Avis Budget Group, Inc. Q1 2010 Earnings Call Transcript

 |  About: Avis Budget Group, Inc. (CAR)
by: SA Transcripts


(Operator Instructions) Welcome to the Avis Budget Group First Quarter Earnings Conference Call. At this time for opening remarks and introductions, I would like to turn the conference over to Mr. Neal Goldner, Vice President of Investor Relations.

Neal Goldner

On the call with me are Ron Nelson our Chairman and Chief Executive Officer, Bob Salerno our President and Chief Operating Officer, and David Wyshner our Executive Vice President and Chief Financial Officer.

Before we discuss our results of the first quarter, I would like to remind everyone that the company will be making statements about future results and expectations which constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act. Such statements are based on current expectations in the current economic environment and are inherently subject to economic, competitive, and other uncertainties and contingencies beyond the control of management. You should be cautioned that these statements are not guarantees of future performance.

Actual results may differ materially from those expressed or implied in the forward looking statements. Important assumptions and other important factors that could cause actual results to differ materially from those in the forward looking statements are specified in our Form 10-K, and in our earnings release which was issued last night. If you did not receive a copy of the press release it is available on our website at www.AvisBudgetGroup.com. Also, certain non-GAAP financial measures will be discussed in this call and these measures are reconciled to the GAAP numbers in our press release.

Now I'd like to turn the call over to Avis Budget Group's Chairman and Chief Executive Officer Ron Nelson.

Ron Nelson

Before we discuss our first quarter results and our outlook I want to comment briefly on the letter we sent to Dollar Thrifty regarding its definitive agreement to be acquired by Hertz for $41 a share which only $34 is being funded by Hertz itself.

As stated in our press release issued yesterday morning, we have on several occasions in the past expressed interest in acquiring Dollar Thrifty. However, at no stage over the last several months did Dollar Thrifty or its financial advisors engage us in substantive discussions about a transaction or offer to provide us with information so that we might submit a bid.

Given our belief that an Avis Budget Dollar Thrift combination would be highly complementary and synergistic we have requested access to legal, financial, and business due diligence information relating to Dollar Thrifty including access to management so that we can formulate and submit a substantially higher offer. We are confident in our ability to structure and finance a transaction that would be mutually beneficially to our shareholders and Dollar Thrifty shareholders, particularly if the excessive provisions in the merger agreement are eliminated.

From an anti-trust perspective, Avis Budget is comparable to Hertz and we don’t see any barriers that would prevent us from completing a transaction on a comparable time table to Hertz. We’ve studied a potential transaction carefully and we would not have gone public with this announcement unless we thought we could get it done.

Accordingly, we look forward to the opportunity to engage in productive discussions with Dollar Thrifty’s Board of Directors to allow its shareholders the opportunity they deserve to realize the full value of their investments in Dollar Thrifty.

With that being said the purpose of today’s call to discuss our financial results. We do not intend to comment further on the Dollar Thrifty matter at this time. As a result, I will ask that you refrain from questions on that topic when we move to Q&A.

We are pleased to have reported a solid first quarter that reflected EBITDA growth in all three of our operating segments, year over year pricing increases, incremental benefits from our cost saving initiatives, and an increase in total EBITDA of more than $40 million versus first quarter 2009.

This morning I’d like to discuss some of the recent trends in our business and our operating strategies, and David will discuss our first quarter results, our capitalization and liquidity, and our outlook.

Let me start with the trends we’re seeing. We said in February that we expected volume in the first quarter to be down year over year but the price would be up and that’s exactly what we have reported. We purposely kept our fleet tight in the quarter and clearly left volume on the table. We set our price levels in certain channels both commercial and leisure at levels where we expected to leave volume behind but at market clearing prices knew that winning would result in unprofitable or minimally profitable transactions.

The net result was that we reported higher pricing and improved margins in each of our segments not only versus a year ago when the industry was in the midst of a crisis but compared to the first quarter of 2008 as well. In the quarter, domestic rental days declined 13% with leisure days down 18% and commercial days down 9%. More importantly, as the quarter progressed, our domestic volume comparisons improved month by month in both commercial and leisure rentals.

With particularly encouraging trends seen in corporate travel, specifically commercial volume was down 13% in January, 11% in February, and less than 4% in March compared with the prior year. In our top 150 commercial accounts volume was flat in March despite the fact that we lost some commercial days this year due to the timing of Easter.

We believe that the overall market volume was probably down in the low single digits. The quick analysis of our segment and channel results would suggest that our volume differential largely occurred in transient channels, meaning it was volume that we could have captured had we offered a lower price. We believe our actions to step away from this less profitable business reduced our rental day volume by at least seven points in the quarter.

The closing of unprofitable off airport locations last year reduced our volume about a point year over year, and turning the Budget LAX franchise back to the franchisee in January cost yet another point. When you consider these factors, our year over change in volume ends up pretty close to our estimate of the year over year change in domestic employments.

The fact that we chose not to chase this unprofitable business did have a positive benefit on our profitability that’s reflected by the improvement of more than 250 basis points in our domestic car rental EBITDA margin in the quarter, excluding unusual items.

I think there are two key takeaways from first quarter. First is obvious, our ability to deliver the numbers we did in the first quarter with lower volumes and only a modest increase in pricing shows the benefit of our cost savings and an efficiency initiatives.

The second is less readily apparent, we believe our decision to keep our fleet very tight in the first quarter was the right strategy. The EBITDA risk of excess fleet impacting pricing and our seasonally slowest period was much greater than in other periods and we were much more confident that a tighter fleet and tighter pricing would have a net beneficial effect on both margins and EBITDA.

That said, we do expect our fleet to return to more normal levels in subsequent quarters. Part of this will be due to the fact that we will be anniversarying more and more of our actions to step away from unprofitable volume as we move through 2010. As noted earlier, commercial volume is returning.

We also point out that ancillary revenue growth accelerated in the quarter driven by increased penetration of GPS rentals, sale of lost damaged waivers, and emergency road side assistance services. Despite the fact that we are now lapping the initiation of our sales training initiative, our customer service agents are becoming more and more accomplished and driving additional revenue.

We also grew our electronic tool collection services by expanding to California during the quarter. All of these products improve our customer’s rental experience and take us one step closer to our goal of becoming a customer led service driven organization, while dropping a high percentage of the incremental revenue to the bottom line.

As we’ve previously discussed, we’re also gradually implementing the industry’s first non-cancellation fee in the US. To be clear, we are not doing this to create a revenue stream. While that may be the short term impact, we believe that longer term this is about improving efficiency and changing customer behavior. We ran our latest tests during President’s Day weekend in a few markets and results were quite promising. The systems and procedures working as expected had no impact on reservations. We should expect to see us implement non-cancellation fees in other markets at selected times and locations going forward.

One of the things we don’t talk enough about are our international operations. We are the clear on airport market leader in each of our key operating countries. For example, in Australia our share is 15 points higher than our next closest competitor and we have nearly a 25 point advantage in New Zealand with our brands holding the highest awareness levels among all the key customer segments.

We generate more than $800 million in annual revenue in our international segment with the lions share coming from Australia, Canada, and New Zealand. We also have a lucrative franchising portfolio generating over $15 million of high margin royalties. In short, our international operations are fairly sizeable businesses with attractive margins in economies of scale and we think we have further opportunities to grow there.

Our truck rental business also had a solid quarter with profitability improving markedly. We are seeing favorability in local commercial demand with one way rentals which is the most profitable part of our truck business, experiencing positive year over year revenue growth in 18 of the last 19 months. The commercial segment posted its first year over year positive monthly volume growth comparison in the last 53 months with both trends continuing into April.

As our former sister company Realogy noted just last week, open home sale contracts are up 38% in April which is a positive leading indicator for our local consumer or self moving business. Demand for use trucks is also improving which is allowing us to reduce our fleet size without impacting our rental volumes. We’re feeling very good about the truck business as it should benefit significantly from a rebound in the macro economic conditions.

Looking at our business more generally, one of the things I’m most encouraged by is our customer service levels. Over the last two years we’ve reduced our fixed and semi-fixed cost base by over $400 million annually and eliminated roughly 10,000 jobs. Despite that, our customer satisfaction scores at both Avis and Budget in the first quarter were not only higher than a year ago they were higher than the first quarter 2008, we think a significant achievement.

We’ve seen improvement in virtually all of our key metrics; rental cars received helpfulness of staff, ease of pick up and drop off, the reservations process. We also improved our speed to resolve customer service calls and emails significantly. With the initiation globally of our customer led service driven strategy this year we’ve already launched a much more expansive voice of the customer portal that posts customer rating information real time, dynamically ranks each airports ratings relative to its peer group, and allows our managers to assess daily their service levels and follow up promptly on any service issue reported or remedy any developed trends.

We’re pleased that our efforts were once again recognized and the brand keys consumer loyalty engagement index where for the 11th consecutive year Avis was named the top rental car company receiving high marks in customer service, reliability, safety, and brand reputation. There are many different measurements that rank the competitors in our industry. We are in a position to choose that question I would choose customer loyalty. Satisfaction can be achieved by simply delivering against the customer’s basic requirements but loyalty is much more difficult to achieve but it requires an extraordinary effort. That’s what makes winning this award very meaningful.

Turning to our 2010 outlook, the macro economic climate appears to be improving with each passing month and we expect year over year volume trends to improve sequentially over the balance of the year. In addition, we will have fully anniversaried our decision to avoid certain unprofitable or marginally profitable business by the end of the second quarter meaning that the second half will be an apple to apples comparison excluding the off airport and Budget LAX decisions which will have a much smaller impact on our volume comparisons.

We also see a number of positive signs in the travel business generally which point to increased corporate demand. March was the fourth consecutive month of increased hotel demand; May could be the first month since early 2008 or so where domestic airline capacity is up year over year. There are numerous positive comments from airlines and hotel companies regarding advanced bookings. Many of our million dollar accounts are indicating to us that they will need more cars in the coming months. We’re seeing more late bookings which is a good indicator that corporate travelers are returning.

To make sure we have enough cars to accommodate the improvement in business travel we are starting to make tactical changes in our fleet while at the same time making sure we don’t get ahead of the demand curve. We will be judiciously expanding the fleet as the second quarter progresses, adding cars in areas where turndowns have been relatively high, and those areas where operating costs are low, and where we believe we can profitably maintain or enhance utilization.

We expect to extend fleet lives modestly to capture the demand trend for the spring and summer. Given the amount of fleet that moves in and out at any given month we are confident that we will have the additional fleet to be able to capture the profitable demand that develops with the improving economy.

Let’s be crystal clear, our overall fleet strategy has not changed. It continues to center around keeping fleet levels in line with demand, focusing on profitability by transaction type, and passing on unprofitable and marginally profitable business. The impact of this strategy is really developing as a reset of the company’s revenue focus.

However, as we pointed out last quarter, the nearly $475 million of cost take out that we will achieve by year end 2010 allows us to increase profitability at much lower levels of revenue. We will be a slightly smaller, more nimble and more profitable business but with a clear focus on profitability. Our first quarter results really demonstrate that phenomenon.

Looking ahead to the second quarter, our domestic leisure pricing was up double digits last year and the comparisons become more difficult as we moved into April. We have seen some price erosion in certain leisure channels which is to be expected given the strong year ago comparisons but even though prices remain substantially higher than 2008 levels we are watching this closely.

One of our competitors did initiate a price increase at the beginning of April effective June 1st. Based on our price checks, most of the industry appears to have implemented price increases effective June 1st and we have as well. We’re also seeing peak summer pricing being instituted a little earlier this year which is encouraging.

The months that really matter to our full year 2010 results are still largely ahead of us, we remain optimistic about the balance of the year. We now believe vehicle depreciation costs will be down 6% to 8% on a per unit basis, which is an improvement from our initial guidance of 4% to 6% decline. Our cost savings initiatives are continuing to provide incremental benefits and volume trends are improving. As a result, we continue to believe that 2010 should provide us with some meaningful growth opportunities.

With that I’d like to turn the call over to our Chief Financial Officer, David Wyshner.

David Wyshner

My comments this morning will focus on our results excluding unusual items. As Neal mentioned, these results are reconciled to our GAAP numbers in our press release.

In the first quarter, revenue decreased 3% to $1.2 billion, EBITDA grew by $42 million to $39 million and pre-tax income in this seasonally slow quarter was -$25 million. All three of our operating segments reported significant growth in EBITDA which reflects our companywide cost reduction efforts with EBITDA margins in each segment not only higher than last year’s first quarter but compared to the 2008 first quarter as well.

First quarter revenue declined 8% in our domestic car rental segment, reflecting a 13% drop in rental days and 3% growth in average daily rate. Commercial rates were up 2% year over year and leisure rates were up 4%. Notably, average daily rate was up 6% compared to the first quarter 2008. Domestic EBITDA increased $23 million for the quarter due to higher pricing, 12% growth in ancillary revenues on a per rental day basis, a 10% decline in pre-init depreciation costs and the benefit of cost saving initiatives, partially offset by lower volume. Domestic depreciation declines were driven by lower expense for model year 2010 vehicles and a strong used car market.

International revenue grew 23% year over year driven by a 36% increase in average daily rate partially offset by a 10% decline in rental days. Excluding the impact of foreign exchange pricing was up 8% and ancillary revenues increased 2% per rental day. EBITDA grew year over year primarily due to stronger pricing, a favorable impact from foreign currency, and a 2% decline in pre-init depreciation costs on a constant currency basis, partially offset by lower rental days. Excluding the impact of foreign exchange, EBITDA increased by $3.6 million.

Revenue in our truck rental segment increased 1% versus last year due to a 1% increase in pricing. EBITDA grew primarily due to lower interest costs, lower fleet costs, and our cost saving initiatives. While rental day volumes were consistent with first quarter 2009 levels our average truck rental fleet was 7% smaller this year.

The used car market continued to perform well in the quarter with demand high index reaching an all time high in March primarily as a result of the reduced supply of used cars and the number of new vehicles sold in the US fell from over 16 million in 2007 to just over 10 million in 2009. Fleet sales to rental companies declined by nearly 50% from 2007 to 2009 and new vehicle lease volumes declined 25% in 2008 and 28% in 2009 which is important because all fleet vehicles are often the next best substitute in the used car market for one of our cars.

We expect these factors will continue to constrain the supply of late model used cars for the next several years which should bode well for residual values. Although our 2010 vehicle depreciation assumptions do not assume the used car market will stay at record levels for the remainder of the year we do expect the market to remain strong.

Our dialogue with manufacturers for model year 2011 purchases began earlier than usual this year, in large part due to manufacturers reaching out to us and our conversations thus far remain promising. As we plan for our model year 2011 purchases we expect to maintain a balance of risk and program cars in our fleet. Program cars allow us de-fleet quickly when there is a sharp drop in rental demand without the potential negative consequences of trying to sell a large number of vehicles during a very short time period.

With early indications that the cost difference between program and risk cars is shrinking for model year 2011 the value proposition of program cars becomes a little more compelling. Based on our favorable results in the first quarter and our outlook for model year ’11 we have revised our estimate of per unit fleet cost this year. As Ron mentioned, while we had previously expected per unit depreciation to decline 4% to 6% this year we now expect it to drop 6% to 8%.

Another factor that is positively benefiting our fleet costs is our sales of cars by the internet. We sell about 40% of our risk vehicles through internet auction channels. There are several benefits of selling vehicles through online auto auctions including lower disposition fees, lower shuttling expense, and lower carrying costs due to the quicker sale of end of life vehicles. As a result, our goal is to further increase our use of online auctions over time.

Turning to the balance sheet, with the credit markets functioning normally again, in the first quarter we felt the time was right to tap the capital markets to pre-fund some upcoming debt maturities as well as extend the maturity dates of our revolving credit facility and other corporate debt. In March we raised $450 million of senior notes with a 2018 maturity date.

This allowed us to pay down approximately $450 million of term loan borrowing due in 2012, extend the maturity of our revolving credit facility by two years to 2013, revise the financial and non-financial covenants in the credit facility to provide greater flexibility to the company, and extend the maturity of approximately $275 millions of the remaining term loan borrowings by two years to 2014. As a result, we now have a total of only $50 million of corporate debt maturities over the next three years.

On the ABS side we completed a $580 million asset backed offering in March representing the first multi-tranche asset backed securities offering in the car rental industry since 2003. With interest rates and advance rates in line with pre-2008 levels we also placed a $200 million asset backed note to refinance a portion of our truck fleet including some trucks that were bought out of expiring leases in late 2009 which positively impacted free cash flow by $40 million this quarter.

Our results for Q1 put us well within the financial covenants that we will be required to meet at June 30. Our leverage ratio was 4.8 times compared to a permitted maximum of 6.25 times and our coverage ratio was 2.5 times compared to a requirement of at least 1.3 times.

We’ve been managing our capital spending judiciously. In fact, CapEx totaled just $7 million in the first quarter and we still expect CapEx for the full year to return to historical levels, almost in line with non-vehicle depreciation and amortization. We ended the first quarter with $470 million of cash, $770 million in committed and available corporate debt capacity, and $3 billion of capacity under our vehicle backed financing programs that we clearly have substantial liquidity.

Let me now turn to our outlook. The key elements of our strategy remain the same, focusing intensely on cost controls, driving relentlessly for improved profitability, keeping fleet levels in line with demand, pursuing ancillary revenue growth aggressively, and refining and improving the vehicle rental experience we offer. As Ron mentioned, we expect to see a modest economic recovery this year which we believe will drive increased car rental demand led by a return in corporate travel.

Price comparisons become tougher starting in Q2 as 2009 second quarter pricing was up 7% in total and 12% for leisure rentals. On the expense side, we intend to keep the size of our workforce and our fleet in line with rental volumes. The decline we expect in domestic per unit depreciation will be partially offset by higher vehicle interest costs of approximately $25 million compared to 2009.

Revenue per employee was up 5% in the first quarter and our cost saving initiatives will provide incremental benefits consistent with or better than our previous expectations. The combination of having a full year benefit in 2010 from actions taken in 2009 and continuing to improve efficiency through our performance excellence initiative should generate incremental cost savings of at least $40 to $60 million in 2010, approximately three quarters of which we expect will be realized in the first half.

Finally, our 2010 GAAP tax rate is expected to be in the 40% range and we expect full year cash taxes to be $35 to $40 million. We will probably become a partial cash tax payer in the US in late 2010 or 2011. More generally, we’re focused on and excited about our potential to grow EBITDA and earnings in 2010 and beyond. The company’s cost structure is significantly leaner and our increased emphasis on profitable rental transactions, ancillary revenue growth and fleet diversity gives us the opportunity to return over time to margin levels we achieved during previous economic cycles, even at a lower revenue base.

With first quarter total car rental margins of more than 300 basis points compared to the prior year and volume trends improving, we feel very good about the start of 2010.

With that, Ron, Bob and I would be pleased to take your questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Chris Agnew – MKM Partners

Chris Agnew – MKM Partners

Is it possible to frame what normal demand looks like through 2Q and third quarter? When are the peak demand periods and how do leisure and commercial volumes vary through the quarters?

Ron Nelson

I think it’s a little hard because of the way our volume numbers aren’t going to be indicative of really where the market is just because of what we’ve been talking about and pulling away transactions. The way we gain our view on it is to look at the airport share data which comes out which is usually on about a two month lag.

What I can tell you is that the volume trends continue to improve through the second quarter, particularly on the corporate side. Enplanements are not roughly flat so that’s a pretty good leading or coincident indicator. As we look at the res build things are improving in both counts but certainly faster in commercial than leisure.

Chris Agnew – MKM Partners

I guess I meant, I suppose there hasn’t been normal for quite a few years. Would one expect as you go through the second quarter volumes to build, April, May, June is that the normal seasonal pattern in any particular year?

Ron Nelson

Yes, we’re not going to project volume but I think the typical seasonal pattern is not unlike the build in January, February, March; it does build April, May, and June.

Chris Agnew – MKM Partners

On fleet costs, your competitors run much higher risk mix and you outlined really your view that residual values will remain strong for several years and how you’ve opportunities to sell more online. I was wondering why you’re not looking to increase your risk mix more and drive down fleet costs?

Ron Nelson

I’m not sure that we’ve fully said that we’re not going to increase our risk mix but I do think that as we see the costs gap narrow between program and risk you have to assess the flexibility trade off and the risk in our business. You shouldn’t take away from here that we’re not increasing our risk percentage, only that the cost gap is narrowing and so you need to think a little harder about what you’re willing to pay for flexibility.

Chris Agnew – MKM Partners

Can I ask for some background on the acquisition of Budget and what were the synergies you achieved and maybe how long it took you to achieve them and what were the revenues and market share when you acquired Budget?

David Wyshner

We appreciate your going back in time and wonder why you’re doing that but happy to talk about the acquisition of Budget. We took north of $100 million of costs out of the Budget infrastructure, virtually all of those costs were out within about a 16 month period, and a lot of costs were out within the first six to eight months. Moving Budget over to operate on the wizard system that Avis operates on was the piece that took the longest and that was an important part of the remainder of the synergies but that was done within about 14 to 16 months, and that as I said was the last piece.

Clearly we do believe as a result of that experience that we have taken a significant amount of costs out of Budget as we integrated that brand into our operations.


Your next question comes from John Healy – Northcoast Research

John Healy – Northcoast Research

I wanted to follow up on Chris’ question about the Budget acquisition. When you identified the $100 million in costs savings you took out, could you maybe give us a little bit of color on maybe where the buckets came from, maybe how much was fleet, how much was IT systems, how much was consolidating operations or consolidating marketing spend. Trying to get a little bit of color in terms of where the real pressure points are in these types of acquisitions.

Ron Nelson

I think we’re sort of trending into an area we don’t really want to go. While I appreciate your question, the fact remains that it was over $100 million in total and actually as we went through our latest cost reduction programs over the last couple of years it’s probably well over $150 million now. It is reflected in the P&L.

John Healy – Northcoast Research

It seems like for the most part people in the industry believe that this summer will be a tight fleeted summer and I think if you go back to last year everyone described it as tight, even summers before that everyone sometimes often described the summer timeframe as tight in terms of fleet and demand. Could you talk about just how you feel, what the new normalcy is for tightness in the summer timeframe, if you look at the industry for this upcoming summer do you expect the industry be as tight as it was last year and with last year maybe an anomaly and how tight you think fleet will be to demand longer term.

Bob Salerno

Let me talk about us. Last year we certainly were very tight and that is exactly how we wanted to run it, as we’ve talked on this call, we did take out a lot of business we thought just didn’t make profit for us. We reduced our fleet by a lot and I think it really paid off for us not only in the profits we garnered throughout the summer quarter, the third quarter, but also in the change in fleet posture in the fourth quarter where you’re normally fighting to bring the fleet down, we didn’t have to do that.

This year we’re going to fleet as Ron mentioned and David mentioned, a little bit heavier than we are today but we’re certainly not looking for huge increases in the fleet for ourselves. As far as what everybody else is going to do this summer, I don’t know. With more risk cars in the industry, one of the other questions was about; when you do that you really do limit the amount of peak you can put into the peak because you just can’t get down off of it as easy as with a repurchased unit.

John Healy – Northcoast Research

I was hoping you could talk a little bit about maybe the pricing trends that maybe you experienced in the first quarter, maybe how those trended on a monthly basis and maybe some of the trends you’ve seen here in the month of April.

David Wyshner

As we mentioned during the prepared remarks, we did see improvement month by month over the course of the first quarter, particularly on the commercial side. I think Ron mentioned commercial volume was down 13% in January, 11% in February and less than 4% in March. While there is a little bit of noise in April due to Easter, generally speaking the trends we’ve seen in the first quarter have continued.

John Healy – Northcoast Research

Was that volume, I was hoping to get a little color on how pricing trended.

Ron Nelson

That was volume that David was speaking about. I think generally you can assume that the pricing followed the inverse trend that was stronger in January and was less strong as volume improved in March.

David Wyshner

Clearly part of that was due to the movement of the comps year over year as well which as we’ve talked about do get tougher as we move into the year, particularly in light of some of the pricing increases we saw in February and March of last year.


Your next question comes from Jordan Hymowitz – Philadelphia Financial

Jordan Hymowitz – Philadelphia Financial

When you did Budget, was Budget’s share 14% do I remember that right?

Ron Nelson

I actually wasn’t here so I don’t remember what Budget’s share was, I’ll defer to my colleagues. Bob is saying that it was probably somewhere in the low double digits maybe 10% to 12%.

Jordan Hymowitz – Philadelphia Financial

So it’s about the same size of the market as Dollar Thrifty was today, obviously the market was a little smaller then.

Ron Nelson

Once again, we’re not simply going to comment on anything related to Dollar Thrifty, you should ask them what their share is.

Jordan Hymowitz – Philadelphia Financial

In terms of the pricing, was there some benefit or negative in March versus last year because of Easter happened in March this year and not last year, in other words, would March necessarily be stronger in April, weaker because of where Easter falls on the calendar?

David Wyshner

Certainly there’s a little bit of noise. Easter did move one week this year, in the scheme of things I don’t think it’s significant. We had some weather in February and we had the Toyota recall issue as well. There are always a few things that anomalously impact the numbers a little bit but I don’t think any of them were terribly significant.

Jordan Hymowitz – Philadelphia Financial

When I look at the merger agreement it seems like the Board has to at least consider your opinion if you approach them. In other words they can’t just reject it without consideration, is that how you read this proposal, section 503b I’m looking at?

Ron Nelson

I think you know the answer to that question is going to be no comment.


Your next question comes from Steve O’Hara – Sidoti & Company

Steve O’Hara – Sidoti & Company

I was hoping you could give a little more color on the advanced booking and cancellation policy. How many markets do you anticipate rolling that out to and what’s the reception been in those markets and competitively is it being accepted by competitors and rolled through them as well?

Ron Nelson

We’ve only done this in a few markets and we’ve done it around holiday periods and on certain vehicles. Primarily it’s been to make sure that the systems and procedures were in effect and that we were able to execute on it. It’s hard to generalize; I don’t know whether the competition followed in those markets. Our commercial accounts that have encountered it actually have accepted it. As far as we can tell in the markets where we have implemented it we haven’t lost any rentals. We think that the people’s consumer behavior will probably adapt. We’re going to be judicious about how we roll it out.

Steve O’Hara – Sidoti & Company

It would be more of a peak type thing and more with business. Would it be more advantageous for a company that runs a risk base fleet or a program fleet would you think?

Ron Nelson

I think initially we’re going to roll it out judiciously and that’s the roll out. Whether it’s more advantageous, I think at the end of the day it allows you to optimize your fleet so whatever mix of fleets you have its going to optimize that mix to best possible utilization.


Your next question comes from Emily Shanks – Barclays Capital

Emily Shanks – Barclays Capital

I wanted to ask a follow up around the volume. What I’m hearing is that we shouldn’t be looking to the industry trends because you’re giving up the transient days; hopefully I’ve got that correct. My follow up question if that’s the case is in the past quarter you indicated that you though both you were giving up transient volume but the fleet was modestly too tight given the sell through that you had done on the vehicles. Is that portion of it over; are you happy with your fleet levels at these levels versus where volume trends are?

Ron Nelson

I think we’re generally happy with our fleet levels. I said we’re going to judiciously expand the fleet over the course of the second quarter and into the summer and don’t forget we in fleet and de fleet a fair number of cars every month so to the extent that volume proves to be higher than our forecasts we can actually hold cars. Our average age of our fleet right now is just a little under seven months. Extending the life of the fleet isn’t going to be an issue for us.

Emily Shanks – Barclays Capital

You don’t think that you lost volume in the first quarter because your fleet was too tight?

Ron Nelson

We probably did. There are always turndowns but it’s generally on a market by market basis. I don’t think you can look nationally and predict those trends. Certainly in some markets we’re not going to be precise all the time.

Emily Shanks – Barclays Capital

Around the $1 million of restructuring charges in domestic rental what does that relate to?

David Wyshner

The $1 million of restructuring charges relates to some positions we moved to the Northeast to some lower cost areas. Its severance related to those positions that should produce savings over the coming years as we move them to a lower cost location in the US.


Your last question comes from Michael Millman – Millman Research Associates

Michael Millman – Millman Research Associates

In talking about fleet, can you talk about where you think the industry is, in particular the OEM seem to put a lot of cars into fleet in the first quarter?

Ron Nelson

I suspect that we’re probably a little tighter fleeted in the first quarter than most of our other competitors just given the mix of our business and the fact that our price was modestly higher. It’s hard to judge anything from the first quarter because of the Toyota recall. Everybody had a lot of cars in and out of the fleet in February for services. As you know well, you can’t be too swayed by the OEM comps because people were putting off fleet orders pretty significantly last year in the first quarter. They’re a little misleading as to what they say about the size of car rental fleets.

Michael Millman – Millman Research Associates

Can you talk about how much the GAAP; quantify the difference in your monthly depreciation between the program and risk cars currently and where it had been historically?

David Wyshner

As you know, on a complete apple to apples basis the program car is more expensive often in the 5% to 10% range. There’s a real challenge in looking at that comp on an apples to apples basis since we tend to like to take larger cars and new model introductions, SUVs and luxury cars on a program basis because those have more residual risk associated with them. There are also timing issues where later in the model year we prefer to take cars on a program basis and as a result it makes it very difficult to do that apple to apples comparison.

By the time you get to April and May and June we’re taking cars they’re going to be last year’s model year into two or three or four months. As a result, since we do want to take cars at that point in time we do think it’s important to be able to have program capacity to minimize our residual risk and to be able to meet the peak. It really is a very difficult thing to look at solely based on the depreciation rates.

Michael Millman – Millman Research Associates

On depreciation rates, can you give us some idea of how you come to your charges, do you run it off a particular Manheim number or do you do some other method to forecast your depreciation?

David Wyshner

We build our depreciation rates by make and model based on obviously in talking here about risk cars we do it by make and model based on our own experience typically with either that model in the prior year as well as what we’re seeing in the auctions for the current year. We revise those on a regular basis over the course of the year to reflect changes in the used car market and what we’re seeing in how cars are performing. That’s a regular ongoing part of how we assess depreciation.

Michael Millman – Millman Research Associates

To be more specific in benchmarking it do you assume rates pricing off 118 or 119 make sense or are you pricing off more like 110 or 111.

David Wyshner

There’s not an explicit link between the Manheim index and our numbers. The Manheim index has a fairly different mix of vehicles than we have. Obviously it’s comprised not only of late model vehicles but also significantly older vehicles. As a result, our risk vehicles tend to be very focused in the small and midsized late model area and as a result we look specifically at those markets and at the performance of our vehicles at auction rather than tying our depreciation to where the Manheim index happens to be or may be forecasted to be.


For closing remarks the call is being turned back over to Mr. Ron Nelson.

Ron Nelson

I would like to thank all of you for joining us today and we look forward to talking to you at the end of the second quarter and giving you an update on how the third quarter is progressing at that time. Thanks very much.


This concludes today’s conference. You may disconnect.

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