airport. If there’s five competitors on airport, right now most of the major airports that are there today have anywhere from 8 t 9 competitors.

In addition to the 8 or 9 competitors in most of those major airports, the pricing is very low. For example, take Orlando, take LAX, take Chicago. Very low pricing already in place at those major airports. So the likelihood is if there is going to be any kind of a care out of airports, it would be a very small airport and it would be with pricing that’s very high. So that’s just typical. It’s a multi tier approach that they use in evaluating that. That multi tier approach would be used here obviously. We feel confident that we’ve done all of the analysis ourselves. We’ve hired lawyers that actually were former FTC people, and feel good that we’ll get this deal done. That’s not an issue, it’s just an issue that there may be a few airports that may be carved out, may be not, depending on how they look at the share.

Jordan Hymowitz – Philadelphia Financial

What were your gains on off leased vehicles in the quarter?

Mark P. Frissora

What were gains?

Jordan Hymowitz – Philadelphia Financial

Yes.

Mark P. Frissora

I don’t know if I have that number.

Elyse Douglas

It was $2.5 million, it was actually a slight loss, and as you know, we adjusted depreciation to really get as close to zero as we possibly can in the quarter, and that’s really across the entire rental car fleet.

Jordan Hymowitz – Philadelphia Financial

In the month of April you disclosed that your fleet remained pretty tight. One of the analysts put out a note that said that pricing was weak in April. Can you say what pricing was in the month of April specifically in the US?

Mark P. Frissora

We haven’t been forecasting that. I’m not going to get into that pricing discussion. My attorney has advised me not to.

Operator, I think it’s time for us to end the call. I want to thank everyone for listening. We appreciate your attention and your support throughout this process.

Operator

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

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