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Dollar Thrifty Automotive Group (NYSE:DTG)

Q1 2011 Earnings Call

May 05, 2011 9:00 am ET

Executives

H. Buster - Chief Financial Officer, Senior Executive Vice President and Treasurer

Scott Thompson - Chief Executive Officer, President and Director

Vicki Vaniman - Executive Vice President, Secretary and General Counsel

Analysts

Fred Lowrance - Avondale Partners, LLC

Michael Millman - Millman Research Associates

Christopher Agnew - MKM Partners LLC

Sachin Shah - ICAP

John Healy - Northcoast Research

Unknown Analyst -

Neil Portus - Goldman Sachs Group Inc.

Stephen O'Hara - Sidoti & Company, LLC

Operator

Welcome, and thank you for joining the Dollar Thrifty Automotive Group First Quarter Financial Results. [Operator Instructions] This call is being recorded. If anyone does have any objections, you may disconnect at this time. And now I'd like to turn the call over to Vicki Vaniman. You may begin.

Vicki Vaniman

Thank you. Good morning, and welcome to the Dollar Thrifty Automotive Group Inc. First Quarter 2011 Earnings Release Conference Call. Scott Thompson, President and Chief Executive Officer; and Cliff Buster, Chief Financial Officer, will be the hosts for today's call.

Some of the comments contained in this conference call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed in forward-looking statements due to many factors.

These factors include, among others, matters that Dollar Thrifty has noted in its latest earnings release and filings with the SEC. Dollar Thrifty undertakes no obligation to update or revise forward-looking statements.

Today, the company will use certain non-GAAP financial measures, all of which are reconciled with GAAP numbers and can be found in today's press release or posted to the company's website at dtag.com under the Investor Info tab.

And now, I would like to turn the call over to Scott to discuss our first quarter earnings.

Scott Thompson

Thank you, Vicki, and good morning, everyone. I'm pleased to report that the continued focus of our employees on profitable revenues, cost control and customer satisfaction resulted in another solid operating performance. In fact, it exceeded our earlier expectations for the quarter. In a seasonally weak quarter of the industry, we generated net income of $16.5 million and a corporate adjusted EBITDA margin of over 10%.

Now turning to the financial highlights for the first quarter. Rental revenues for the first quarter of 2011 were in line with the first quarter of 2010, driven primarily by a 2.7% increase in rental days, offset by a 2.7% decrease in revenue per day.

As previously announced, severe winter weather in January and February, not only had an adverse effect on transaction volume, but also resulted in soft pricing environment as companies attempted to increased utilization following the storms.

We were very pleased with the subsequent recovery in revenues in March, driven by strong transaction growth and improved pricing.

As a result of the fleet refreshing we took -- that took place in the first quarter of 2010 and our decision to hold additional vehicles for the spring and summer peak rental periods, we sold approximately 7,600 less vehicles this quarter as compared to the first quarter of 2010.

This timing difference in fleet deletions resulted in a $17.8 million reduction in vehicle gains for this quarter, which would negatively impacted fleet cost compared to the first quarter of 2010. Fleet cost per unit for the first quarter of 2011 totaled $251 per month compared to $206 per month for the first quarter of 2010. We will discuss our fleet cost expectations in a minute.

Corporate adjusted EBITDA for the first quarter of 2011 totaled $36.3 million compared to $49.4 million in the first quarter of 2010. The decline in prior period resulted primarily from the $17.8 million decline in gains on sales I previously mentioned.

Additionally, I should highlight that merger-related expenses increased to $3.5 million in the first quarter of 2011 compared to only $1.7 million in the first quarter of 2010, also negatively impacting the comparison between the periods.

I think from an operating standpoint, this quarter compares favorably to last year, but we'll let the analysts to do their work inside.

We are pushing forward with revenue opportunities. We executed a new agreement with Orbitz that was effective April 1, providing us with an additional online distribution channel that we have not been in since 2008.

Additionally, we branded an additional 6 franchises in 5 markets during the quarter.

We're also continuing to focus on cost controls, and again achieve favorable year-over-year results in operating expenses. This in spite of a 3.5% increase in average rental fleet and increased merger-related expenses.

I should mention that during the quarter, we negotiated a new long-term IT outsourcing agreement that will provide meaningful cost reductions in the future, while allowing for termination in case of a future merger.

Additionally, we continue to aggressively pursue improvements in areas of purchase consolidation and employee productivity.

Now Cliff will review the details of the quarter.

H. Buster

Thanks, Scott. GAAP net income excluding merger-related expenses totaled $16.5 million for the first quarter of 2011 compared to $24 million in the first quarter of 2010. Again, excluding the impact of the merger-related expenses, non-GAAP diluted earnings per share for the first quarter of 2011 totaled $0.53 per share compared to $0.80 per share in the first quarter of 2010.

Now turning to Table 1 in the press release. Rental revenues for the first quarter of 2011 were $332 million, consistent with prior year levels, which met our expectations considering the first quarter weather issues. Our fleet utilization during the first quarter of 2011 decreased 60 basis points from the first quarter of 2010, as disruptions from the winter storms negatively impacted January and February utilization, and we held additional vehicles to protect us against potential supply disruptions.

Selling, general and administrative expenses, or SG&A, in the first quarter of 2011 increased slightly from prior year levels, although SG&A for the first quarter of 2011 was negatively impacted by $3.5 million of merger-related expenses compared to only $1.7 million in the prior year period.

Direct vehicle and operating expenses, or DV&O, in the first quarter of 2011 declined $1.5 million or approximately 1% compared to the first quarter of 2010. This was in spite of a 3.5% increase in our average fleet size.

Excluding merger-related expenses incurred during the quarter, operating expenses, SG&A and DV&O, totaled 64.2% of revenues for the first quarter of 2011 compared to 65% of revenues in the first quarter of 2010. As an example of the steady progress we have made in our total expense structure over the last two years, this expense ratio represents a 280-basis-point reduction in operating expenses compared to levels achieved in the first quarter of 2007 prior to the credit crisis.

Vehicle depreciation expense for the quarter increased $15.2 million or 26% from $59 million in the first quarter of 2010 to $74.2 million in the first quarter of 2011. The increase was the result of a $17.8 million decrease in vehicle gains compared to the prior period, combined with a 3.1% increase in the average depreciable fleet.

As Scott mentioned, the decrease in vehicle gains resulted primarily from the sale of 7,600 fewer vehicles compared to the same period in 2010.

I should also note that our gains per vehicle were down from 2010's first quarter, as our depreciation rates were adjusted previously to more closely reflect market conditions.

Interest expense net of interest income totaled $21 million for the first quarter of 2011, down from $21.4 million for the same period last year.

Moving on to key balance sheet items on Table 2 of the press release. Cash and cash equivalents totaled $519 million as of March 31, 2011, a decrease of $44 million from year-end. Restricted cash declined by $117 million to $160 million. The declines in both unrestricted and restricted cash resulted from seasonal investments in revenue-earning vehicles to meet expected peak fleet demand.

I would highlight that the company received a refund of approximately $49.8 million during the first quarter of 2011 related to tax overpayments made in 2010, thereby reducing our previous income tax receivables.

Revenue-earning vehicles net of depreciation totaled $1.68 billion at March 31, an increase of $340 million from December 31 levels. The increase in the book value of the fleet resulted from seasonal fleet increases in preparation for the spring and summer peak seasons as our fleet increased from approximately 95,600 units at December 31 to approximately 110,000 units at March 31. Our ending fleet was up approximately 2.5% compared to the first quarter of 2010.

Vehicle debt had increased $157 million from December 31 to March 31, with vehicle debt now totaling $1.4 billion. The increase in vehicle debt resulted from borrowings to support the seasonal fleet investments.

Turning to liquidity and capital resources. The seasonal fleet investments I previously mentioned totaled approximately $340 million and were funded utilizing a combination of restricted cash, borrowings under our fleet financing facilities and unrestricted cash.

At peak fleet levels, we currently expect to provide up to an additional $75 million of unrestricted cash as collateral enhancement under our fleet financing facilities. These funds should move back to unrestricted cash by year-end in the normal course of fourth quarter de-fleeting.

Additionally, during the quarter, the company repaid approximately $300 million of asset-backed notes through borrowings under the variable funding facilities that we put in place in 2010. The final $200 million in installments due under the series of asset-backed notes will be repaid by May, utilizing available capacity under our $300 million 3-year variable funding note.

We ended the quarter with tangible net worth of $536 million, and the company had no net corporate debts. The company's leverage ratio based on gross corporate debt totaled only 0.65:1 based on trailing 12 months corporate adjusted EBITDA for the period ended March 31.

I'll now turn the call back over to Scott for a discussion of possible merger activity and our outlook for 2011.

Scott Thompson

Thank you, Cliff. I would now like to make a few brief remarks about possible merger activities. As I'm sure you will respect, I'll be limited on my comments on this topic during Q&A.

As previously reported, Dollar Thrifty submitted a certification of substantial compliance with the FTC Second Request in late February. The company is currently continuing to cooperate with Avis Budget to support their work with the FTC.

As we discussed on last quarter's conference call, Dollar Thrifty and Avis Budget have no agreement, written or verbal, with respect to merger terms, including price. We have devoted a substantial time and financial resources to this process and are very eager to bring this process to a close and provide clarity on any antitrust matters for the benefit of our shareholders and employees.

If any offer is received to purchase the common stock of the company, the Board of Directors, consistent with their fiduciary duties, will consider it in the light of the current facts and circumstances at the time. There is no assurance that any merger terms can be agreed upon in the future.

Turning to 2011 outlook. Although the first quarter started slow, our guidance for rental revenue for the full year of 2011 remain unchanged, with expectation of rental revenue growth of 2% to 4%, driven primarily by transaction growth. We are pleased with the strength of the transaction growth in March and in April.

From a fleet-cost perspective, we, like all the rental car companies, are continuing to benefit from the strength of the used vehicle market. We expect that the current market conditions will continue at least through the end of the second quarter, and accordingly, we have lowered our full year 2011 fleet cost target to a range of $230 to $240 per vehicle per month.

We expect that the company will realize significant benefits from the sale of risk vehicles in the second quarter, which will result in fleet costs of approximately $200 to $210 per vehicle per month in the second quarter.

While we expect the used vehicle market to be very strong during the second quarter, we have not factored the recent record Manheim Index levels into our future residual assumptions beyond the end of the second quarter. In the event that the current market conditions are sustained beyond the second quarter, fleet cost for the full year 2011 could be below our target range.

The extent of the impact of the current supply disruption on the market has yet to play out. And as a result, we have limited visibility on how that might benefit our fleet cost expectations for the year.

Based on the favorable results for the first quarter, expected transaction growth, continued cost control efforts and the reduction in fleet cost, the company is now targeting, exclusive of any merger-related expenses, corporate adjusted EBITDA of $260 million to $285 million for 2011.

In conclusion, we're very excited about the future for Dollar Thrifty. We are armed with 2 well-established value brands, a sturdy balance sheet and have a very competitive operating and financing cost structure. We expect revenue growth, combined with cost controls and an excellent used vehicle market, will result in 2011 being another outstanding year for the company.

We continue to maintain our focus on running the company on a stand-alone basis, and maximizing return on assets.

We are making investments in our people in our systems, continually to improve -- continuing to improve our customer service experience and aggressively seeking profitable growth opportunities.

At the same time, management at the company and the Board are fully aligned with the interest of our shareholders, and consistent with our fiduciary duties, will be open to appropriate alternatives to maximize shareholder value.

That concludes our prepared remarks. Operator, will you please open the call up for questions?

Question-and-Answer Session

Operator

[Operator Instructions] Chris Agnew, your line is open. [MKM Partners LLC].

Christopher Agnew - MKM Partners LLC

What should -- in terms of free cash flow, how should we think about that, this year, plus in terms of timing and potentially, how much of the EBITDA may increase, to your guidance, goes through to free cash flow?

H. Buster

In terms of free cash flow, Chris, I think we told the market before, from a working capital standpoint, we have a little bit of a seasonal increase in the summer. If you look for the full year, because we do pull the investments in the fleet out of the enhancement cash, the EBITDA will pretty much -- the free cash flow would be EBITDA less the corporate interest expense, probably about $10 million less capital expenditures, which we previously said was about $25 million, and given that we pull the enhancements back out, on a full year basis, that doesn't have a real net impact.

Christopher Agnew - MKM Partners LLC

Okay. And in terms of your fleet cost guidance. We've heard a couple of comments that the used car market is starting to soften in May. I mean, can you talk about your expectations for the quarter? And then can you relate what your -- in terms of the Manheim, what your expectations are for the rest of the year?

Scott Thompson

I can take some of that. The used car market, I would say, is still very good. Maybe it's off a tad but probably not enough to matter. I think when you look at it, you got to drill down a little bit deeper and look at particular products. If you're talking about the heavy metal or the vehicles that gas mileage is not particularly good, those vehicles clearly are under some pressure. If you're talking about the lighter metal and the vehicles that have good gas mileage, those vehicles are clearly continuing to move up and being very robust. Cliff, you want to kind of touch the Manheim expectations?

H. Buster

Yes, on the -- as far as the Manheim expectations, Chris, what we did, as Scott said in the prepared remarks, is for the second quarter, we're looking at what the market is and we've run that through our depreciation assumptions. Beyond the second quarter, we're really looking back to where the market was at say, the end of February, beginning of March, for the balance of 2011, beyond that, when we look at 2011 model year vehicles that would go into 2012, we're assuming a 118 Manheim going into next year.

Scott Thompson

The last comment I'll kind of give you on the used car market, I mean, this is a very strange year in the used car market and I think we're watching it closely. But the latest statistic I saw on North American production for the second quarter, if you go through and look at it, you see the Japanese assembly plants in the U.S. having their production for the second quarter being down more than 20%. And you see the U.S. OEM body overall production being down about 3%. That, at a time, when the new car market is growing, it's strange. What that normally would mean is that you would get an increase in pricing at the new car level or transaction pricing level that would be very good for the used car market. But this is a very strange -- it's going to be strange used car market this summer, but I think it's going to be very solid.

Christopher Agnew - MKM Partners LLC

And -- I see. Can I, just -- a quick follow-up to that. How would you describe fleet levels in the industry at the moment? And what are the implications do you think of the strong used car market as you head into the summer period?

Scott Thompson

Well, the fleet level, always in the month of May, are always a little bit sloppy and loose, as we all carry extra cars heading for the peak. I think that's also true this year, that people are carrying cars to get to the peak. I think, probably, if I were guessing, I would -- if people are doing what we're doing, which are probably carrying a few extra cars into the peak because of the risk of supply disruptions. And since nobody knows exactly what the supply disruptions are going to be, I imagine everybody's carrying a few extra cars. On the supply disruption issue, we're fortunate that only about 5% of our fleet is Japanese, then so although we have had cancellations from our Japanese partners, they -- because of the volume we buy, they've been relatively insignificant. Primarily, our domestic partners have been solid. We have had a few cancellations from one of them but again, they've been minor and we've been able to work through it. But I think there still is some unknown as to deliveries. And so, I imagine people are carrying a few extra cars.

Christopher Agnew - MKM Partners LLC

That's all for me.

Operator

John Healy, your line is open. [Northcoast Research]

John Healy - Northcoast Research

Scott, I wanted to take a step back and think less about the quarter and think more about the long term for the company. If I were -- if you were to normalize kind of a used car market for the business today, after all the achievements you've made and now it's demand coming back on, where do you think of normalized level of EBITDA margin is for Dollar Thrifty in kind of a normal used car market and normal moderate demand environment? What sort of EBITDA margins do you think the capable of -- the company is capable of putting up on a consistent basis?

Scott Thompson

Why don't you just ask a hard question? First of all, I guess I'd make the point that since I've been here, there hasn't been anything that I would call normal, so it's really hard to figure what normal is. When you talk about normalizing used cars, you also have to kind of normalize the revenue stream. Because as much as we've been a good used car market, we certainly have been in horrible travel market. And so, I think to get to normalized EBITDA, you've got to normalized both the revenue side of the equation and the cost side of the equation. And I'm not going to give you a margin number or a target at this point, but I guess what I'd tell you is we continue to feel very comfortable that this company can produce significant cash flow. And because of our capital structure, that cash flow ends up being, what I'll call, real cash that shows up on the balance sheet and puts us in a very good competitive position. We're continuing, every day, to work on the cost structure, and we're continuing, every day, to look at revenue enhancements.

John Healy - Northcoast Research

That's fair. And I wanted to ask you about the demand environment. If you look at the business today, where do you think the booking windows are? How much visibility do you have in the demand today? And if you look back over the last month or so, are you feeling better? Are you feeling worse? Are you feeling the same about what you think summer demand looks like?

Scott Thompson

The booking window really hasn't changed. We've got great visibility for 30 days, pretty good visibility for 60 days, some visibility at 90 days. And after about 90 days, we don't have much visibility other than, what I call, macro-analysis of the economy. So the booking window probably hasn't changed any. We are seeing good bookings. The demand looks pretty good. And I would say, probably the demand looks better now than it did probably last time we had one of these earnings conference calls. The pricing environment currently is a little choppy, which is not unusual but it is a little bit choppy. The length of rent appears to be lengthening, and I take that as a sign that consumers are -- vacations are lengthening and is probably be a positive. We did have double-digit growth in tour from a days standpoint. And at the same time, we had increased RPD from the tour side of the business. So I feel pretty good about the inbound-tour side of the business.

Operator

[Operator Instructions] Steve O'Hara, your line is open. [Sidoti & Company]

Stephen O'Hara - Sidoti & Company, LLC

Can you just talk about pricing and when do you start to get pricing in the industry? Or we already kind of see that back in, I think, it was '09. I mean do you expect that to turn?

Scott Thompson

Well, as you know, we're the smallest of the big players, and we don't really drive the pricing as much as we react, most likely, to other people's pricing. And -- so I don't think we're probably the best company to discuss expectations. But you know, it's kind of like it always is, in particular markets, it's very strong. And in some markets, it's very weak and that has to do with supply/demand in each individual location. But I think it looks okay, but it really depends on how some of these fleeting issues play out though the industry, how the deliveries work through the industry, as to what I think probably the peak pricing will be. And I think it's a little too early to tell what the deliveries will be.

Stephen O'Hara - Sidoti & Company, LLC

And you can -- you can envision a scenario where maybe too much fleet is delivered in kind of eclipses people's expectations?

Scott Thompson

No, I think it's the other way around. I think, probably, if you want to say -- you want to call it risk and I'm not sure it's a risk, it might be a positive. But I think any supply disruptions would lessen the fleet and would be positive to pricing. I don't think anybody's at risk of getting too much fleet. I mean the manufacturers worldwide are stretched to produce enough cars currently for retail demand. It would look like to me that, that situation is going to continue for a number of months. I don't think it's a long-term issue, but I do think it's a issue over the next 5 to 6 months, just the ability of the OEMs to produce volume for the retail demand. And that certainly has some implications on the wholesale buyers of vehicles. I think by this time next year, we won't be talking about it. But in the short term, the U.S. auto market is very tight on producing cars.

Stephen O'Hara - Sidoti & Company, LLC

And then, finally, in terms of the guidance, when you guys gave out guidance, I think it was March 22, and not many days 'til the end of the quarter, what happened there? I mean you guys, being overly conservative in that guidance, kind of given the macro environment at that time, do you think?

Scott Thompson

Well, I mean, we try to give the best information we have at the time we give it. Things are dynamic. We also certainly worked very diligently to try to make sure that we're giving accurate information. And look, January, as I mentioned before, January and February weren't very good. And late March came in a lot better than we'd expected. But at the time, that was our best thinking. And today, we've given you our best thinking and tried to be very transparent about what the assumptions are in our fleet cost. So you know that, look, if the used car market were to continue to stay at this very robust level, that we will probably have a revision for you sometime in the third quarter. But we're not building that market into our guidance at this time.

Operator

Our next question comes from Neil Portus. [Goldman Sachs]

Neil Portus - Goldman Sachs Group Inc.

I just want to dig in a little bit more on supply. Some of your competitors, they've broadly said that they think they can get the cars they need for the peak summer travel season, that they don't anticipate supply disruptions? What are you seeing that's different there?

Scott Thompson

I don't think I said anything different. I just said that we don't know for sure what the deliveries are going to be. And we talk to the OEMs every day, and I think there will be some supply disruptions, so that doesn't -- but I did not indicate that people will not be able to mitigate the supply disruptions.

Neil Portus - Goldman Sachs Group Inc.

Okay. And then second, I just wanted to see if you could comment on the current pricing environments in the leisure market? How competitive are some of your peers on price?

Scott Thompson

Well, I think I would answer that question the same every time it was asked, which is look at the pricing, it's always competitive. And it changes rapidly. I think it's no different today than it would be next month or a month ago. During these mini peaks or mini troughs, you get quite a bit of volatility in pricing. As I mentioned before, I think all of us are carrying a few extra cars to protect ourselves from a supply standpoint. So the industry feels a little loose, but not anything that I can -- would consider to be out of the norm.

Neil Portus - Goldman Sachs Group Inc.

Okay. And maybe just finally, in your search for new cost/save measures, is there -- just using an analogy, is that inning that you're in or how much further do you think you have to go after 1Q's performance?

Scott Thompson

I think from a cost standpoint, the game's kind of never over. So I don't think I have an inning. I think it's part of the culture that you got to continue, you continually look at your cost structure and way to improve it from a competitive standpoint, especially in this industry. And so, look, yes, we've gotten some of the low hanging fruit but it is -- are there more opportunities going forward, without question. And as new technologies are put in place and we clean up some of our technology issues, are there significant opportunities in the future, no question. And we'll continue to work on those every day.

Operator

Fred Lowrance, your line is open. [Avondale Partners, LLC.]

Fred Lowrance - Avondale Partners, LLC

Cliff, you made a comment earlier and I think I just missed what you said about your tax receivable, what had happened to that during the quarter. And then, if you could just let us know, have you received any of the tax refund amount that you thought you were going to receive this year and sort of what is the timing for that to play out? I guess what's the total amount at this point?

H. Buster

The total -- the tax receivable we had at year-end was around $65 million. In the first quarter, we've gotten back, effectively, $50 million of that, has already been received. The remainder of that would play out third quarter or fourth quarter when we actually file our return and get any refunds back or apply it against any nominal amount of tax that we might owe.

Fred Lowrance - Avondale Partners, LLC

All right. And just any additional comments on what you're going to do with all this cash beyond the $100 million share repurchase program you have out there. I know you're sort of holding off on doing any of that with all the M&A action going on, but sort of any incremental thoughts about where that cash may be put to use?

Scott Thompson

I think what we're going to do right now is, what I'll call, harvest cash and work through the strategic alternatives. At some point, when the strategy alternatives have run their course, and if we're standalone at that point, we'll have some information to the give the market on what we'll be doing with the cash. Clearly, our current capital structure is not ideal, and we understand that. But we think at a time when you're working through these strategic alternatives, it's in our best interest to not do anything drastic and continue to harvest cash.

Operator

Our next question comes from Michael Millman. [Millman Research]

Michael Millman - Millman Research Associates

When you total up all your HP outsourcings, how much does that amount to on an annual basis?

Scott Thompson

What we pay HP?

Michael Millman - Millman Research Associates

Yes.

Scott Thompson

I'd rather not give that exact number out, but let's say that the new contract has embedded in it about a 15% cost reduction. And let's say that, that is, call it, $4 million to $5 million of benefit to the company on an annual basis.

Michael Millman - Millman Research Associates

But that's only one of...

Scott Thompson

That's only one of our IP costs. We outsource to HP, but we also have other relationships in the IT structure.

Michael Millman - Millman Research Associates

Can you give a rough approximation of how much those are?

Scott Thompson

How much we spend in IT in total?

Michael Millman - Millman Research Associates

Yes.

Scott Thompson

$70 million?

H. Buster

$70 million.

Scott Thompson

About $70 million.

Michael Millman - Millman Research Associates

And, of course, the question is, if indeed there is -- that you're purchased by Hertz or Avis, how much of that goes away?

Scott Thompson

I don't know. I mean you would have to talk to the acquirer or it will depend on how they want to run the business. I don't think any of it would go away instantly. It will take quite a while to integrate, but that's really a question of integration and the person who should answer integration questions would be a buyer, not a seller.

Michael Millman - Millman Research Associates

Can you talk about what impact, if any, smartphones are having on your ability to sell GPS?

Scott Thompson

Yes. I've been asking that question every quarter for a long time. And to date, we can't -- we don't see any impact. I would expect at some point in the future, there might be an impact. But right now, we're not seeing any issues in that area.

Michael Millman - Millman Research Associates

Do you have some alternatives when that day occurs?

Scott Thompson

We always have alternatives. You know that.

Michael Millman - Millman Research Associates

Can you talk about what those are?

Scott Thompson

No.

Michael Millman - Millman Research Associates

I guess I knew that too. Are you buying any used cars?

Scott Thompson

We, at times, look strategically or tactically to buy used cars. In particular, cars that -- classes that we need. We're not buying very many and the used car market is such that I don't expect we're going to be buying very many in the short term. Over the long term, I imagine we'll buy 10% of our fleet used, but not anytime soon. And you're exceeding your limit of questions.

Michael Millman - Millman Research Associates

I'm sorry, just one more. What are you seeing from Advantage?

Scott Thompson

We see them in the marketplace every day. They continue to be in the marketplace like all the other competitors. But I can't tell you we're seeing anything unusual or unique from the Advantage standpoint.

Operator

Our next question comes from Jason Miller [ph].

Unknown Analyst -

I wanted to understand what level of debt you might be comfortable with, if you consider other alternatives?

Scott Thompson

I think what we would do is, at the time we were ready to make that decision, we would look at the economic environment. And I think it would depend on what the economic environment looked like. To the extent that we're in a solid recovery and things look good for the long term, that would be one level of debt. If it still looks a little choppy, that would be another level of debt. And the other factor, I think, that would influence that decision would be the type of debt and the length and probably rate. I'd, obviously, be much more comfortable with 7- or 10-yeared money and a larger amount of leverage. If that's the paper we're talking about, if we're about 3-year paper, it wouldn't be quite as comfortable. And having said all of that, I don't have a particular target in mind, yet. But clearly, the industry has a couple of public companies out there that have some debt, so there's some benchmarks out there. I suspect that our appetite for debt would be slightly less than our public competitors. That probably has to do with our profile of risk cars and the broadness of our revenue base, is such that I think we would probably be -- would want probably less leverage. There are larger companies, have a larger revenue base and don't run as many risk cars as we do. Having said that, it gives you kind of some ideas, but I think we would be lower than our public competitors.

Unknown Analyst -

And I'm sorry, with respect to antitrust; I didn't hear what your comment was.

Scott Thompson

I don't think I had any comment other than we continue to work with our friends at Avis as they work with the FTC and continue to have merger-related expenses every quarter.

Unknown Analyst -

Well, I think the expectation was that there would be some update in early April. And I'm wondering if there's a problem or an issue or a concern that I should think about as to why this is taking longer than originally anticipated and when do you think you'll be in a position to offer an update.

Scott Thompson

I'd point you, one, to the Avis earnings call, realizing that Avis is taking the lead. This is Avis working on FTC approval, and I think Ron [Ronald L. Nelson] had very clear comments on his earnings call. And I guess that's where I'd point you.

Operator

Sachin Shah [ICAP], your line is open.

Sachin Shah - ICAP

Just a few questions. I just want to understand the statements that you put in the release this morning. The last ends basically says that you don't have a D&A in place and there aren't anything specific to the specific terms. So I'm just not clear on have you been negotiating or not negotiating? Why did you put that statement in the release?

Scott Thompson

I don't think that's a new statement. The company does not have a definitive agreement with Avis. And I think we've been very clear on that from probably third quarter last year, on. And nothing's changed on that status. There -- the companies that have not been negotiating a definitive merger agreement. What's been going on is that Avis has been working with the FTC, and Dollar Thrifty has been working with them in facilitating that activity, as Avis works on FTC approval.

Sachin Shah - ICAP

Okay. Any kind of update on the other approvals? I think that the Canadian approval is still pending. And just wanted to find out, is the path to kind of working towards negotiation and ultimately, getting to a definitive merger agreement is this FTC approval? And then, you're working your way through the process afterwards?

Scott Thompson

I would, again, kind of point you to the buyer on those particular issues, as we're the target. And the buyer is point on regulatory approval issue.

Sachin Shah - ICAP

Okay. You mentioned about the merger expenses and you're obviously accruing them as this continues. Is there any kind of commitment from Avis on reimbursement of those expenses? And could you just -- man, I missed it in the release. What the expenses or costs have been since they made their offer?

Scott Thompson

Each party pays their own expenses. And so we're making an investment every quarter in the activity. As to our total expenses, we've spent on this -- I'm not exactly sure, I don't have that right in front of me. But it's probably in the category of $25 million.

H. Buster

Yes, I think we [indiscernible].

Scott Thompson

Yes, probably it's kind of hard to tell when the Hertz merger activity stopped and when Avis merger activity started. I don't know exactly how to split those. But I would say we spent probably in total, around $25 million on the 2 activities. And with that, we need to move on to the next caller.

Operator

[Operator Instructions] Jordan Smith [ph].

Unknown Analyst -

Two things. One is are you doing anything on hourly car sharing or anything like that, like a zip car model?

Scott Thompson

No.

Unknown Analyst -

No plans to do so at this point?

Scott Thompson

Not at this point.

Unknown Analyst -

Okay. The second question is, the autodealers which is a space you know and love well, commented that -- or several of them commented that the manufacturers have told them that the deal is we'll get the cars over the rental car companies in the second quarter. Are you hearing the same thing or is that just speculation on their part?

Scott Thompson

That's a complicated question, because a lot of manufacturers and I might not have the same answer for every manufacturer. I think that, as I mentioned before, it's going to be a very tight market for a little while on acquiring new vehicles. And I think some manufacturers will favor of the retail channel over the wholesale channel and I think other manufacturers are taking a longer-term view of it and are being very supportive of both channels and equally allocating the pain.

Unknown Analyst -

So would you sell less cars by choice in the second quarter, because of the situation?

Scott Thompson

We certainly sold less cars in the first quarter, because of the situation. In the second quarter, we're continuing to monitor. I think we'll sell -- I don't think we'll have to change any of our delete plans in the second quarter based on what we see and hear now from manufacturers.

Operator

And I'm showing no further questions. And I'd like to turn the call back over to Scott Thompson.

Scott Thompson

Thank you. We appreciate your time and interest today. Thanks certainly goes out to our 6,000 plus employees for their efforts everyday in helping the company achieve its goals. Lastly, I would like to thank our suppliers, lenders and shareholders for their ongoing support.

Operator, that concludes our call today.

Operator

And this concludes today's conference. Thank you for your participation. You may now disconnect.

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