Hertz Global Holdings' CEO Discusses Q4 2011 Results - Earnings Call Transcript

Feb.23.12 | About: Hertz Global (HTZ)

Hertz Global Holdings (NYSE:HTZ)

Q4 2011 Earnings Call

February 23, 2012 10:00 am ET

Executives

Leslie Hunziker - Staff Vice President of Investor Relations

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

Elyse Douglas - Chief Financial Officer, Executive Vice President and Treasurer of Hertz Corp

Unknown Executive -

Scott P. Sider - Executive Vice President and President of Car Rental & Leasing The Americas

Analysts

Brian Arthur Johnson - Barclays Capital, Research Division

Michael Millman - Millman Research Associates

Richard M. Kwas - Wells Fargo Securities, LLC, Research Division

Christopher Agnew - MKM Partners LLC, Research Division

Emily E. Shanks - Barclays Capital, Research Division

John M. Healy - Northcoast Research

Adam Silver

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

Yilma Abebe - JP Morgan Chase & Co, Research Division

Bobby Jones

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Hertz Global Holdings 2011 Fourth Quarter and Full Year Conference Call. The company has asked me to remind you that certain statements made on this call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of performance and, by their nature, are subject to inherent uncertainties. Actual results may differ materially. Any forward-looking information relayed on this call speaks only as of the date -- as of this date, and the company undertakes no obligation to update that information to reflect changed circumstances.

Additional information concerning these statements is contained in the company's press release regarding its fourth quarter and full year results issued yesterday, and in the risk factors and forward-looking statements section of the company's 2010 Form 10-K and quarterly reports. Copies of these filings are available from the SEC, the Hertz website or the company's Investor Relations department.

I would like to remind you that today's call is being recorded by the company and is also being made available for replay starting today at 12:30 p.m. Eastern Time and running through March 8, 2012. I would now like to turn the call over to our host, Leslie Hunziker. Please go ahead.

Leslie Hunziker

Good morning. You should all have our press release and associated financial information. We've also provided slides to accompany our conference call that can be accessed on our website at www.hertz.com Investor Relations. 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 Incorporated, a publicly traded company. Results for the Hertz Corporation differed only slightly, as explained in our press release. With regard to our Investor Relations calendar over the next couple of months, we'll be presenting at the JPMorgan High-Yield Conference on February 29, the Auto Rental News Show in Las Vegas on March 12 and the BofA auto summit on April 4.

This morning, in addition to Mark Frissora, Hertz' Chairman and CEO; and Elyse Douglas, our Chief Financial Officer; on the call, we have Scott Sider, Executive Vice President and President of Vehicle Renting and Leasing in the Americas; Michel Taride, Executive Vice President and President, Hertz International; and Lois Boyd, Executive Vice President and President of Hertz Equipment Rental Corporation. They'll be on hand for the Q&A. Now, I'll turn the call over to Mark.

Mark P. Frissora

Good morning, everyone, and thanks for joining us. I'm sure I'm preaching to the choir when I say the stock's performance over the last week has been extremely disappointing, especially when you consider that 2011 was a great year for Hertz.

Let's start on Slide 6, and I'll show you what I mean. As you can see, records were set on many fronts. We achieved the highest full year consolidated adjusted pretax income and margin in the company's history at $680.5 million and 8.2%, respectively. This exceeds the previous peak in 2007 of $656.4 million and 7.6%.

While our record earnings were supported by the early-stage recovery in the equipment rental market, the contribution was most evident in our worldwide rental car business. To be specific, in the worldwide rental car, we achieved the highest volume level and record volume growth year-over-year for both the fourth quarter and for 2011.

On the earnings front, on both a GAAP and adjusted basis, worldwide rent a car reported record pretax income and margin for the fourth quarter and full year. On an annual basis, the new peak for rental car adjusted pretax margin is 12%, up from 9.9% in 2010, the previous peak, and even the prerecession level of 8.7% in 2007. Corporate EBITDA for global rental car also set new historical highs from both an actual dollar and a margin perspective in 2011.

Moving to Slide 7. Clearly, our year-over-year performance was significant. The incremental upside to earnings came from the successful execution of our strategic initiatives to grow and diversify our revenue streams, increase efficiency and productivity and improve our capital structure. We made substantial progress on the actions we outlined last year to build out our value brand, expand our insurance replacement network and further penetrate equipment rental end markets for incremental organic growth. We also completed several strategic acquisitions that enhance our product and service portfolio. These assets position us as a new entrant in the leasing market, they expand our geographic coverage and increase our exposure in the fastest-growing markets for industrial equipment rentals.

On Slide 8, let me walk you through the progress we've made. We've completed the acquisition of the Donlen Leasing business in September 2011 and are in the midst of a very smooth integration. The integration team has discovered key synergies in the area of acquisition, remarketing and operations, to name a few. Our new integrated sales structure is in place and more than 100 cross-selling opportunities have been identified. Sales representatives from both companies are working together to build our combined brand in the marketplace and close deals.

We're also continuing to roll out our Advantage Network worldwide. 2011 revenue was about 21% higher than in 2010, with adjusted pretax income up 14%. Our value brand benefited from 35 net new locations last year. This brings the total to 81 locations, of which about 32% are positioned in Europe. In the U.S., Advantage offers rentals in 44 of the top 65 airports.

In addition to Advantage, you'll recall that in early 2011, we acquired ACE rentals, which now has 10 locations throughout New Zealand and Australia, that further expand our value leisure portfolio abroad. Offering a value brand enables us to attract new, price-sensitive rental customers at a lower cost without tarnishing our premium brand or its pricing structure.

We continued our success in growing our insurance replacement business by securing a co-primary position with one of the largest national insurance companies in 2011. We believe we added share in the $11 billion off-airport market over the last 12 months by increasing overall off-airport revenue nearly 11%, opening 247 net new locations and growing our position with 4 of the top 5 insurance companies by an average of 22%. With only a small market position today in off-airport, we have a huge opportunity in front of us to rapidly increase our position, and clearly, momentum's on our side.

Finally, our ability to share our fleet between the Hertz classic brand, the Advantage value brand and the insurance replacement operations helped drive worldwide rental car fleet efficiency up 35 basis points last year to 78.6%, the highest annual rate since becoming a publicly traded company. Worldwide rental car monthly depreciation reached a record low in 2011 of $265 per vehicle as a result of a more diversified fleet, our ability to share fleet between end markets and selling used cars into higher return channels. In 2011, gains on sales to consumers increased 43% over 2010, and direct-to-dealer sale gains were up 86% year-over-year.

As it pertains to rental car, I like where we sit. We're strategically positioned to drive the fastest earnings growth in the $22 billion U.S. rental car market with the #1 premium preferred brand, the fastest-growing national discount brand and an accelerating insurance replacement product with lots of room to grow.

I also like how we're positioned in the equipment rental market and the headway we're making there. This is on Slide 9. In 2011, total worldwide equipment revenue increased 13% over the prior year and was up 14.1% in North America, which represented 89% of total equipment rental revenue. National account revenue in the U.S. grew 15% year-over-year, making up more than 50% of total revenue. And corporate EBITDA improved 19.7%, with margin up 220 basis points over the prior year.

As we build a better company, we continue to invest in small, accretive acquisitions that improve our business model by focusing on fast-growing, less-cyclical, higher-margin businesses. As you know, the major industrial story of 2011 was the expanding oil and gas potential of the North America onshore, which created an intense demand for infrastructure. Last summer, we acquired WGI Rentals, which allows us to bring our industrial service expertise into a new region, while tapping into the growth of North Dakota's oil and gas industry.

And then in the fall, we purchased the offshore equipment rental division of Delta Rigging & Tools based in Louisiana. Oil and gas was about 15% of total North American revenue in 2011. By year end, we had acquired DW Pumps, located on the West Coast. Total revenue from our Pump & Power equipment rentals, which is used in a variety of areas like the entertainment industry, facility maintenance projects and oil and gas ventures, increased 22% worldwide last year and 32% in North America.

And earlier this year, we closed on the acquisition of Cinelease, a U.S.-based leader in lighting equipment rentals to the TV and film industry. This acquisition builds on our unique position in the $2 billion entertainment sector and contributes to a more stable revenue stream. We have plans to invest another $600 million in gross CapEx for fleet this year, possibly more if nonres construction recovers faster than expected. We'll also continue to make investments in strategic equipment rental acquisitions.

Now at the same time that we're growing our business, we're extremely focused on cost management. On Slide 10, through Lean/Six Sigma actions, we delivered cost savings of $458 million. Consolidated revenues per employee was up 1.7% from 2010. We implemented our global Lighthouse project throughout 66 operating locations last year and 84 locations since inception in mid-2009.

As you know, Lighthouse is a holistic program reengineering operations through the eyes of the customer. We're only about 40% deployed on this global program in terms of revenue, but its effectiveness is evident. In 2011, worldwide rental car's net promoter score was up 6.4% year-over-year, and locations that have completed the initial Lighthouse program in 2011 have an adjusted pretax margin about 250 basis points better than non-Lighthouse locations.

Another key initiative is our asset-light strategy, which revolves around franchising and employing technology in place of infrastructure. This is on Slide 12. We've identified roughly $600 million of global corporate revenues that could be appropriated to franchise. Capital required for fleet investments average about 120% of rental car revenue, so we could have a total opportunity to reduce assets by $720 million from fleet alone. At the same time, through royalties and new service and marketing agreements, the earnings upside could be substantial. Now we don't expect to capture this overnight.

In 2011, we franchised 10 locations in Australia and Italy. Our franchise network now represents 43% of total international revenue. Additionally, in the U.S., we franchised 4 locations. Franchisees in the U.S. make up 4% of total U.S. rental car revenue today. Last year, most of our focus was spent laying the groundwork for future transactions. In 2012, we have a goal of franchising 1% to 2% of worldwide rental car revenue.

Our asset-light strategy also includes replacing infrastructure with technology. We are more broadly rolling out virtual kiosks, which allow us to co-locate with body shops, maintenance facilities, hotels and other retailers without incurring the cost of opening our own facility off-airport. The cost savings between the kiosk and a fully staffed, traditional off-airport facility is significant. A virtual kiosk uses employees in our customer care facility to service a rental transaction quickly and without distraction from anywhere in the world. It's not only cost-efficient but customer friendly. Today, we have kiosks in 45 of the top 65 targeted airports nationally. And our first European virtual kiosk is live at Heathrow. Our goal is to more than double the number of kiosks we have in the U.S. before the seasonal peak.

Innovation also allows us to offer our Hertz On Demand hourly car-rental service without adding infrastructure. The Hertz On Demand vehicles with their self-service technology are either delivered to the customer from an existing Hertz facility or parked on the street or in public garages. It's a very efficient model.

So you can see that our strategies are paying off. We exceeded our 2011 financial targets. In fact, we grew adjusted EPS roughly 87% last year, and that's on top of a 79% increase in 2010. More importantly, we set new company benchmarks for profitability, and we strengthened our balance sheet, paying down debt and reducing interest expense. All of this was achieved in the midst of a challenging external environment that included global economic uncertainty, political turmoil, unusual weather disruptions and ongoing weakness in the worldwide construction market. We hope our performance gives investors more confidence in our ability to successfully operate under any macro circumstance. Now let me turn it over to Elyse, so she can give you some details around the fourth quarter and our capital management initiatives.

Elyse Douglas

Thanks, Mark. Good morning, everyone. Let me begin on Slide 14, focusing primarily on our fourth quarter financial results on both a GAAP and an adjusted basis. Consolidated revenue for the quarter was up 9.7% to $2 billion, with the rental car division growing 9.5%, including Donlen revenue of $107.5 million. The equipment rental division improved 11.1%. Consolidated adjusted pretax income increased 136.5% in the quarter to $165.1 million, driven by higher revenues as well as lower fleet and interest costs and lower operating expenses.

GAAP pretax income was $92.8 million versus last year's fourth quarter loss of $6 million, despite incurring approximately $5 million more in restructuring and restructuring related charges year-over-year to better align future costs in Europe with the weakening macro demand.

In the fourth quarter, we generated cost savings of $117 million. About half of the savings came from direct operating expenses, which declined almost 400 basis points as a percent of revenues as shown on Slide 15. This reduction was due to improved operating leverage in Hertz as the business continues to recover, gains on property sales and equipment, lower damage costs in the Rent A Car business, partially offset by higher gasoline expenses.

Let me spend a minute on the fourth quarter property sale gains of $38 million, which we highlighted in our earnings release. Each year, we open and close locations. In the U.S. alone this year, we opened 415 and closed 168 locations, incurring gains, losses as well as start-up and closing costs. Estimates for these costs and gains are always included in our guidance. These property sales are in line with our asset-light strategy to reduce our brick-and-mortar and move to a lower cost facility model. In addition, every year, we incur costs which are not specifically highlighted that are embedded in DOE that more than offset any gains on sales. This year, for example, there were roughly $90 million of costs offsetting these gains. Examples of these costs include unrecoverable concession fees and consolidated facility costs, unpredictable FX gains and losses as well as higher gasoline expenses. The last item alone negatively impacted yearly results by $22 million versus 2010.

We incur gains and losses on property sales each year, and it is our policy to record them in our regular operating income when they are not part of a restructuring event. Just to put the gain in context, our global DOE expenses are $4.6 billion, with the gain representing less than 1% of these costs.

Now I'd like to shift gears and talk about our EBITDA improvement. Consolidated corporate EBITDA of $335.2 million was a 25.3% improvement over the 2010 quarter, and the margin improved 200 basis points to 16.6%. Worldwide HERC corporate EBITDA margin of 44.3% was 420 basis points better than the 2010 fourth quarter, and it is the best margin reported in the past 13 quarters.

Worldwide rental car fourth quarter corporate EBITDA margin of 11.9% was the best fourth quarter result we've reported since becoming a public company. Mark highlighted many of the full year financial results, including the record adjusted pretax income of $680.5 million and adjusted EPS of $0.97, up 86.5% over the prior year. I'll only add the GAAP diluted EPS of $0.40 per share improved from a loss of $0.12 per share in 2010. This occurred in spite of 8% higher diluted shares outstanding related to the impact of the convertible notes and stock options.

Now, let me give you some more detail on the quarterly performance trends by business unit. Starting with U.S. rental car on Slide 17. Total revenue improved 2.9% in the fourth quarter, driven by 8.6% higher volume and 5.6% longer rental transaction. Breaking this down on Slide 18, airport volume grew 4.3% on 4% longer rentals. Advantage volume was up 15.8% on 1% longer rental length, while off-airport volume increased 15% and transaction length was 6.5% longer, reflecting the growth in insurance replacement, which was up 15.4% over the prior year.

Slide 19 outlines our progress in expanding the off-airport and Advantage businesses during the quarter. We opened 87 net new off-airport locations and recorded same-store revenue growth of 8.1%. Our U.S. Advantage brand revenue grew 11.4% due to a larger footprint and greater consumer visibility. The growth in insurance replacement and leisure rentals, which averaged 13 and 6 days respectively, resulted in fourth quarter U.S. fleet efficiency of nearly 80%, an improvement over 2010.

We continued to see negative RPD trends in the fourth quarter, in part due to some industry overfleeting coming off the summer peak. But longer rental length, reduced fleet cost and improved efficiency more than offset the impact on profit. In fact, U.S. Rent-A-Car adjusted pretax profit was up 45.1% in the quarter, reflecting an improved -- a margin improvement of 440 basis points. The growth we're seeing in lower-priced channels is making a strong contribution to profit.

Let's look at Slide 20. In the fourth quarter, while the total revenue per day variance improved 100 basis points from the sequential third quarter, it was down 5.3% year-over-year. Of the decline, the shift in rental mix accounted for 2.2%, so from a pure price standpoint, U.S. RPD was down 3.1%, with leisure pure price down 2.7%. Other factors impacting rates include competitive pricing for corporate accounts and fewer one-way, high-RPD rentals in the 2011 fourth quarter due to milder weather year-over-year.

In terms of car costs on Slide 21 and 22, you can see monthly depreciation per unit in the U.S. declined 12.2% versus the fourth quarter of 2010, as we remained focused on our purchasing and remarketing strategies, and the residual market continued to benefit from a low supply of off-lease vehicles. For the full year, worldwide rent a car monthly depreciation per unit was down 11.9%.

Now let's move to Europe on Slide 23. Excluding the impacts from foreign exchange, revenue in European rental car was up 0.4% in the fourth quarter. Volume increased 1.2% over the prior year, offsetting a decrease of 2.1% in revenue per day. However, if you exclude the negative mix impact from the lower-priced Advantage brand, pricing was relatively flat. Remember, 85% of the total Advantage Europe locations were opened in 2011.

Moving to Slide 24. I'd like to provide some information to help you understand the impact of the Donlen Leasing business on 2011 and 2012 results. Donlen was acquired on September 1, 2011, so in the first column, you can see the 4 months of actual results generated. In the middle column, we've calculated the pro forma results for Donlen for the full year 2011, consistent to the reporting you will see in the 10-K. In the last column, you can see that this year, based on the pro forma results, we expect a revenue increase from Donlen of 12% to 14% and the adjusted pretax margin is expected to be approximately 9% for the full year 2012.

Now let's turn to the results of our equipment rental business on Slides 25 through 28. For the fourth quarter, worldwide HERC revenue increased 11.1%, reflecting strong performance in North America, where growth in total revenue was 12.9%. The equipment rental acquisitions contributed about 2% to the fourth quarter revenue increase, with the balance driven by strong growth in the industrial oil and gas area as well as specialty services, Pump & Power, and entertainment services.

Volume growth of approximately 8% in the fourth quarter was led by industrial projects and rental penetration as more companies turned to renting versus buying equipment. Pricing improved for the quarter by 3.4% worldwide and 3.6% in North America. On an apples-to-apples basis, using competitor methodology North America pricing was up 5.7%. As Mark mentioned, we made investments to refresh and enlarge our fleet offering. The average equipment age was 47.9 months, a slight decrease from last year. Sales of used equipment continued to improve as retail residual values are approaching prerecession levels.

Slide 28 shows we delivered strong earnings performance in the fourth quarter for worldwide equipment rental. Corporate EBITDA of $140.7 million was a 22.8% improvement over the prior year. Corporate EBITDA margin of 44.3%, a 420-basis-point improvement.

These results reflect the focused effort on productivity, process improvement and tightly managing other operating costs. Also contributing to our pretax profit improvement was a 390-basis-point increase in time utilization. For the full year 2012, we've already indicated that we expect corporate EBITDA flow-through to be roughly 60%. We plan to make investments in people and facilities and incur maintenance costs associated with the older fleet and increased delivery charges as we grow the business. The construction market still awaits a full recovery, with industry forecasts showing only modest growth in 2012.

Moving to Slide 29. Interest expense for the fourth quarter was $167.7 million, a decrease from 2010 of $33.6 million, and cash interest expense declined $18.2 million, reflecting lower rates from refinancing and the absence of the negative carry related to prefunding a portion of our high-yield debt last year. These results were partially offset by higher fleet levels, negative currency translation and incremental debt for the Donlen business. Total interest expense and cash interest expense for the year were down $73.7 million and $21.5 million, respectively, versus 2010, reflecting the results of the improvements made to the capital structure over the past 18 months.

For the full year 2012, we are expecting cash interest expense to increase $10 million to $20 million over 2011. This is due to an anticipated increase in fleet size to support planned revenue growth and the impact of a full year of funding the Donlen fleet, partially offset by additional interest savings.

Restructuring and restructuring related charges are shown on Slide 30. In the fourth quarter, these charges were $19.3 million compared with the prior year's $14.4 million, reflecting our continued effort to streamline the business and rationalize our global workforce, primarily in Europe. As Mark mentioned, 2011 was a year of investments as we capitalized on acquisition opportunities, purchased more rental car and equipment rental fleet to meet the demand recovery, refreshed our facilities, rolled out new technologies and refinanced high-cost debt, all of which impacted 2011 cash flow.

On Slide 31, you can see that cash flows from operations improved by $105.7 million in the fourth quarter, compared with the same period in 2010. For the full year, cash flow from operations was $2.2 billion, an improvement of $25 million versus last year. However, overall corporate cash for the full year was negatively impacted by several items, including acquisitions and investments of $209 million, debt refinancing costs of $166 million, planned increased year-over-year Hertz equipment cash outlays of $215 million and a year-over-year increase of $88 million in net nonfleet capital expenditures to invest in technology to support our growth strategies, as well as to expand and upgrade our facilities. For 2012, we expect cash flow before acquisitions to be at more normalized levels.

At the end of the quarter, we had approximately $2 billion of corporate liquidity available to fund growth initiatives, as outlined on Slide 32. And in spite of higher debt balances due to cash flow and the negative impact of foreign exchange, our corporate leverage ratio improved to 2.6x, down from 3.1x in 2010. And while we no longer have a leverage covenant as part of our credit facilities, the ratio illustrates the progress we're making toward investment grade status. With that, I'll turn it back to Mark.

Mark P. Frissora

Thanks, Elyse. I'm going to pick up on Slide 34. So you've all seen our initial guidance. It reflects our best estimate based on today's global economic and operating environment. As we get more visibility and if things change, we'll update our forecast as appropriate. But right now, the IMF is projecting 1.8% real GDP growth in the U.S. in 2012, but only 0.2% growth in the Eurozone countries. Some economists are even forecasting a year-over-year macro decline in Europe. But with all of our growth initiatives they brought a recovery in equipment rental and a full year's contribution from Donlen. We believe we can overcome the near recessionary environment in Europe to generate 7% to 8% global revenue growth this year. In the short time we've been working with Donlen, we've discovered that there are more opportunities to leverage each other's strengths and competitive advantages than we originally thought. We currently have 9 new products and programs in various stages of development, from early conception through beta testing. These products leverage the best technology and expertise from both companies and give our customers the industry-widest range of offerings from a single mobility provider. Not only are we developing new and innovative products, but we're enhancing several of our existing products to create an even more expansive offering that will improve efficiencies across all areas of vehicle and equipment rental and leasing. As Elyse mentioned, we're planning for roughly 13% top line growth in our leasing business this year.

On Slide 35, you can see that we're targeting volume growth of 5.5% to 6.5% in worldwide rental car. The incremental growth will be driven by the strategic initiatives I outlined earlier on the call, along with the rollout of Advantage abroad and our expansion in emerging markets. On the equipment rental side, we're looking for volume to grow 9% to 10%, on top of the 11% volume we captured last year, and the continued recovery of the overall industry are the drivers.

Now on pricing, we're anticipating worldwide rental car revenue per day to be slightly negative as we continue to shift our business mix towards our longer length value brand and insurance replacement offerings. Europe's weakness will also weigh on price, especially in the leisure market and as Advantage expands. On the competitive front, our corporate business continues to face pricing pressure, with more than 65% of the Fortune 500 companies' business, we're naturally going to be a prime target. But our corporate business is contributory and provides a steady stream of revenue to cover fixed costs. It's clearly an important piece of our business, so our strategy to invigorate pricing is to offer business customers a greater value proposition. In the past year, we've introduced new technologies and services like eReceipt, Gold Choice, mobile alerts, eReturn and counter bypass, all that enhance the customer experience. It's early, but so far, the customer feedback on these services has been overwhelmingly positive.

For equipment rental, we expect pricing this year to reflect our inventory of higher rate new equipment, increasing demand and generally strong industry fundamentals, partially offset by weakening pricing in international markets.

On Slide 36, for corporate EBITDA and adjusted pretax income, we're estimating 14% and 26% growth, respectively, at the high end. The top line growth and an estimated $250 million of incremental cost savings will be only partially offset by investments in both rental car and equipment rental fleet, higher depreciation per vehicle in the U.S. as we overcome last year's tsunami benefit and, as Elyse mentioned, incremental investments in staff, facilities and advertising in the equipment rental business.

Now while the bottom line gets us to a healthy 30% increase in adjusted diluted EPS, there's definitely more conservatism baked into earnings guidance to hedge against any further European weakness. And we'll keep our -- we'll be keeping our eye on how the presidential race in the U.S. affects consumer confidence later this year. Regardless, we feel good about our plan and are optimistic that we'll see some upside before the year's done.

Let me tell you what we're seeing so far in the first quarter. In spite of soft conditions in Europe, we're encouraged by industry trends across businesses in the U.S. In rental car, the total revenue per day variance seems to be improving compared with the sequential fourth quarter. Right now, volume growth looks like it could be up double digit versus a year ago, and rental car residual values continue to be very strong. In equipment rental, the operating environment remains positive. The Architectural Building Index above 50 in January, which is a positive sign. And our current U.S. rental revenue is tracking up roughly 15% to 16% on the base business, and our recent acquisition of Cinelease, our first this year, is expected to deliver an incremental 4% to 5% rental revenue in the first quarter. We have a robust acquisition pipeline for equipment rental and expect to close on another acquisition within the next few weeks.

And finally, before we open it up for questions, as is consistent with our previous call, we won't be really taking any calls on Dollar Thrifty -- or any questions on Dollar Thrifty as our Dollar Thrifty acquisition strategy remains the same. We continue to work forward constructively with the FTC on getting a consent decree, and once we get that consent decree, our intention is to work with Dollar Thrifty board in order to try to consummate a transaction that makes sense to both companies. So with that, operator, let's open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And first, we go to the line of Brian Johnson with Barclays Capital.

Brian Arthur Johnson - Barclays Capital, Research Division

Would like to just drill down a bit more, especially in light of some of the reports from competitors, on the leisure pricing environment in north -- in the U.S., how that's -- is that seemingly getting any better? Your fleet grew exactly in line with your rental base, so maybe want to understand a bit of how you're managing that. And then -- so that's sort of an Elyse-more question. Then for Mark, maybe, we talked after first quarter about your utilization management focus in on issues. Maybe you could update on that because I think this 80%, I don't know if it's close to a record but maybe getting there.

Mark P. Frissora

Yes, so on the fleet utilization number, it is a record, and we still think there's upside as we mature our strategy around off-airport growth, which drives a longer rental length, 13 days on average versus airport, which is roughly 3, 3.5 days. And then as we continue to grow Advantage, that also has a longer rental length, typically 6 days to 7 days and, again, beating the Hertz classic brand on-airport, which is, again, about 3. So as those strategies mature and get more traction, we expect our utilization opportunity to improve. I mean, long term, I think I've told investors in the past, we think we could get to 85, 88, kind of percent kind of numbers as both of those strategies begin to mature more and more over the next 2 to 3 years. Elyse, I don't know if you want to talk about the first part of the question. I'm not sure if...

Unknown Executive

Leisure RPD.

Mark P. Frissora

What's that?

Unknown Executive

Leisure RPD.

Mark P. Frissora

Yes, leisure RPD, which -- in terms of -- I mean, I guess in that, in the press release as well as in the -- in our script this morning, pretty much we said what we saw, which is an improvement from fourth quarter levels, so we're seeing sequential improvement on that, and that's about all we can say. I mean there's really not a whole lot else to talk about. We don't want to -- we want to make sure that we're consistent in our comments in what we said in the script and what we say now, which is that we feel that things have improved from what we're seeing today.

Elyse Douglas

The only thing I would add is that we are being very flexible in terms of how we acquire the fleet, so that we can acquire to meet the demand and not be in a situation to be overrun [indiscernible].

Mark P. Frissora

Yes, Brian. We typically will buy only about probably 70% of what we really need for the year. And so we have about 30% of our capacity that's flexible, and we're able to flex up or down on that by either buying or selling cars. And so we're pretty good at being able to kind of judge where we need to be and be at the right place. We're pretty accurate on that. We've not had many problems being too loose or too tightly fleeted. We're usually right where we need to be based on the demand planning model we've had in place now for over 1.5 years.

Operator

Next, we'll go to a question from the line of Michael Millman from Millman Research.

Michael Millman - Millman Research Associates

You mentioned, I think, 2.2% effect from mix. Is that something we can use going forward to assume mix will cost you that amount roughly each quarter?

Mark P. Frissora

I think, Michael, I think that's a good number. It may -- any given quarter, it may get higher or it may go a little lower, but I think it's about right. We've had it go -- like, in a month, we'll have it go to -- we track it every week, but it's gone 2.5%. We've seen it even gone 3%. I mean, the month of February -- I mean, it can go high depending on the month and the quarter. In general, it's probably not going to go lower. If anything, if our strategies work, it will go higher. Okay?

Operator

Next, we have a question from the line of Rich Kwas from Wells Fargo Securities.

Richard M. Kwas - Wells Fargo Securities, LLC, Research Division

Mark, on the guidance for worldwide price, what's embedded for leisure on-airport for the U.S. market? In recent months, you've been a little more constructive on the potential for year-over-year performance in 2012. How should we think about that relative to what you've provided for guidance on a worldwide basis?

Mark P. Frissora

Yes, we don't break that out, Rich, so I can't give that to you. I guess, again, for us -- do you have another question about this that you want to ask? Because I want to answer a question for you, so.

Richard M. Kwas - Wells Fargo Securities, LLC, Research Division

Okay, so on the -- just a bigger picture question, Mark. On franchising, pretty big increase expected for 2012 versus 2011. As we look out longer term, is there a bit of a snowball effect? You said you've laid a lot of the groundwork in 2011, so if you think out 2013, '14, I know your goal is to get to investment grade down the line, franchising is a big piece of that, but I mean, should we expect '13, '14 even bigger increases on the franchising front?

Mark P. Frissora

No, I mean, I certainly think on longer term -- I think we gave you a number here of $600 million to $700 million in kind of U.S. Rent A Car. I mean, that number could be larger. I mean, it could be $1 billion kind of longer term. And in Europe, certainly, I mean, there are -- it takes -- again, when you're talking about a whole country or a whole region of the country, these are big agreements that we're negotiating right now, and yes, we try to be conservative when we give you the numbers. $600 million and $700 million, I mean, it could be as much as $1.2 billion. It could be double that if our strategies work and if we're able to work out the agreements the way we want to with potential franchisees. We have a lot of interest right now. We have a lot deals under consideration. So again, I think the strategy is a good one. We feel really good about our ability to control quality and still buy the fleet and still be able to have our leverage and, at the same time, provide a very high quality customer satisfaction experience as most of our franchisees actually develop NPS scores that are equal or better than the scores that we have. And they're all in our NPS system. So again, we have very good control of quality. But I think this strategy can get us to investment grade faster. Obviously, when you're looking at taking $1 billion out of your capital number, that throws a lot of free cash flow our way and would help us get to the right ratios faster.

Operator

Next, we go to the line of Chris Agnew from MKM Partners.

Christopher Agnew - MKM Partners LLC, Research Division

Question on vehicle remarketing, I was wondering if you could provide an update on your goals this year and maybe longer term for the direct-to-consumer vehicle remarketing strategy and whether this year, you start to see incremental cost savings increase as you scale that business? Or do you need to continue to invest in infrastructure? And then maybe very quick question for Elyse, on Donlen depreciation, is that above or below the corporate EBITDA line, and should we model that to grow in line with revenues?

Scott P. Sider

The first question was with respect to...

Mark P. Frissora

Yes. You're -- he's asking about the infrastructure, and I guess -- Scott's here with me. Scott, why don't you tell them how many states we're kind of licensed in and ready to set up to sell used cars and how many more will be in this year? And then talk about also salespeople. We added a few last year and where we are this year.

Scott P. Sider

Thanks, Mark. In terms of the number of states we're licensed for Rent2Buy, we're licensed in 36 states today to sell Rent2Buy. We're continuing also to open more retail car sales locations and we're combining those with our off-airport locations. So we feel comfortable that this year, our retailers -- direct-to-customers retail car sales will improve by about 50% on a year-over-year basis. And then in terms of dealer direct, we've added over a dozen dealer direct managers. We feel that the penetration will go up about 30% more dealer direct sales. So both of those 2 items will help us to improve our residual values.

Elyse Douglas

And then I think, Chris, your other question on Donlen depreciation, and it will be treated like Rent A Car depreciation. It will be in the worldwide Rent A Car results.

Operator

Next, we go to the line of Emily Shanks from Barclays Capital.

Emily E. Shanks - Barclays Capital, Research Division

I just have a question related to the way to think about cash flow, 2 parts. The first one is can you give us an update on what used car residual values are in Europe? And then secondly, can you please just expand, Mark, on your comments around the robust acquisition pipeline relative to HERC? What type of size acquisitions are you targeting and how are you thinking about that?

Mark P. Frissora

Elyse, why don't you...

Elyse Douglas

Sure. Okay. So U.S. car residuals. I mean, we are [indiscernible] plan a continued improvement in residual values, and I would say that on a age-adjusted basis, in the fourth quarter, we were about -- I'm just trying to get -- about 3 -- about 2.5 points above where we were a year ago. The residuals continue to be strong. And then in -- does that answer the question on residuals? Emily? Oh, she gets cut off. And so hopefully that -- if that doesn't, Emily, please dial back in. And then your second question was on HERC acquisitions. And I think they'll be kind of more in line with what we've been doing in the past couple of quarters in terms of size.

Emily E. Shanks - Barclays Capital, Research Division

No, I was curious specifically in Europe for used car residuals, what trends you're seeing there, what your outlook is?

Elyse Douglas

Car residuals in the fourth quarter were softer year-over-year, and we are still seeing softness in the first quarter, and we do expect the residuals to improve toward the back half of 2012, in the second half of 2012, I should say.

Operator

Next, we go to the line of John Healy with Northcoast Research.

John M. Healy - Northcoast Research

Mark, I was hoping you could talk a little bit more about the off-airport business. I think you mentioned how many locations you opened in the quarter. Can you update us on where you are in terms of the number of locations across the country? Does that number need to keep increasing? And if not, what sort of benefit do we get in the cost structure? And how confident do you feel that you can keep growing at these double-digit rates, and do you see further share gain opportunity? It sounded like you mentioned a big insurance company that you're doing business with this year, but are there more of those out there? And if so, what's the upside if you can capture some of those?

Mark P. Frissora

So I'm going to let Scott Sider answer that, since he's very intimately involved in it.

Scott P. Sider

To answer your first question, we feel very confident that we can continue to grow double-digit off-airport in the foreseeable future. In terms of additional locations, we do anticipate a net increase in locations of 250 to 300 locations per year. And that will probably be at least over the next 3 to 5 years. We continue to improve in the insurance replacement. You saw that in the top 5 companies, we grew over 20%, and we see that continually going forward. So we don't see any slow up in the off-airport growth in the near term.

Operator

Next, we go to the line of Adam Silver from Babson Capital Management.

Adam Silver

My question's already been asked, but I have one follow-up question in relation to acquisitions in the equipment rental space. What's your long-term outlook on industry consolidation in light of the recently announced RSC-URI merger?

Mark P. Frissora

First of all, our policy is not to comment or speculate on acquisitions and divestitures. So that's my answer. In terms of just broadly speaking, I guess, the industry is, I think -- did a consolidation move that's fairly large, and I think that's kind of where it stands today. I wouldn't speculate on anything other than that. I think that the status quo is kind of where I see it.

Operator

Next, we have a question from the line of Fred Lowrance from Avondale Partners.

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

Just wanted to see if we could drill down a little bit more into the $38 million gain that you reported or net gain that you reported in the quarter. We're kind of used to $1 million here, $1 million there, don't really pay too much attention to it, but obviously, this one is kind of huge and really moves the needle on earnings. So I'm wondering if you could kind of give us some color on what was this. Was this sort of accelerated franchising activities means more gross gains on sale? Was it fewer store openings, so fewer opening costs? I mean, what was driving this and made it so much different from prior quarters and prior years?

Mark P. Frissora

Fred, I don't know, did you listen to the script? I mean, we really dealt with that issue. I think we told you that we -- each year, we open and close locations. In the U.S. alone this year, we opened 415 and closed 168, incurring a lot of gains and losses as well as start-up and closing costs. All of this runs through direct operating expenses. Direct operating expenses this year were $4.3 billion, in the fourth quarter, I know over $1 billion. And these property sales are in line with our asset-light strategy to reduce brick-and-mortar. In addition, every year, we incur costs, which are not specifically highlighted like -- that are embedded in DOE, so that offset gains and losses. So this year, for example, there were roughly $90 million of costs that offset those gains. Examples of those costs included unrecoverable concession fees, consolidated facility costs. Again, over $90 million of those -- in fact, just one item was we had $22 million of unrecovered gasoline costs. We had -- I know when we look at concession fees alone, that number can be $35 million for this year. So again, these costs offset gains that we have, but we felt we would call out this particular gain because it was large enough to call it out and be totally transparent around it, so. But just to put it in context of our global DOE, again, it's a $4.3 billion number. So every single quarter, when we sit and look at our risk and opportunities, we look at those risks and opportunities, and we include that in our guidance. So as we looked at this quarter, as we have in all other quarters, we knew what we had in the bank and what we don't have in the bank in terms of risks and opportunities. And so what I'm trying to say is that this is something that wasn't a surprise for us. But -- so I guess in terms of going forward, we would expect that we will probably have gains and losses on real estate sales going forward. Our asset-light strategy tries to get less assets if -- as it relates to real estate and more virtual models. So as we go forward, I'm sure we'll be looking at some gains as well.

Operator

Next, we have a question from the line of Yilma Abebe from JPMorgan.

Yilma Abebe - JP Morgan Chase & Co, Research Division

High-level question on your path to investment grade. You mentioned the growth in the franchise business potentially accelerating that path. If you look at all the drivers on a cap structure in terms of attaining the investment grade ratings, can you give us a little more context in terms of the importance of the franchise business in orders of magnitude?

Elyse Douglas

I'm not sure how I can address your specific question about how franchising fits in, but in terms of investment grade goals here, as we said, our net corporate debt to EBITDA leverage this -- ended the year at 2.6%, and we believe that if we're in the 1.5% range, our stats begin to look more like the investment grade model. The other point is one of the criteria of one of the agencies is that we have less secured debt. And as you know, most of our fleet financing is all secured. So surely, the franchise strategy helps us in terms of meeting that goal.

Operator

[Operator Instructions] We have a follow-up from John Healy with Northcoast Research.

John M. Healy - Northcoast Research

Mark, Elyse, I think kind of a big picture question, kind of, as you talked about your goal for investment grade. When I think about your business, and I think it's a great goal to have, with the Rent A Car side, I feel like you're kind of already borrowing kind of at the investment grade status with enhancing the facilities. And maybe you could borrow a bit better if you were investment grade, but I was kind of wondering what sort of real benefit do you guys get out of being investment grade, and how do you weigh that maybe in terms of maybe instead of approaching it, maybe buying back stock? I was just trying to understand kind of what the real upside could be if you guys do move towards that?

Elyse Douglas

No, you're absolutely right, John. In the U.S., because of the ABS market, we can very cost effectively finance the fleet, and I would argue that those rates are clearly investment grade level borrowing costs. On the corporate side, though, our costs are higher, so we do, on the corporate debt side, we'd get the benefit of a lower interest expense. But when you look outside the U.S., the situation isn't quite as robust. The ABS market is not as robust and, therefore, we do have higher fleet costs in jurisdictions outside the U.S., which are key growth areas for us. So that's really where we see the benefit. And in terms of how we utilize our excess cash flow, whether to pay down debt, buy back shares, make acquisitions, invest in growth strategies, we constantly look at all those options and make the decision based on what we feel drives the greatest shareholder value.

Operator

And we have a question from the line of Bobby Jones from Highland Capital.

Bobby Jones

I'm really sorry to beat the horse on this one. I was just wondering maybe if you could just quickly touch on how your acquisition strategy plays into your desire to attain a investment grade rating, certainly with things in the pipeline and that sort.

Mark P. Frissora

Our goal on any acquisitions we make is always to try to make it credit neutral within the first year. So that's always accretive and always credit neutral. I mean, accretive in the first year and credit neutral in the first year. So I guess we wouldn't expect any acquisition to really hurt our strategy for becoming investment grade. In fact, in some cases, it may accelerate it, depending on who the acquisition is. So we feel like we'll be consistent in that as we move throughout the year, at least in the short-term time horizon.

Operator

And speakers, we have no further questions at this time. You may continue.

Mark P. Frissora

Thank you, everyone, for attending and look forward to talking to you next time.

Operator

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

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