Full Transcript of Cendant’s 3Q05 Conference Call - Q&A (CD)

| About: Cendant Corp. (CD)

Here’s the entire text of the Q&A from Cendant’s (ticker: CD) Q3 2005 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Question-and-Answer Session

Operator
Q&A

Operator

Operator Instruction Our first question comes from Jeffrey Kessler with Lehman Brothers.

Q - Jeffrey Kessler

I have a couple questions, and I'll make them brief. First, with regard to the spin-offs, these spin-offs are of a tax-free structure; there have been some rules in the past limiting the amount or focusing on the amount of time after which something can happen to one of these deals, these structures usually a year. Yesterday on your call you basically said that once these entities were free and clear what they were free to be acquired or whatever on their own. Is there going to be some prohibition of some time difference after the period of time that the spin-offs occurred?

A - Henry Silverman

Jeff, the way the tax rules work is if you spin-off pursuant to a plan, a scheme, a wink or a nod, it's not going to be tax-free. Period, end of story. So we have no plan, scheme, wink or nod. No dialogue, no discussion -- if somebody approached us we would say go away. That said, the day these companies are public the boards of those companies could entertain an unsolicited offer from a potential buyer that had not begun prior to the date of the spin-off. And it wouldn't begin prior to the date of the spin-off because we wouldn't have dialogue with anybody. Because the last thing we need to do is to affect the tax-free nature of the spin. Hopefully that answers your question.

Q - Jeffrey Kessler

Yes, it does. Question two, Orbitz and your GDS business -- I'm sorry Orbitz and your online business overall, how is it tracking in your opinion relative to your competitors domestically and internationally, given that you cited some disappointed because of the shift, the online off-line shift going on with regards to suppliers?

A - Ron Nelson

Think you've got to be careful with percentages, Jeff. Let me deal with the easy one first. Ebookers is not tracking as well as our other international competitors are. And I think it is largely due to some of the problems we've had in conversion and a more difficult integration than we had anticipated. We do think that is interim and we do think that the transition to the Orbitz technology will, once again, ratchet up their bookings growth. Because as you know, the market is growing in the north of 25 to 30%. In Orbitz is where you've got to be careful of the numbers. Our merchant hotel numbers versus 2004 are up pretty substantially in the 35 to 40%. But recall measuring against a year ago Orbitz had just gotten into the merchant hotel business, so it has somewhat of a low base. So on a percentage basis we are probably doing better than our competitors. But I think overall we did fall short of our forecast, and I believe that the amount by which we fell short of our forecast is probably consistent across all the online services. As we've said before, that in periods of strong economic demand the chains domestically can aggregate their own demand, and they allocate less rooms to the online merchants, at least on a merchant basis. And my sense is this is consistent across all the online businesses. So we are down from forecast, but on a percentage basis we are up a lot. I'm sure up a lot more than the other online services.

Q - Jeffrey Kessler

And on this point with regard to ebookers, what are the issues? You've talked about certain integration issues. Could you elaborate on that a little bit, and also perhaps talk about how if and when the integration finally occurs, if it is that late on in 2nd half of 2006, how is this going to help? In other words, are we going to see a bump from ebookers in the fourth quarter of 2006? Will it be -- up enough to move the needle?

A - Ron Nelson

No, I think -- look, Jeff, you know we've seen ticks up in Cheaptickets conversion almost within three weeks to four weeks of implementing the Orbitz technology. The problems with ebookers are not dissimilar than we talked about a couple of years ago with Cheap Tickets. Its content and functionality. And I think that we are working as fast as we can to implement the Orbitz technology there. We are putting as much of our hotel content as we can on the platform, but the platform really can't support substantial amounts more of content. So you are kind of chasing your tail. And we are -- I guess the answer to your question is that I do think that we will have this done by the middle of 2006, and I do think it will impact the back half results.

Q - Jeffrey Kessler

Okay. Next question, can you just give some idea obviously Sabre has made some mention of their beginnings of negotiating under the GDS renegotiations. Have you been approached, or have you approached your counterparts on this issue at all yet?

A - Henry Silverman

There are dialogues that are ongoing with all of the suppliers, and I don't think it would be appropriate to characterize those at this point as anything other than preliminary. As you know, Jeff, Sabre has about a 50% share in the U.S., we are somewhere between 25 and 30. So they are at least in the U.S. the market leader on these issues. And I think more than that probably is not appropriate.

Q - Jeffrey Kessler

Final question, car rental pricings, what type, and we would obviously we've spoken to Hertz on this issue in the past, they've had the same, the whole industry has the same problems that you do. You're not facing anything different. The question is the timing of when you can get pricing from both the consumer and the business side to get yourself in equilibrium with the costs that have gone through. I'm certain that interest rates have not helped here. At some point in time in 2006, though, you've got to get back to equilibrium on this because you can't sustain massive price increases without suffering something at some point in time.

A - Ron Nelson

You're absolutely right, Jeff. You may recall in the call last quarter, we said that we needed another 5 to 6% price increase from where we would be at the end of the fourth quarter to offset the impact of the fleet costs. Additional interest costs probably mean that that means to rise another point. As to the timing of those increases, probably also not appropriate to comment. I would say that the efforts at raising business prices mid-term aren't getting as much traction across the industry as we would have hoped. I think people are selectively doing it across all their accounts, and certainly they are doing it at contract termination. So I would and it is really just speculation that you're going to have to move leisure pricing well before you move business pricing, or risk sort of a share war, which I don't think occurs to anybody's advantage.

Q - Jeffrey Kessler

Finally, finally, finally, you mentioned that acquisitions on the real estate side are going to add about 6% to sides. You mentioned what your franchise sales were, but you did not mention how much franchise sales would be adding to your base in the franchise business. You say it's up 13%, but what will that add to your base in the franchise?

A - Ron Nelson

I think order of magnitude, another 2 to 3%.

Q - Jeffrey Kessler

All right.

A - Ron Nelson

We're at 98% renewal across all of our brands, and so the additional franchise sales are incremental.

Q - Jeffrey Kessler

Okay. Thank you very much.

Operator

We go next to Paul Keung with CIBC World Markets.

Q - Paul Keung

Good morning, I'll limit myself to just two. I guess first, I was wondering if you can quantify the organic revenue growth for your order-maker business in the TDS. Specifically, I'm just trying to get a better handle of how those brands did, specifically Orbitz, Gulliver's, both in the gross booking and revenue margin trend. And then second, I guess given your outlook, the outlook we're getting now on home pricing, inventory backlog activities, how do those trends compare of your expectations on an organic basis, particularly in the fourth quarter in '06? So if were to adjust for the mortgage business in January, the new franchise signings and acquisitions that you and Jeff talked about, has the organic outlook for size and pricing changed on a go-forward basis?

A - Ron Nelson

Let me see if I can take your first question first. The composite rate of growth across all of our domestic businesses for online bookings is 15%. Just given the relative -- the two businesses you're talking about are Orbitz and Cheaptickets. Cheaptickets bookings were up, I think, close to 20%. So Orbitz were probably at about 1 point below the 15% composite that we reported, maybe 13 to 14%. And those, as we measure it, the only organic number would be Cheaptickets because it was the only online platform we owned domestically in the third quarter of last year. But if you look at Orbitz' reported bookings when they were public last year in the third quarter and then compare them to where they are now, they are probably up 13 to 14% I think is the number.

Q - Paul Keung

How do the transaction revenues compare there, the revenue margins on that business? Are transactions going faster as well?

A - Ron Nelson

Transactions are going much faster, but again, it is mostly because of where we stand in the ramp-up of the merchant hotel business. You know, we are just -- they weren't in it until the middle of last year. So it is somewhat happiness is a low base.

Q - Paul Keung

And the question on real estate?

A - Henry Silverman

Well, we still think we'll grow next year in real estate. Your question was organic growth or --?

Q - Paul Keung

The organic, and if I were to take out your new contract signings, the new franchise contracts, the acquisitions, where do you see sides and prices looking on your core business?

A - Henry Silverman

Well, I think probably NAR or Fannie Mae are better proxies for that. And they are projecting that sides will be slightly down and that price will be slightly up. So if you take it all together, you would say, okay, the pie is going to be basically flat, but we're going to get a bigger piece of the pie through what we consider organic growth which is new franchisees, as well as new NRT acquisitions, as Ron indicated, and therefore, our result should be positive.

Q - Paul Keung

Thanks. The outlook is basically a flat outlook for that business next year?

A - Henry Silverman

For the existing home sale market in general yes, not for us but for the macro environment.

Q - Paul Keung

Okay, great. Thanks.

Operator

We go next to Steven Kent with Goldman Sachs. Go ahead please.

Q - Steve Kent

Hi good morning, could you just talk a little bit more about the Internet travel side? Short of a change in the tight supply for the hotel market, which we actually think could go on for two years and we are not the only one, Smith Travel, others think that. What changes the disintermediation or the secular decline that you guys are talking about that caused some of the shortfall? What strategies are you working on to either reduce your expenses or increase your revenues on that side of the business, so that you just don't have this secular decline to deal with for the next two years and that is the only -- and that basically drives your results for some period of time.

Operator

We will go next to Justin Post with Merrill Lynch. Go ahead please.

A - Ron Nelson

I was not on. Steve, let me answer your question. We had a little microphone snafu here. I think as we have said before we actually don't believe that what is going on in the domestic hotel market is secular. We think it really is probably more countercyclical than anything else. You know, the domestic hotel chains dominate the landscape here, and they have the ability to aggregate their own demand. So when they can do that in times of good, strong economic times, they are going to go for it, I think when it gets a little softer than they'll provide more inventory because they are going to have more available rooms and they are going to want the eyeballs that we bring. So I would say that about the domestic market. The international market is a little different. The chains don't dominate the landscape internationally. And as you know, with Gulliver's we control some 25 million room nights a year and 90% of those come from independents who don't have the same ability to aggregate demand. So on a global basis we think that we are net ahead. Now what are we doing in times of stronger economic times when it is soft? The customer service aspect of what we do in online is an important part of it. I think winning the J.D. Power award actually has some very significant business impacts and more than just conference call fluff. That is a real item that people look to. The second thing is that you obviously up your advertising budget and try and drive your brand so that it is the first stop that comes into people's mind. And the other thing, which I think will ultimately differentiate us when we get fully integrated is access to our own inventory, which will continue post spin. We will put commercial agreements in place between all of our companies to be able to maintain that.

A - Henry Silverman

Steve, I just like to add one thing to what Ron said. You and I have been discussing this for quite a while, and you are probably more right than you're wrong, but we generally take the term secular decline meaning something is going lower each year. I think it is fair to point out for the people on the call what you're really saying is that the rate of growth is slowing. And I think that is an important distinction that we want our investors to understand.

A - Sam Levenson

Operator, can we will take the call, question from Justin Post now please?

Operator

Sure. Mr.Post, your line is open.

Q - Justin Post

Great, thank you. A couple questions. I know that your long-term strategy is to have leverage in the model; it is kind of services business and I think your EBITDA forecasts are higher than your revenue forecasts so over the long-term really didn't see the leverage in the model. I know hurricanes caused some of the lower growth in EBITDA. When do you start seeing leverage in the model again?

A - Henry Silverman

That's a very good question because it is something that I challenged the team on a monthly and quarterly basis. Unfortunately or fortunately we had lots of benefits for one-time items last year, all which we disclosed, none of which recurred this year which typically a one-time item is all revenue and all profit. Which really obscure the fact that we did have operating leverage and our margins actually got better on an apples to oranges basis. Unfortunately, GAAP does not permit us to disclose that. But let us assure you that the operating leverage in our model is still there.

Q - Justin Post

Second question and then a final follow-up, it looks like the GDS margins were down. I know you were outperforming some of your peers in the GDS industry for a while on the margins front. What really is driving that? Can you give us any color on that?

A - Henry Silverman

Well really they were running a lot of integration costs through that P&L. Once again, GAAP requires us to do that. 100 years ago or maybe five years ago we would have taken a charge, set it up separately and you would have seen the continuation of the strong margin. I think another answer to your first question, which I probably neglected to mention is that we have a mix issue also in that some of our faster growing businesses are lower margin, whether that is rental car, timeshare, I mean timeshare is growing faster than lodging, lodging is a very high margin business as a franchise or timeshare is 25% kind of margin. NRT is a 6% margin business. Real estate franchise group is an 80% margin business. So a lot of it is a mix issue, Justin.

Q - Justin Post

Okay, great. And then on the GS is there any specific thing you can point people to as far as integration technology spend, a couple big projects going on?

A - Ron Nelson

Well it all really relates to the Orbitz, ebookers and Gulliver's acquisition and where you take the headcount out. And for the most part, a big chunk of the headcount that has been taken out has been on the technology side. And that was resident in Galileo or in the GDS, and that is what is impacting it. The other thing over a longer term that is impacting margins is that we used to lease a fair amount of equipment to our subscribers, travel agents. And that is very high margin business. And over time travel agents have replaced our terminals with personal computers. And so and this is really an ongoing trend, this has been going continuing on a downward track since 2002. But every year it ticks down, and this is probably 80+ margin percent business.

Q - Justin Post

Last question, Henry, we have a couple people really want to know why you really want to be with the travel business; I think you're going to head that business up after the split. What you're most excited about that and why you picked that one to really be the leader of going forward.

A - Henry Silverman

Well, I think the New York Times this morning actually summarized it very well. Any of our leaders could run their businesses without any help from me. Sam and Richard do not have any specific public company experience, or in Richard’s case, lots of capital markets experience. In the case of TDS, it is probably our, as you can tell by the amount of questions and by Ron's commentary, it is probably the business which has the biggest upside, including RCI and our Vacation Rental business, but also has the most challenges. And frankly, it is too big a job at the moment for any one human being. So that is where I'm going to spend my time helping Sam with that business. But I do not intend to be there forever. So this is a year or two post spin and then I am quite certain that the existing management will be quite able to fly without me.

Q - Justin Post

Great. Thank you.

Operator

We go now to Michael Millman with Soleil Securities. Go ahead please.

Q - Michael Millman

Thank you. I guess continuing a little bit or following through on some of the comments on the online travel, particularly domestic, could you give us an idea of the marketing efficiency and also the trends in conversions?

A - Ron Nelson

Mike, you know, it is hard to comment on our marketing efficiency largely because we are in the build phase of our merchant hotel business. And I would be loath to say that the efficiencies we are getting would be mirrored once we are at steady-state kinds of numbers. So I am just reluctant to use a number.

A - Henry Silverman

The management would tell you, Mike, and I'm sure they have, that we have a greater share of wallet than share of voice. But I don't know that we can on this call give you empirical data that would be statistically valid. As Ron says we're growing up a very low base so the numbers are somewhat skewed favorably; that you probably should not interpolate for five years from now.

Q - Michael Millman

And that is even true in conversion?

A - Ron Nelson

Conversion is actually up a couple of tenths on Orbitz. Orbitz actually converts I think in the high fours, low fives depending on the time of the year. And it has ticked up as we've added more content. But there hasn't been appreciable gains. Like we saw, frankly, when we converted Cheap Tickets over to the Orbitz platform.

A - Henry Silverman

The Cheap Tickets experience was very positive. We moved the conversion rates very similar to Orbitz from somewhere that was like 1 or 2%. I think if you check with Expedia they will tell you they also convert about 5%, and that seems to be about the rule of thumb for the industry.

Q - Michael Millman

And can you talk -- I guess obviously the Holy Grail is to pick that up, which means doing more CRM kind of things. Can you talk a little bit about what you're doing in that connection?

A - Henry Silverman

Well we like everybody else, yes, you are right, that is one of many things. Obviously content is important, functionality is important, customer satisfaction is critical. We are doing all of that as Ron has mentioned. It is also important to increase your rate of attachment. As you know, that means selling more than one product during that service. We are using the travel link database, which is really our CRM in the sense of knowing where people are going and then e-mailing them and asking them if they need something else that we can book for them through Orbitz or Cheaptickets or both. So we are going in the right direction. And again, I want to repeat for the people on the call these businesses are doing very well. They just not are doing as well. We have a very aggressive forecast based on assumptions which were valid at the time, based on our EBITDA increases through the month of June and July. The trends really reversed themselves based on the second London bombing. And have become exacerbated since then. They are still growing. They are just not growing at -- as Ron said they are growing in the mid 20s, not the mid 30s.

Q - Michael Millman

Can we switch to real estate? Can you give us at least some idea of the sensitivity to your total real estate business of say one million change, or 100,000 change in existing home transactions?

A - Ron Nelson

1% in sides or prices is $15 million of EBITDA.

Q - Michael Millman

And that is across all of --.

A - Ron Nelson

That is across NRT.

Q - Michael Millman

What about across the total, I guess?

A - Ron Nelson

Well, I think it depends on where it comes from. You know, the incremental revenue in the franchise business ought to drop to the bottom line about 90%, Mike. So if you go through the math on sides and average price and figure out what the commission is and then taken an average royalty rate of 5%, that incremental revenue ought to drop through at a rate of about 90% and conversely if it goes down, it is the same relationship, the overhead there is fairly fixed.

Q - Michael Millman

And on car rental, could you give us the leisure price increase and the commercial price increase number or percentages, and where that -- where those prices are in October?

A - Ron Nelson

I don't have the October data right in front of me, Mike. Hold on. For the third quarter, Mike, both commercial and leisure were on a year-over-year basis down about 2%. The one offset to that is on the leisure side our length of rental was up about 1 or 2%. So it didn't really have much impact. But again, the critical part in sort of understanding where the business is going, as I said in the call, is sequentially from the second quarter to the third quarter prices were up 6%.

Q - Michael Millman

Both in commercial, each in commercial and leisure?

A - Ron Nelson

It was a blended rate.

Q - Michael Millman

And we assume more in leisure than commercial from what you said?

A - Ron Nelson

Yes.

Q - Michael Millman

And is Enterprise, Enterprise has been reported as not going along with the corporate rate. Is that what is really killing that opportunity?

A - Henry Silverman

Enterprise is not relevant; they really don't have any corporate business, so it is more PR than it is actuality. The corporate competitors you need to look at are Hertz and National. Our market share with theirs is like 98% of that market. Enterprise is a very small player in the commercial business.

Q - Michael Millman

Okay. Thank you.

Operator

We have no further questions in queue at this time. I will turn the conference back to Henry Silverman for any closing or additional comments.

Henry Silverman, Chairman and CEO

I just want to thank you for your patience with us yesterday and today. And we will see you on the next conference call, which will be in 2006. Bye-bye.

Operator

That does conclude today's conference call. We do appreciate your participation. You may now disconnect your lines.

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