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Dollar Thrifty Automotive Group, Inc.

Q4 2007 Earnings Call

February 28, 2008 11:00 am ET

Executives

Todd D. Dallenbach - Executive Director, Investor Relations

Gary L. Paxton - President and Chief Executive Officer

Steven B. Hildebrand - Senior Executive Vice President and Chief Financial Officer

Analysts

Michael Gallo - C.L. King

Chris Agnew - Goldman Sachs

Christina Wu - Morgan Stanley

Vlad Shteynberg - Lehman Brothers

Michael Millman - Soleil Securities

Operator

Hello and welcome to Dollar Thrifty Automotive Group fourth quarter and full year earnings conference call. (Operator Instructions) I would now like to turn the call over to Mr. Todd Dallenbach, Executive Director of Investor Relations.

Todd D. Dallenbach

Good morning and welcome to the Dollar Thrifty Automotive Group fourth quarter and full year 2007 earnings release conference call. Your hosts for today’s call are Gary Paxton, President and Chief Executive Officer; and Steven Hildebrand, Chief Financial Officer.

Before we begin, counsel has asked that I provide you with the following information. 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 we have noted in our latest earnings release and filings with the SEC. Dollar Thrifty Automotive Group undertakes no obligation to update or revise forward-looking statements.

Listeners are advised an audio replay of this conference call will be available via the corporate website, www.dtag.com, for one year.

And now, I would like to turn the call over to Gary Paxton.

Gary L. Paxton

And thank you all for joining us this morning. As I think you can all appreciate, 2007 was a challenging year for our company. Economic uncertainty, the decline in consumer confidence and travel demand, another substantial increase in depreciation expense, and vehicle delivery issues related to our primary vehicle supplier combined to negatively impact our financial performance.

The fourth quarter was especially difficult and disappointing as our results were below expectations. A number of issues, some related to end-consumer demand, some to the industry overall, and some of which were company specific, contributed to these results.

We’ve outlined these factors and their financial impact in our earnings release today and in the release we issued earlier this month. I won’t repeat this information, but I do want to provide my perspective on it.

First, from a consumer standpoint, we experienced weaker consumer demand particularly in the later half of the fourth quarter. This is evidenced by lower enplanement as reported by the ATA, which rose approximately 1% in October and declined about 4% in December.

As a result of the lower enplanements, our holiday-related bookings were lower than we had anticipated. This obviously had a negative impact on pricing and fleet utilization. Revenue per day, which was up over 5% on a year-over-year basis in October, turned negative later in the quarter with December down almost 5%.

Keep in mind that revenue per day finished a quarter up 1.1% over the previous year and this was against a tough comp from the previous year, up 10.8% in the fourth quarter of 2006 versus 2005.

Excess fleet capacity across the industry exacerbated the problem of weaker consumer demand. It is our belief that our industry entered the fourth quarter with too much capacity. Weakness in the used car market, as widely reported by Manheim and ADESA, impacted the industry’s ability to down fleet during the quarter.

We believe that this softness impacted expected residual values for everyone in the industry. It may, however, have impacted us to a greater degree due to some specific makes and models in our risk fleet. The problems we encountered on these fronts were not limited to just the US. We also experienced similar issues in Canada. I’m highlighting Canada as our Canadian results have a greater relative impact on earnings insofar as the Company does not record any income tax benefit from those losses.

As we have in the US, we’ve implemented cost-cutting and other restructuring plans for our Canadian operations. As I mentioned, company-specific issues also contributed to a fourth-quarter performance. This includes the delay in vehicle shipments from our primary vehicle supplier. These began in the third quarter and, while we ultimately received our supply in December, the delay adversely affected fleet expenses during the quarter.

Now, that gives you some perspective on the drivers of our fourth quarter performance. Now that we’re about two months into fiscal 2008 and about two-thirds through our first quarter, what are we seeing now?

Well to start, January was relatively slow with continued weakness in demand and excess industry capacity adversely impacting pricing and revenues. We also saw continued weakness in the used car market and, as a result, we expect vehicle cost will increase in the quarter due to higher depreciation expense and the potential for additional vehicle remarketing losses.

As we moved through the quarter, we began to see some key trends turn more positive. Pricing for bookings in February has improved and bookings for March have as well. We also see signs that the industry is actively reducing fleet capacity to better match supply with consumer demand, which should, over time, have a positive impact on pricing and utilization. So that gives you a view of key trends in the first quarter.

Let me turn now to address more broadly some key developments and drivers that will impact our performance over the course of the entire year. First, we continue to make progress in installing our new fleet optimization software program which will help us to better manage vehicle cost. We’ve completed the installation of all of the components of the fleet optimization software that we’ve began in the third quarter of last year.

We are aggressively modifying our operating structure and practices to position ourselves to gain the maximum potential of this excellent fleet optimization tool. We expect to start to recognize the financial benefit from this initiative in the second half of this year on an escalating trend and the full run-rate estimate of 20 to $30 million in cost savings is expected to flow through beginning in ‘09.

Second, fleet management continues to be an area of significant focus for us, particularly as our fleet includes a greater percentage of risk cars. In addition to the implementation of fleet optimization software that I discussed a few minutes ago, we are continuing our efforts to expand our relationships with dealers and wholesalers thereby avoiding some expenses at the auctions.

For 2007, we disposed of approximately 60% through auctions and 40% through dealers and wholesalers. We have expanded our remarketing channels through the use of additional online auctions and by doubling our direct staff. We’re also well into the development of two projects that will allow us to offer risk units for sale prior to their last rental.

Third, we should also benefit over the course of 2008 from the actions we took last year to reduce cost on an annualized basis by roughly $20 to $24 million per year. As we have said, a portion of these savings will be reinvested in our business to improve customer service delivery and to support our growth initiatives.

The net savings impact, which we estimate to be about 50%, will flow through in full beginning in Q1 of this year. Also, on the expense side, we incurred certain expenses in ‘07 that we should not have on ‘08. For example, last year we had about $13 million in severance costs, asset write-downs, and outsourcing transition cost. We also had an estimated $7 million negative impact from the vehicle shipment delays and expect some residual negative impact to carryover into the ‘08 fleet cycle, which we have included in our fleet cost estimates.

Finally, as we have said before, we believe that the sharp increases in depreciation expense that we’ve experienced in each of the past two years, will significantly moderate this year.

So far, I’ve discussed key developments and initiatives that will mainly impact cost and expenses during 2008. I’d like now to shift gears and discuss our revenue growth and diversification efforts.

First, as we have previously discussed with you, we’re beginning to move more aggressively into the corporate business segment, specifically targeting the small and medium-sized corporate accounts. This overall segment represents a substantial component of the airport market and, until recently, we’ve largely chosen not to compete in it.

While we’re at the early stages of our focus on this segment, we showed strong growth in 2007, up over 20% on a relatively small base. In addition, during the fourth quarter of 2007, when we had additional resources in the marketplace selling, new account signings were extremely promising, as we have found businesses very receptive to our product offerings, especially, in the current environment where companies are looking to reduce their T&E expenses.

The success is very encouraging to us as this is a very large segment that will allow for substantial growth for us going forward. In addition, incremental business in this segment diversifies our revenue base while complimenting our leisure focus nicely in terms of the rental patterns of the two types of renters.

Second, our additional sales and distribution efforts directed at the international inbound business are showing very positive results. In 2007, revenue from international inbound tour business to the US was up approximately 25%.

Healthy increases in these segments continue into 2008, with future bookings from this segment showing strong increases in both volume and revenue per day helped by the continued weakness of the US dollar and the fact that the US is a bargain right now for the foreign traveler.

Third, we continue to see a success in the sale of our incremental products. Sales of our insurance products, our Garmin GPS units, and vehicle upgrades continue to perform extremely well. While new products that were introduced last year, such as RoadSafe, TripSaver and Rent A Toll, have been nice additions to the incremental product line that is designed to provide additional value-added services to our customers. Overall, we saw an increase in the sale of these incremental products of about $30 million in 2007.

Fourth, as you know, we have historically had the highest penetration of any car rental company on our own dot com channels. In order to continue that trend and in response to what customers have said what they wanted, we’ve recently launched the new, improved Dollar.com. In addition, we will be launching the new Thrifty.com in June.

These new sites feature added functionality such as providing easier navigation through the site, displaying our complete inventory of cars for each shopper, a faster Dollar EXPRESS enrollment process, and I might add enrollments are up 38% year-over-year since the launch. New Dollar City sites where our customers can get specific information about Dollar locations in every city as well as many other meaningful improvements.

Customers are noticing the changes. Conversion rates of shoppers to bookers on the new Dollar site are up since our launch of this new site, which was one of our primary objectives. As a reminder, this continued push to have customers come to our own sites is a key ingredient in us maintaining a low cost position at the industry as these sites represent our lowest cost with customer acquisition.

Fifth, our movement into the local market continues with the addition of 46 new locations in 2007. Our long-term goal is to continue this push in 2008 and beyond at the rate of an additional 50 stores per year. Local market revenue was up 16% in 2007 at $164 million.

And sixth, we will continue to evaluate franchise acquisition opportunities as we move forward. We estimate that the remaining opportunity here is about $100 million in incremental revenue.

As you know, our primary focus here is the remaining franchisees in the top 75 airport markets in the US, as well as other key markets. During 2007, we acquired a total of two Dollar and sixteen Thrifty franchise markets adding about 5500 cars to our fleet. In each of these revenue growth areas, we believe there are solid opportunities for our company and we are determined to continue the success we have already seen.

Let me step back for a moment and put all of this together in terms of what it means for us in 2008. In short, we expect our 2008 non-GAAP earnings per share to be at or above the level achieved in 2007. We included our 2008 earnings per share forecast in the press release that we issued earlier this month. Assuming a 2% increase in both revenue per day and total rental day volume, we would expect to achieve full-year, non-GAAP earnings of $1.00 to $1.50 per share.

This guidance range represents corporate EBITDA of $97 to $115 million. I want to add here that this forecast includes our estimate that we will report a non-GAAP loss during the first quarter.

As I mentioned before, January was a quite weak for us in terms of demand and pricing for rental cars as well as in the used car market. While key metrics improved in February and looked to be better for March, we do not expect to be able to overcome the impact of our weak start in January.

We built our annual guidance around an assumption that domestic airline traffic will be relatively flat in 2008 with 2007. We expect some positive impact from international inbound travel as the very weak US dollar makes travel to the US exceptionally cheap this year.

Vehicle cost increases will be challenging for us in the first half of the year as we have increased vehicle depreciation rates to reflect the recent decline in used car values. We expect improving trends on used car values as we get into the more traditional stronger selling season in the second and third quarter.

Overall, we’re looking for about a 10% increase in vehicle depreciation cost per vehicle. Of course, depreciation will be impacted by trends in used car prices and our ability to begin realizing the benefits of our new of fleet optimization software.

Finally, the 2% increase in revenue per day built into our forecast is more impacted by incremental sales than by the market pricing. The 2% increase in volume reflects flat same-store volume combine with the impact of annualizing franchise acquisitions and new local market stores.

As you know, visibility in this industry is limited and the current economic uncertainty makes it more difficult to provide solid earnings guidance. At this point, however, we feel the market assumptions used here are reasonable and consistent with those described by others in our industry.

The last issue I want to cover before I turn things over to Steve are the management change we recently announced. One of these changes is Steve’s retirement from Dollar Thrifty after 20 years, most of which he served as chief financial officer. Steve has been a tremendous asset to our company during this time. Steve has agreed to stay on till March 31 and will remain available to us after that time. So we expect a smooth transition as we bring in a new CFO.

To further strengthen our management team, Jay Foley has been promoted to Senior Executive Vice President and Chief Operating Officer. In his new role as COO, Jay will be responsible for corporate operations, revenue management, and fleet planning. In addition, Scott Anderson has been promoted to Senior Executive Vice President and Chief Marketing Officer.

As CMO, Scott will be responsible for the revenue growth, sales and marketing, franchising, and all distribution channels. Both Jay and Scott are proven veterans who have succeeded in a variety of roles at our company. They are intimately familiar with our market, our opportunities, and our challenges and they’ve hit the ground running to implement our growth and cost-management initiatives.

So to sum up, clearly, we have experienced some difficult times in Q4 and early Q1. We’re beginning to see more positive trends, though it’s too early to say whether or how long those who continue. Visibility, especially in this type of environment, is very difficult.

We do believe that our 2008 non-GAAP earnings per share will be at or above 2007 and our focus is on controlling what we can and on executing our clear strategy for success. We have the brands, the market position, financial strength, and management talent to build significant value for our shareholders.

With that, let me turn it over to Steve.

Steven B. Hildebrand

Thanks, Gary. Before I start, I’d like to say how much I’ve enjoyed working with you and the entire Dollar Thrifty team these past 20 years. I’ve also enjoyed with our investors and analysts over the years. I have great confidence in this management team to continue to meet the challenges ahead with great success.

So to begin, non-GAAP earnings per diluted share were at a loss of $0.88 for the 2007 fourth quarter as compared to a loss of $0.05 for the 2006 fourth quarter. Non-GAAP earnings do not include changes in fair value of derivatives.

GAAP earnings for the quarter were at a loss of $1.45 per diluted share versus a loss of $0.11 in the year-ago period. Also, for your information, the 2007 fourth quarter earnings per share is based on 21.1 million shares outstanding, while the year-ago period was based on 23.4 million shares outstanding.

I’d like to walk you through some of the key items impacting the decline in earnings per share. Although we were successful in increasing year-over-year rental pricing in the fourth quarter by 1%, it was not enough to overcome the 16% increase in per unit vehicle depreciation costs that we ultimately experienced. Vehicle depreciation expenses were higher than the 5% increase we originally expected coming into the quarter due to a weaker used car market and the impact of vehicle delivery issues.

In addition, our vehicle utilization rate was 1.3 percentage points below last year due to declining rental demand during the quarter and the challenges we encountered as vehicle deliveries accelerated in the latter part of the quarter. These factors combined reduced our 2007 fourth quarter earnings per share by $0.43 as compared to the same period last year.

We also incurred additional income tax expense in the fourth quarter, which reduced 2007 earnings per share by $0.22 from last year’s fourth quarter. The additional tax expense included differences between our 2006 state income tax returns ultimately filed in 2007 and the estimates recorded in the prior year. There were also additional valuation allowances for state income tax net operating losses due to lower than previously expected earnings.

We also incurred increased losses in Canada, where we do not report any income tax benefit for losses.

In addition, we also had lower self-insurance cost in the fourth quarter of 2006 as a result of favorable actuarial cost trends. The financial impact of these trends was a benefit of $0.13 per diluted share in the year-ago quarter that we did not have in the 2007 fourth quarter.

As you know, when we issued our previous guidance in early November, we expected to approximately break even on a non-GAAP earnings basis for the fourth quarter. We described the key reasons for the lower results in an earlier release, and Gary has already commented on them. So I won’t walk through these items again.

In summary, though, lower than anticipated volume and pricing, lower than expected used car prices, coupled with the vehicle delivery issues and lower vehicle utilization, resulted in a disappointing fourth quarter performance.

Now, I would like to walk you through the key up line items in our income statement. If you would turn to Table (1) in the release, total revenues for the fourth quarter of 2007 were $389 million, down about 1% compared to last year.

Vehicle rental revenue increased 2% mainly due to a 1% increase in revenue per day. The number of rental days during the quarter was up about 1% compared to Q4 of last year, and excluding the impact of franchise acquisitions, it was down about 2%.

Utilization during the fourth quarter was 1.3 percentage points below last year, reflecting vehicle delivery issues discussed earlier and weakening rental demand.

Now, let’s turn to the expense side of the income statement. Total expenses, excluding income taxes, increased 4.9% for the quarter. Direct vehicle and operating expenses was $214 million, up 8% from the 2006 fourth quarter. This reflects higher vehicle insurance cost due to favorable actuarial cost trends in last year’s fourth quarter and to increases in personnel and gasoline expenses.

Vehicle depreciation expenses were $120 million, up 15% from the 2006 fourth quarter as a result of increased cost per vehicle, partially due to increased depreciation rates and vehicle remarketing losses, which were related to the fourth quarter decline in used car values.

Year-over-year, per unit cost increases have improved as we’ve moved through the year. The first, second, and third quarter increases on a cost per vehicle basis were 45%, 34%, and 20%, respectively.

During the fourth quarter, we had a loss on the remarketing of our risk vehicles of about $4 million. This compares to a loss of about $3 million in last year’s fourth quarter. As a reminder, these gains and losses reflect a true up between the value of the vehicle upon sale and the value that we had previously estimated. They are included in the average depreciation cost per vehicle that we discussed.

SG&A expenses represent a 12.7% revenue for the quarter, down significantly from 16.3% in the year-ago period. As we have discussed before, the change in market value of assets and the deferred compensation plans impacts the SG&A line with an offset in other revenue but does not impact pretax income.

Excluding the impact of the change in the market value of these assets, SG&A expenses improved 170 basis points as a percentage of revenue. Interest expense during the quarter totaled $25.8 million, up from $23 million in the fourth quarter of last year. This increase was due primarily to higher interest rates, including the impact of the new corporate debt issued in the second quarter.

At December 31, about 75% of the total debt outstanding was at fixed rates continuing our past practice of hedging the majority of our debt against rising short-term rates.

I would now like to comment on our vehicle financing plans for 2008. The asset-backed, medium-term market has not been available due to the ratings issues for the bond insurers. We have about 500 million of these note amortizing this year.

Because we already had significant excess vehicle financing capacity, we expect to meet our 2008 peak financing requirements through the renewal of our existing commercial paper programs. These program are scheduled to renew in June, however, we are planning to move this renewal into the March-April timeframe.

Based on our fleet projections renewing these facilities after existing size will cover our peak financing requirement. However, we may increase the program slightly to build in more flexibility and cushion at the peak. These programs provide $760 million in vehicle financing capacity today. We do expect the credit enhancement levels will increase on these facilities upon renewal and we believe we have adequate liquidity in place to meet these requirements.

Let me briefly describe now our results for the full year. Non-GAAP earnings were $1.02 per share versus $2.26 per share in fiscal 2006. GAAP earnings were $0.05 compared to $2.04. Corporate EBITDA for 2007 was $107.5 million versus $139.5 million for the prior year.

Total revenues for 2007 were up 6%. Vehicle rental revenue increased 9%; revenue per day was up 7%. In 2007, rental days rose 1.6%. When excluding the impact of franchise acquisitions, rental days were down about 4%. This reflects our decision to focus on price more than volume in 2007.

Also, vehicle utilization in 2007 was 82.6%, down 1.3 percentage points. 2007 total expenses, excluding income taxes, increased 9%. Direct vehicle and operating expenses rose 7%, vehicle depreciation expenses increased 26%, and the average depreciation cost per vehicle also increased 26% in 2007.

SG&A expenses represent a 13.3% of revenue in 2007 compared to 15.6% in 2006. Adjusting for the change in market value of the assets in the deferred compensation plans, SG&A expenses, as a percent of revenue, improved to 150 basis points in 2007.

Now, if you would please turn to Table (2) in the earnings release and refer to the selected balance sheet data at the bottom of the page. Cash and cash equivalents were $101 million, restricted cash and investments totaled $133 million and are primarily restricted to acquire vehicles, revenue-earning vehicles net of depreciation totaled $2.8 billion, and vehicle-related debt was $2.4 billion.

The weighted average interest rate for vehicle debt outstanding at December 31 was 5.3%. Non-vehicle corporate debt totaled $249 million with an interest rate of 6.8% at year-end. During 2007, we spent $30 million on franchise acquisitions and $41 million for non-vehicle capital investments.

I should mention here also that we are not paying significant cash income taxes due to the company’s tax net operating losses. We had currently expect this NOL, along our like-kind exchange program for the fleet, to shelter ordinary federal cash income taxes at least through 2008. The new economic stimulus bill past this month provides for 50% bonus depreciation on capital assets placed in service during 2008 which will be available for our rental fleet purchases.

We also highlighted in our press release that, based on our lower stock price, we will need to continue to monitor and test for goodwill impairment as we look forward into 2008. We do have a minimum net worth covenant in certain of our financing agreements which we expect can be managed by amending the covenant to eliminate any impact from any potential non-cash write-down of goodwill or providing the additional enhancement.

I’d like to briefly comment also on our share repurchase program. In The first quarter of 2006, a $300 million share buyback plan was authorized and, at the end of 2007, approximately $117 million remains from that authorization. We spent about $72 million this year, including $11 million during the past quarter until the weakness in the industry trends became apparent, at which point we temporarily suspended the program. The authorization for share repurchase plan extends through December 31, 2008. So, if the market environment improves, we may elect to restart the program.

Before we turn the call over to questions, Gary would like to comment on one final item.

Gary L. Paxton

During March, our executives will be receiving Dollar Thrifty shares earned under our long-term, incentive compensation plans. These shares include shares previously earned and deferred and shares earned over the past three-year performance period.

Some executives will be selling shares to fund the income taxes due on this income. We do not expect this to be a significant number of shares, but I wanted to mention it to you since it may seem a little unusual to see executives selling shares at the current depressed stock price. I personally will not be selling any shares during this time period.

Thanks and now we’ll take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Michael Gallo - C.L. King.

Michael Gallo - C.L. King

On the balance sheet, sequentially, the fleet grew Q3 to Q4. I was wondering if that was a function of the delivery delays from Chrysler. Whether that also had a working capital impact on your cash balances in the quarter?

Steven B. Hildebrand

At the end of the year, we had a lot of vehicles at auction. We had a lot of program vehicles returns in December and those, of course, remain on our balance sheet till they’re sold. So, the operating fleet was slightly ahead of our plan due to some of the delivery issues. But in terms of the net book value, that was a little inflated more due to the timing of a lot of program returns late in the year that were still at auction.

Michael Gallo - C.L. King

Any sense for what impact the timing that that had on the cash flow in the quarter? Because it would seem otherwise that the cash burn would have been significantly greater than what we normally would have seen in the fourth quarter?

Steven B. Hildebrand

I don’t think that had a significant impact on our working-capital cash.

Michael Gallo - C.L. King

Around the industry in general, obviously, we’ve seen, in the last year or year and a half, you’ve seen some significant industry consolidation and it didn’t look like it really manifested itself in 2007 in a better environment. I was wondering if you can comment on what you think drove that.

It seemed the industry throughout 2007 seemed to be under-fleeted in the peaks and way over-fleeted in the trough. I was wondering if you can give us some color on, one; how you intend yourself to operate differently through 2008 and whether you still believe the consolidation ultimately should manifest itself in a more benign competitive environment?

Gary L. Paxton

I’ll give you my opinion from experience and what I’ve seen in this business. I believe that the change in the industry from a majority of the rental units being program or buyback units to the majority of the cars in the fleet being risk units has had more impact than the consolidation of the industry in 2007.

When you step back and reflect on 2007, it was the first year we’d really felt the full impact of the majority risk fleet in our operations. And I think that’s resulted in some difficulty in the industry in adjusting its fleet and balancing it as quickly as it did in the past when we had all of these, basically, guaranteed depreciation cars that we could turn back in when we were coming off the peak and when we could get a better supply of cars going into the peaks knowing that you could get out of them quickly.

So, it’s changed the way the industry has to do business and the way the industry has to fleet. I think what you should see going forward and what you should expect to see from us going forward is managing our fleet assets more to the valleys than to the peaks.

We’ve got in a habit, if you will, during all the 15 years of guaranteed buyback programs of filling every peak to maximum capacity, meeting every peak. I don’t think you’ll see that in the future going forward. And that should result in higher prices for rental cars during the peaks and more rational prices during the off peaks.

But we we’re going to have to plan our fleets to get back to that valley very quickly from the peaks. And the only way to do that, when you have a bunch of risk cars and the market place for risk cars fluctuating, is to really develop a plan that has you operating more to the valleys than the peaks.

Michael Gallo - C.L. King

Yes, just to reiterate that, it strikes me you’re much better off having fewer cars or fewer rental days than having too many cars and lower pricing. Can you comment at all on where your fleet levels are right now relevant to where you’d like them to be?

Obviously, you had some of the hangover from the issues that were in December and January. And, obviously, you’ve been working to reduce your fleet. I was wondering whether your fleet is getting to where you want it to be or whether you expect to continue to bring it down even though, obviously, we’re going to be coming into the stronger season here soon.

Gary L. Paxton

We’ve made a lot of progress getting off that peak from the fourth quarter. We’re not 100% there yet. But we’ve made a lot of progress on it. We think the rest of the industry has also from what we’re seeing at auctions and what we see in the marketplace.

We would expect to have our fleet, right size by our plans, in early to mid-second quarter because it just takes some time to adjust to these orders. But you should see us operating a fleet for the year that is very tight and we’ll probably end up the year with a fleet slightly below last year’s fleet.

Michael Gallo - C.L. King

Obviously, you had the delivery issues with Chrysler in Q4, obviously some of Chrysler’s issues in Q1, be it with Plastech or some of the other suppliers, are obviously being well publicized. I was wondering whether you saw any similar issues in Q1 or whether, so far, you haven’t had any further delivery issues.

Gary L. Paxton

We haven’t had any further delivery issues and Plastech was a very short-lived difficulty for Chrysler. The part suppliers and the manufacturers are in a changing environment. They’re in Detroit, too, and I think that’s going to continue to be for all of the manufacturers just continue to be a difficult part of their business. And it could very well end up in some further disruption in schedules in the future, although we don’t see any on the horizon right now. I just can’t predict what will happen in future.

Operator

Our next question comes from Chris Agnew - Goldman Sachs.

Chris Agnew - Goldman Sachs

Did you say that the fleets are currently fairly tightly fleeted for the industry? And if that’s the assumption going through the rest of this year, does that not leave you very cautious on your 2% RPD guidance?

Steven B. Hildebrand

Chris, that is the assumption going through the rest of the year and that is what we’re seeing right now. And, yes, we are very cautious on our 2% RPD guidance because we, frankly, don’t control that. We had a 7% increase in RPD for the year 2007, which is substantially greater than any of our competitors reported for the year. So we’ve got a tough compare in addition to not being able to control it.

Chris Agnew - Goldman Sachs

About cost, you’ve talked about before $20 to $30 million in cost saves, but you’ve been reinvesting half of that in 2008. And then I think you said today that you’d fully realized all of those cost savings by 2009. And I’m just wondering the difference between that reinvestment this year, is that than going away in 2009? Maybe just shed a little color there.

Steven B. Hildebrand

There are two components there and I don’t want to you to get them confused. We had $20 to $24 million of cost saves related to outsourcing IT, call center and then some organizational downsizing we did in ‘07. And we’ve indicated that we expect about half of that to be reinvested and half of that to flow through here in ‘08.

The other component that we’ve been discussing is the benefits that we expect to realize from the fleet optimization software that we began installing late in ‘07. We pretty well have that up and running now and the guys are starting to really learn how to use it. There, we’re expecting $20 to $30 million in savings kind of on a full run-rate basis in ‘09 and we expect to start seeing some of that later in ‘08. I hope that clarifies.

Chris Agnew - Goldman Sachs

Can you give us a little more color how the fleet optimization software actually works? Is it on the front end helping you and improve the utilization in placing your fleet? Or is it more at the backend helping you manage disposals? Quite few of your competitors are also ramping up similar software. Does that speak to more rationality in the industry potentially?

Steven B. Hildebrand

I think it helps in all of those points, both in choosing where you put vehicles that’s in your purchase plan, how long you keep the cars, which cars to dispose of at different times. And we believe it’s going to help our utilization improvements. So I think it helps on all fronts. I do believe that, as the industry improves their skills at managing fleet that will be supportive of a more rational industry environment.

Operator

Our next question comes from Christina Wu - Morgan Stanley.

Christina Wu - Morgan Stanley

I wanted to delve into the issue of Canada a bit because, in your press release on February 1, you said that in the fourth quarter your EPS would have a $0.25 impact due to weakness in Canada. I was hoping for a bit more color there?

Gary L. Paxton

Canada has experienced all of the economic difficulties that we’ve been experiencing here in the US, plus they’ve got difficulties with their dollar compare against our dollar which has further impacted the economy in Canada. They’re our biggest trading partner and, when the US isn’t performing well, Canada isn’t performing well either. So, that’s been the difficulties we’ve had in Canada.

They’ve been the same difficulties we’ve had in the US but on lower volumes. We’ve been working very hard to get Canada up to a volume level and to an expense level where it would be self-supporting. We haven’t achieved that yet. So, it started out below the waterline and fell quite rapidly for us in the fourth quarter.

Christina Wu - Morgan Stanley

Do you think that there was anything unique about your operation? Some of your competitors have commented that they didn’t have any particular weakness in Canada during the second half of the year. Is there anything, as we think about the comp for the second half of 2008, that we should consider as a one-time charge for you versus this general overall weakness?

Gary L. Paxton

I’ve heard what my competitors have reported and I won’t comment on that except to say we all operate in the same market. And there isn’t any one timer in there that I expect to have a big reversal in 2008.

Christina Wu - Morgan Stanley

I was also hoping that you could speak a bit about hold times. It seems that one of the trends happening in the industry is extending hold times even further. I know it’s something we talked about a year ago. And when I have asked previously, because of your focus on the leisure market, I think that you were extending your hold times from like seven months to around seven-and-a-half months, eight months. Can we expect that to increase even further given your new revenue expansion plans?

Gary L. Paxton

Christina, I think you can expect to see that continue to increase and that will be driven primarily by as we ramp up and get a higher and higher percentage of risk units in our fleet. Those units, in order get adequate depreciation on them, we’re going to have to hold them longer and I think you’ll see that across the entire industry.

Christina Wu - Morgan Stanley

Can you give us a sense of how long you expect to hold your fleet?

Gary L. Paxton

I really can’t. I hate to give you an estimate of what it could be because we’re going to hold it to try to maximize depreciation. On some units, that may mean 12 months and, on some units, it may mean eight months. So I would expect to see the average length going up.

Christina Wu - Morgan Stanley

Is it correct to assume that you were at about eight months at the end of 2007?

Gary L. Paxton

Yes, right around there. Yes.

Christina Wu - Morgan Stanley

And also if you could just give us an update, at the end of ‘07, what your balance of risk versus program cars was and what you expect it to be in ‘08?

Steven B. Hildebrand

We’re purchasing about half of our vehicles in ‘08. The ‘08 model year has program and about half as risk. It’s almost 50:50, about 55% program at year-end and 44% on program. So, it’s about 50:50 at year-end as well.

Operator

Our next question comes from Vlad Shteynberg - Lehman Brothers.

Vlad Shteynberg - Lehman Brothers

On the incremental sales, did I hear it correctly? You said its $30 million of incremental sales from things like GPS, fuel and other?

Steven B. Hildebrand

That’s correct.

Vlad Shteynberg - Lehman Brothers

Okay, can you break it down by buckets? How much of it was GPS?

Steven B. Hildebrand

I won’t break down all the buckets. I think we did about $12 million in the GPS this year, and incrementally I think it was about $6 or $7.

Vlad Shteynberg - Lehman Brothers

So you’re assuming another incremental $30 million to come in ‘08 and you’re assuming all of your price increases will essentially come from that? Did I understand that correctly?

Steven B. Hildebrand

No, you didn’t. We didn’t give a number for how much extra for ‘08. What we said is a good amount of our increase in RPD next year we do expect from incremental sales. I think in our projections right now it’s about half market pricing and about half incremental sales for ‘08.

Vlad Shteynberg - Lehman Brothers

If I just do 2% of your ‘07 vehicle rentals prices, that gets me to about $33 million.

Steven B. Hildebrand

You’re ahead of me. But that sounds right.

Vlad Shteynberg - Lehman Brothers

What has the take rate on GPS been so far and how reasonable is it to expect that that’s going keep growing at the same rate?

Steven B. Hildebrand

We’re currently running between 4% and 5%. I think we have around 7,000 units in inventory, and we’ve got about 3,000 more on the way now. So the take rate has been improving. So we think we’ll be able to continue to grow that revenue.

Vlad Shteynberg - Lehman Brothers

SG&A has been down sizably on a dollar basis. What is that a result of exactly? What are the driving factors within that?

Steven B. Hildebrand

Well, there are a lot of things moving around in SG&A. One of the things that we highlighted here in our comments was the fact that we included in that line is a mark-to-market adjustment for the assets in our deferred comp plans, which reduced in value this year, which had the effect of reducing SG&A and also had the effect of reducing other revenues. It didn’t impact our earnings, but it did impact us those two lines.

But even aside from that, we had about 150 basis point improvement, and that’s coming from a lot of areas. We talked about the outsourcing initiatives that we’ve had, the cost efforts that we’ve been exercising over the last couple of years, and it’s having an impact in those areas. Probably the other factor to highlight for you, this year, because our earnings were lower, the incentive compensation was also lower this year as well.

Vlad Shteynberg - Lehman Brothers

So probably a good half of the same savings to stay permanently due to the restructuring actions?

Steven B. Hildebrand

Right.

Vlad Shteynberg - Lehman Brothers

And then lastly, can you just comment maybe a little more quantitatively on January, in particular, and also February in terms of price and volume? How much was the price down in January and to the extent you can indicate what February looks like as well?

Steven B. Hildebrand

I’ll give you just some general comments on that. January was down a little worse than December. I think it actually is going to prove to be the trough in terms of year-over-year pricing, and December was down about 5%. So, I think January came in down around 6%, maybe a little more.

As we look into February, it looks like we could be around flat year-to-year. So, that’s a big improvement, and we currently expect March to be, year-over-year better. So, it appears that the December-January months were the valley, kind of climbing down from October to December, now climbing back up from January to March.

Vlad Shteynberg - Lehman Brothers

And what about volumes?

Steven B. Hildebrand

Our volumes are okay. I would say in the 2% to 3% range tracking here in February, year over year.

Vlad Shteynberg - Lehman Brothers

Increase.

Steven B. Hildebrand

Right.

Vlad Shteynberg - Lehman Brothers

And January was a decline?

Steven B. Hildebrand

I don’t have January, but I believe it was a decline.

Vlad Shteynberg - Lehman Brothers

Regarding the vehicle depreciation, you indicated that the expense will be up 10% in ’08, expectations-wise. What’s the actual vehicle cost components of that putting aside the gains-losses component? How much are you expecting the vehicle costs from OEMs to go up by?

Steven B. Hildebrand

Well, we don’t break all that out. Now that the industry is operating a high percentage of risk fleet, a big driver of your cost is now your expectation of residual values as important as the cost increases on program cars. But we don’t break that out. That’s a collective projection of all the components, including changes in program rates, incentives, and our expectation of used car prices.

Operator

Our next question comes from Michael Millman - Soleil Securities.

Michael Millman - Soleil Securities

I think you said that your risk car-holding period is about eight months. But I thought for example, Hertz just reported that they had about 14 months. Can you talk about why there’s such a difference?

Gary L. Paxton

We didn’t break out our risk car-holding period from our guaranteed depreciation car-holding period. But our total fleet for the year, for ‘07, was about eight months for the entire fleet.

Michael Millman - Soleil Securities

And what’s the risk holding?

Gary L. Paxton

I don’t have that broken out here in front of me.

Michael Millman - Soleil Securities

Would it be similar to Hertz’s 14 months?

Gary L. Paxton

No, I don’t believe it would be. We’re looking at extending the length of hold in our fleet and we’re doing it with our new tool. And we haven’t settled on quite yet where exactly we’re going to land on length of hold. I should point out we’re using the same tool as Hertz. So, I can’t say that we’re going to have the same result, but it could be similar.

Michael Millman - Soleil Securities

Well, I guess, in part, they have more off-airport which impacts that number.

Gary L. Paxton

That’s correct.

Michael Millman - Soleil Securities

Also, touching on some of the pricing, I guess you’re suggesting that T&M will be up 1% this year. Kind of seems surprising with fleets tightening up. So, maybe you can talk about what that suggests for second and particularly third quarters.

And also, regarding price, in March you said you’re seeing price better. What has the trend been? In other words, when you looked at a March res two months ago versus a month ago versus currently, what’s it look like?

Gary L. Paxton

Michael, if we looked at a March res two months ago, we didn’t have a very big pool to look at. As you know, one of the challenges in the industry is limited visibility. We get most of our reservations within the last 14 days before the transaction really takes place. So, the visibility is very short.

But when you look at what we’ve seen happening is pricing was up in October, flat in November, down in December, down a little bit more in January. And now it’s clawing its way back to flat in February, and it looks like it’s going to be up slightly in March. Our April bookings, got 23% of our days that we’re forecasting for April booked, and, versus a year ago, right now it’s running slightly below a year ago.

So we have very limited visibility even into April. So when you ask me about the third quarter, what’s it going to be, it’d be a wild guess.

Michael Millman - Soleil Securities

And can we assume in this challenging period that second quarter bottom line, non-GAAP, this can be well below where it was a year ago?

Steven B. Hildebrand

Our projections show it would be below a year ago in the second quarter right now.

Michael Millman - Soleil Securities

Can we assume that’s a lot, like 50%?

Steven B. Hildebrand

I wouldn’t make any particular assumption.

Michael Millman - Soleil Securities

Chrysler, could you talk about what options you have to make yourself less dependent? Because it seems Chrysler is a considerable competitive disadvantage and given the greater risks that they may not be around or may cut back production significantly?

Gary L. Paxton

I think, first of all, on the production issue, all of the manufacturers are reducing the number of cars they put in the rental car companies.

And Chrysler certainly in part of their plan to rationalize their dealers and make their dealers more profitable, I think you’re going to see when they announce they’re going to eliminate models, they’re going to eliminate, my understanding is, most of the duplication of models, where they have built one model for a Chrysler dealer and a different model for a Dodge dealer. Basically they are the same car and they’re just badging it differently.

So I think they’re still going to have a full line of vehicles available. You’ll have to buy them at one dealership instead of three and that’s part of their plan. They have had a lot of difficulty in this change of management and ownership and in right-sizing their production capacities. Our indications from them is that they’ve got their production schedules under control now versus where they were in the fourth quarter, when it didn’t appear to us that they had them under much control.

The short answer to your question as to what we can do: we can and we are buying more vehicles from other suppliers in order to lessen our dependence upon Chrysler. And we plan to continue to expand our vehicle fleet with vehicles from other suppliers until we get down to probably a 50% area and then look at it again.

We started last year we were, I think, about 90% Chrysler. Now we’re back to about 85% Chrysler. And we’re continuing and we will continue to work on reducing our dependency on them.

Michael Millman - Soleil Securities

Are you contracted to buy 100,000 cars from them annually?

Gary L. Paxton

Yes.

Michael Millman - Soleil Securities

And so, if you’re contracted to buy 100,000, how are you going to get to 50% by getting up to 200,000 in total? A big expansion from where you are now?

Gary L. Paxton

Along with their desire to reduce production to the car rental industry, there may be an opportunity for us to commit to purchasing fewer cars and they might want to commit to building fewer cars for us.

Michael Millman - Soleil Securities

Are you in discussions now?

Gary L. Paxton

We’re in ongoing discussions with Chrysler. All I can tell you is they’re our major supplier. We’re one of their biggest customers, and we have ongoing discussions with them.

Michael Millman - Soleil Securities

And are you finding it easy to get the supplies of Japanese cars, for example?

Gary L. Paxton

I wouldn’t call it easy. If it was easy, we’d move quicker, but it’s something you kind of earn your way into their sales allocation process. And we are in the process of doing that and building it.

Michael Millman - Soleil Securities

And then I want to get back to this consolidation question. Looking at it a little differently, I think everyone has agreed, including yourselves, that if there’s some more consolidation, you’re going to be a big part of it. Can you talk about what you’re doing to make this a reality? Or is it a reality?

Gary L. Paxton

I can’t talk about that, Michael. I think that the industry, there’s probably another turn on the consolidation wheel. And I think when you look at the percentages of market share and how they’re broken out and the one that we play in one of those turns. But beyond that, I can’t get into any specifics or speculation about when and if and whether or not that would even happen.

Michael Millman - Soleil Securities

Are there any discussions that you’re having with anyone to make that happen?

Gary L. Paxton

You know I can’t answer that.

Operator

This does conclude the question-and-answer session for today.

Gary L. Paxton

I want to thank everybody for his or her interest and I assure you that we are working very hard to see that we don’t repeat another quarter like the fourth quarter. Thank you very much.

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Source: Dollar Thrifty Automotive Group, Inc. Q4 2007 Earnings Call Transcript
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