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Cendant Q4 2005 Earnings Conference Call Transcript (CD)

February 14, 2006, 11:00 am EST

Executives:

Sam Levinson, SVP of Corporate and Investor Relations

Henry Silverman, Chairman and CEO

Ron Nelson, President and Chief Financial Officer

Hank Diamond, Group Vice President of Investor Relations

Operator

At this time for opening remarks and introductions, I would now like to turn the call over to Mr. Sam Levinson, Senior Vice President of Corporate and Investor Relations.

Sam Levinson, Senior Vice President of Corporate and Investor Relations.

Thank you Phil. Good morning everyone and thank you all for joining us. On the call with me today are our Chairman and CEO Henry Silverman, our President and Chief Financial Officer, Ron nelson and our Group Vice president of Investor Relations, Hank Diamond. Before we discuss our results for the quarter I would like to remind everyone of four things. First, the rebroadcast, reproduction and retransmission of this conference call and web cast without the express written consent of Cendant Corporation are strictly prohibited.

Second, if you did not receive a copy of our press release, it’s available on our website at www.cendant.com or on the first call system.

Third, the company will be making statements about its future results and other forward looking statements during this call. Statements about future results made during the call constitute forward looking statements within the meaning of the private securities litigation reform act of 1995. These statements are based on current expectations and the current economic environment. Forward looking statements and projections are inherently subject to significant economic, competitive and other uncertainties and contingencies which are which are beyond the control of management. The company cautions that these statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied in the forward looking statements.

Important assumptions and other important factors that could cause actual results to differ materially from those in the forward looking statements and projections are specified in the company’s form 10Q for the period ended September 30, 2005 and in our earnings release issued last night and filed on form 8K.

Finally, during the call the company will be using certain non-GAAP financial measures as defined under SEC rules. Where required we’ve provided reconciliation of those measures to the most directly comparable GAAP measures in the tables in the press release and on our website.

Before I turn the call over to our chairman, let me briefly review the headlines of yesterday’s press release.

Revenue for the 4th quarter increased 7% to $4.3 billion. The company reported Q4 earnings per share from continuing operations as adjusted for specified items, of $.23, which met our most recent projection. And we generated free cash flow of $445 million. For the full year 2005, revenue increased 9% to $18.2 billion. Earnings per share from continuing operations as adjusted for specified items, was $1.28 and free cash flow was $2 billion. Over the course of 2005, the company returned over $2.5 billion in value including over 70% of its free cash flow to its shareholders in the form of cash dividends, share repurchases and the PHH spin off. Now I’d like to turn the call over toe Cendant’s Chairman and CEO, Henry Silverman.

Henry Silverman, Chairman and CEO.

Thank you Sam. I will quickly update you on the status of our plan to separate Cendant into four publicly traded pure plays and our search for the new CEO of TDs. Then Ron will discuss our financial results and outlook.

With respect to the timing of the separation, the spin offs are proceeding exactly according to plan. We expect the audited financial statements for real estate and hospitality to be ready around the end of March and Mid-April respectively and to file form 10’s with the SEC soon after the audits are completed. I won’t attempt to handicap the SEC review process, but our best guess is that the first two spins, real estate and hospitality, will take place in June and July respectively and the spin of TVS in October when we cycle the five year tax requirement. As we have previously indicated, we expect to complete the financing for the vehicle rental company in April and to finance the other new companies over the subsequent 3 months so as to repay all of the Cendant corporate debt by the completion of the 2nd spin.

Regarding the search for the new CEO of TDS we have an active process. Ron and I have seen or will see a number of highly qualified candidates this month and I expect that we’ll zero in on 2-3 finalists next month.

So we’ve done a lot, we have much left to do and the coming months will be both challenging and 3exciting for Cendant as we complete the process of launching four new companies.

We are aware that we share your desire to complete the spin offs as quickly as practicable. Our management teams and employees are energized about the long term growth prospects for each of the spin-offs and the benefits we expect to accrue to shareholders of the four new companies. With that, I will turn the call over to Ron.

Ron Nelson, Group Vice president of Investor Relations

Thanks Henry. I’m going to spend just a few minutes talking about our fourth quarter results and then I’d like to talk a little bit about our 2006 outlook, particularly for real estate and car rentals since in a status quo scenario those two businesses would otherwise be pivotal in the direction of Cendant’s earnings in 2006.

I also plan to briefly update you on some of the progress we have made in addressing the challenges at TDS. And then finally, we know from hearing from a number of you this morning that there is some concern and/or confusion over the size of the impairment charge, relative to the guidance we gave in December. So we’ll plan on explaining the nuances of that calculation at the end of our comments just before the Q&A begins.

Let me start with travel content, where timeshare resorts was clearly the star performer this quarter with revenue increasing 15% and EBITDA increasing 32%. The timeshare industry has gained an enormous amount of visibility and momentum this year, with many of our competitors now showcasing the business as an important part of their growth strategy. We share the other industry participants’ enthusiasm as evidenced by our decision to enter the business 5 years ago through two strategic acquisitions. And we now have a leading position. We are positioned in the broadest part of the industry and somewhat differently than our competition. Our primary customer is a middle income earner with a family. This business produced three income streams. One, the profit on the initial sale, two the financing spread that the majority of our customers pay us and three the upgrade profit we harvest a we mine our customer base of over 750,000 members who are looking to go different places for longer periods of time.

As you know, we merged the management of our two businesses last year and it has proven to be the right change. At TrendWest, TourFlow, CloseRate and Pricing, were all up year over year, contributing to the strength of this year’s results. Given that this remains a relatively under penetrated industry with favorable demographics and a strong value proposition to consumers, we believe that timeshare continues to be a very strong long term growth opportunity.

Our lodging franchise and RCI timeshare exchange business has also continued to perform well. We expanded our franchising portfolio to include an upscale brand with the acquisition of Wyndham in the 4th quarter. We believe Wyndham is a strong brand with significant distribution opportunities. This will enable the reflagging of competitors and attract developer capital for Grove. The pool of capital available for upscale and luxury development is far larger than for economy, where most of our brands are currently positioned.

We’re also running what we have better. Excluding the addition of Wyndham and Ramada international, our lodging brands grew revpar by 11% this year, which as in the 3rd quarter, we believe will exceed the industry average for the economy segment.

RCI, our leading timeshare exchange business, generated another quarter of strong subscriber and transaction growth. The earnings impact of that growth was muted by the restructuring charge we took in the quarter to rationalize the overheads of RCI Europe, with our European vacation rental operation, which was merged into RCI in the second quarter of this year. This charge, which was the difference between the segment being up 16% and down a reported 4%, will begin to immediately add income in 2006.

Turning to vehicle rental, our 17% growth in car rental volume reflects increased airport share for both Avis and Budget. Domestically, commercial volumes were up 14% during the quarter while leisure volumes were up 19%. At the same time, we increased our fleet utilization, despite a 17% increase in fleet size. In general, while we did see strong volume gains and an improved pricing environment, these were not enough to completely offset the fleet related cost increases we bore in the 4th quarter.

There is no question that we have successfully restored the Budget brand to its roots as a value priced, leisure focused but business friendly company. But the real benefit we believe is in having 2 differentiated brands with which to target different pockets of demand for vehicle rentals.

We also continued to expand our local car rental presence. We entered the year having reached a total of 980 domestic off-airport locations, adding over 100 locations in 2005. We plan to add another 200 in 2006. We were just shy of $650 million of revenue from this business in 2005 and continue to believe that the local car rental business remains a good long term growth opportunity for our vehicle rental company.

On the pricing side, there have been three leisure price increases since June of ’05, in order to help offset the higher fleet costs. Generally, the price increases are rolling. On the corporate part of the business however, price increases are going to take longer to achieve as market conditions would suggest, and most car rental companies are waiting until contracts come up for renewal before raising prices. While this substantially accounts for the fact that overall prices were down modestly year over year during the quarter, we did experience positive year over year pricing in December. It was more important however, and I would advise you to focus on, is that overall pricing did increase sequentially from the 2nd quarter 2005 to the third quarter 2005 by 6 percentage points. And finally, from the 3rd quarter of 2005 to the fourth quarter of 2005 by another percentage point. While the increases from the 3rd quarter to the fourth did not seem like much, keep in mind that pricing typically declined seasonally from the third to fourth…

Henry Silverman.

This is Henry. Ron is suffering from a bit of flu, so I’m going to continue on in case you hear a different voice. So let me continue.

However as we cycle more of the costly 2006 model year cars into the fleet, the absence of meaningful corporate price increases will have an impact. As a result, we have modestly reduced our outlook for first quarter car rental pricing which will affect the first quarter EPS by about a penny or maybe two pennies per share. As we have said previously, it will be a challenge for this unit to generate the same level of EBITDA for full year 2006 as in full year 2005. We do believe, however, that price increases will ultimately begin to more than offset higher fleet costs, allowing for EBITDA growth in 2007 and beyond.

The fourth quarter residential real estate finally saw reality catch up with expectations. The decline in size that we have been talking about with you began to accelerate, particularly in the last month of the year. Price remains strong, rising 10-12% in our markets, but sides were down approximately 5%. The most affected regions were, not surprisingly, New England, California and Florida, where the most speculation has been reported. Together, these three regions were off on sides a composite of 19% at NRT. That said, the remainder of NRT’s market segments were up 4%, attesting to the value of the size and diversity of our portfolio and more importantly the local nature of the residential real estate business.

Looking into 2006 as we have told you throughout 2005, we continue to expect a soft landing for the real estate market in 2006, with roughly a slightly down market on a dollar volume basis. We expect to outperform the overall market by about 2 percentage points in sides, as a result of the annualization of franchise sales and NRT tuckins completed in 2005 plus additional activity in 2006. Remember, and this is very important to keep in mind, the metric we use to measure the market is GCI; gross commission income, since it is commission dollars that drive our revenues and profitability.

Based on this market outlook for the full year 2006, we expect our real estate businesses other than NRT in aggregate to grow revenue and EBITDA versus 2005. However, we do expect EBITDA in NRT to be down and as a result anticipate our total real estate segment’s revenue to grow but EBITDA to remain flat in 2006 vs. 2005. As you know, NRT is more concentrate in some of the regions on the East and West coast, that are now experiencing double digit declines in closed sides volume. The real estate market in most of the remainder of the country remains healthy, albeit moderating as expected and this accounts for why NRT’s results should be weaker than our larger or geographicly diverse franchise business.

To counter the impact of the slow down at NRT, we have put in place a cost reduction program which principally includes consolidating local offices in order right-size NRT’s cost structure to be in line with reduced volumes. We expect these cost-cutting efforts to positively impact results, beginning in the 2nd half of the year.

Looking at the first quarter, we do not expect our results in real estate to be reflective of the results we anticipate for the full year. Based on current trends, we now expect our first quarter EBITDA to be down 30-40% in real estate, year over year, reducing our first quarter EPS projection by about $.03-$.05. The percentage decline in this quarter is exaggerated significantly by the seasonality of the revenue stream. The first quarter is clearly the slowest quarter, at both NRT and our franchise operations. In fact, NRT traditionally loses money in the first quarter. However, we do anticipate a natural market adjustment that will see sellers bringing prices in line with lower demand, which we believe will allow our real estate results to improve in the back half of 2006. Which, when combined with the cost reduction efforts and seasonal increases in revenue, should result in positive comparisons in the third and fourth quarters.

Turning to travel distribution, both Orbitz and Gulliver’s are growing, are solidly profitable and we believe are performing well versus their competition. During the quarter, our domestic online gross bookings increased 21% on an organic basis.

Our America’s consumer packaging growth also continues to be strong, with gross bookings up 58% for the quarter and 72% for the year. In addition, we increased our domestic merchant hotel mix by 1,000 basis points to 64% during the 4th quarter. Gulliver ended the year with gross bookings up approximately 16% on a constant currency basis to almost $1.3 billion. And while earnings comparisons from ’04 to ’05 aren’t comparable because of the integration costs that we had to incur in 2005, earnings nevertheless increased by almost 25%. This is the asset, quite frankly, we were most enthusiastic about. Gulliver’s was clearly run quite successfully as a true entrepreneurial organization, with the former five principals making all the decisions. Management information systems were fairly rudimentary and yield management non-existent. This coming year, we will begin to introduce database management into the system so that we know what we have and when we have it and begin to overlay yield management techniques on the massive hotel inventory that Gulliver’s controls. Both will add to the 20%+ growth rate we are forecasting for gross bookings in 2006.

With the exception of the brokers, our previous reductions to projections were primarily the result of forecasted revenue synergies proving to be too high; it was not the result of poor performance by these businesses or a failed investment thesis. In fact, we believe both our domestic online business and Gulliver’s will be equated to EPS in 2006. We also continue to expect our overall TDS EBITDA to grow in 2006 vs. 2005 from about $525 million to around a low end of our most recent projection to $575-$625 million.

With respect to E-bookers, that business currently is not profitable and will not be for the balance of 2006 for a variety of reasons, most of which are fixable, although few in the short term. We’re very encouraged by the remediation plan put in place by Mitch Truitt since he took over responsibility for these businesses. First, a new management for the international online assets has been installed and has hit the ground running. Mike Nelson, who is one of the original members of the Orbitz team is running international markets and brings to the job a broad background in market supply relationships and finance. Second, as importantly, the new platform build is processing on time and on budget. This will ultimately automate many manual processes, improve site speed and stability and enhance the product offerings. And third, we are moving aggressively to rationalize the costs of these businesses. Cost savings will come in three primary areas: 1) shifting the business mix online. E-bookers still much web enabled offline businesses that is marginally profitable. We need to affect a shift and remove the associated costs. 2) We need to automate the platform business system processes, which the platform overhaul will accomplish and last, we need to rationalize our investment across Europe. We have to look at the skill of our individual operations and deploy resources to those markets where we have the best opportunity for growth. These actions should start to provide benefits in the back half of 2006, with substantial improvements in 2007.

Before we turn to our outlook for the 1st quarter of 2006, let us briefly comment on the highlights of our full year 2005 results.

For the full year, each of our core reportable segments generated revenue growth ranging from 9-36% and our total core segments revenue growth was 14% including organic revenue growth of 8% in excess of our stated target of 5-6%. In addition, each of our core segments was profitable and our total core segments EBITDA growth was 4% excluding the non-cash impairment charge at TDS. We generated over $2 billion of free cash flow, which exceeded our projections, primarily due to timing benefits. We returned over 70% of this cash to our share holders through $423 million in cash dividends and approximately $1.1 billion of share repurchases, net of option exercises. Together with the spin off of PHH, we returned over $2.5 billion in value to our shareholders.

While we are disappointed that the results of certain of our TDS businesses muted the company’s share price and performance in 2005, we are nonetheless encouraged that each of our businesses grew revenues organically and continue to generate substantial amounts of free cash flow. These attributes won’t go away in each of the four new companies and in fact, if our previous experience with PHH, Write Express and Jackson Hewitt is a guide, they will only improve. We expect that each of the four new companies will be well positioned for future growth and success.

Finally, a few additional words about our outlook.

Our first quarter outlook is described in detail in the press release, and I won’t repeat it here. In terms of our outlook for full year 2006, if Cendant had remained together, we would expect that our total core reportable segments would grow revenue in the high single digits and EBITDA in the low single digits, excluding separation costs and the fourth quarter impairment charge at TDS.

We are clearly in a cycle of reversion of the mean in real estate, but our long term growth objectives remain unchanged.

Last, we plan to hold our investor day on March 21, in New York City. At this investor day, we plan to have presentations by the senior leadership of the first two spin offs, real estate and hospitality. Richard Smith, Steve Holmes and their management teams will describe their businesses and give projections and other financial data for these new companies. We will also update you on the 2006 projections for the rest of Cendant and we then plan to hold a second investor day in late summer or early fall, at which time we’ll have presentations by the senior leadership of TDS and Vehicle Rental and will give projections and other financial details for those two companies.

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

Ron Nelson, Group Vice president of Investor Relations

Before we get started with the questions, let me see if I can tackle the impairment charge for you a little bit. I know you’re all scratching you head on the size of the charge, so let me take a minute to explain some of the nuances of how and why it got to be larger than we expected.

The interaction of FAZ 142 and FAZ 144 is complicated. The first step in the 142 analysis allows you to benefit from a portfolio effect, namely if some assets in a measurement group have a greater fair market value than carrying value, you can use the overages in one to offset shortfalls in another. However, if that first step analysis suggests that the combined value of all the assets in the group is less than their combined carrying value, in other words you fail step one of the test, then step 2 of the process requires analysis at a more detailed level. You have to measure each intangible asset in the measurement group on a stand alone basis to determine if there has been any impairment first in intangibles, then of good will for the group. In general, you lose the portfolio effect of all the assets in this step.

In prior years, TDS was one measurement group. Everything was bundled together for the purposes of measuring step one of the test and resulted in no impairment. This year, with the new acquisitions, we had to redefine the measurement groups and the online business globally became its own measurement group. So we had a combination of recently acquired high multiple assets, combined with recently acquired high multiple assets that underperformed. So as well as some of the businesses are doing, they did not produce enough excess value in step one to overcome the deficits presented by e-bookers and certain other online assets in the group. So now, we’ll move to questions and hopefully that helped explain a little bit why the impairment charge was larger than we thought.

Questions-and-Answer Sesssion

Operator:

Thank you gentlemen. If any of our participants would like to ask a question of our presenters, you may ask that question by pressing the * key followed by “1” on your touchtone telephone. If you’re joining use with a speaker phone, please release your mute function so your signal may reach our equipment. We will pause for just a moment.

Our first question will come from Chris Gutek with Morgan Stanley.

Chris Gutek.

Thanks, good morning guys. A couple of questions. First, Henry, is there any situation under which the company would consider an LBO of the whole company at these stock price levels? And if so, would that have any consequences for the tax-free nature of the spin, if those conversations didn’t result in a transaction?

Henry Silverman.

Well the answer to the second part is no, they wouldn’t, because the spins are not pursuant to a plan to sell the businesses. In other words, there’s no pre-arrangement, no dialogue that would lead that. On the first question, yes we definitely would and if anyone on the call wants to wire us $25-$30 billion, we’ll be happy to accept it. We don’t think, Chris, strike that. Our advisors don’t think at current levels, even with a normal premium, that there’s enough capital in the world to affect an LBO. The funding hole is too big and therefore the ability of doing an LBO at prices that our board would accept and at which we would get a fairness opinion is really not an available option.

Chris Gutek.

And Henry, the follow up on your prepared comments on the real estate business, the Q1 guidance would imply that the real estate markets are slowing a bit more than you previously expected. I’m curious if you could elaborate on that in terms of what specifically is different. And you did talk in the press release about some cost-cutting activities. Could you try to quantify how much cost you can take out? And then finally, interest rates haven’t gone up that much, they’re still low by historical standards. I would assume you would have to have contingency plans to take down costs much more aggressively if rates were to go a bit higher; if you could comment on that as well. Thanks.

Henry Silverman.

The accelerations, while we have been expecting on a quarterly progression basis real estate to continue to soften, we have been quite surprised at how strong it remained for most of 2005. Frankly, in excess of our budgets in every month, every quarter until the month of December when we saw a real acceleration and a lot of data points that would indicate that the market is softening. One being, for example, that our default rate or cancel rate, meaning people that did not close on contracts, spiked by about 30%. Just in December alone and in the markets you would expect Chris, meaning the markets where as I said, most of the speculation has been reported. And that says, as well as the home builders have said that the flippers, the speculators either have or are departing the market. So we certainly saw some of that, really quite interesting phenomenon based on where we were in open contracts mid-December vs. how the month ended. I think the market is basically where we expected it to be, but because it was higher than we had thought for most of 2005, the deceleration or lack of acceleration is greater; meaning you’re coming off a higher base. And it’s particularly exacerbated at NRT. Let me try to help you with that. NRT has fixed expenses of about $300 million per quarter and has revenues after broker commissions of roughly $1.6 billion, so you should in theory make about $400 million per year. And that’s also after taking out the royalty paid to the real estate franchise group. But unfortunately, the way it works is 25% of the costs for each quarter but generally only 15, 16, 17% of the revenues take place in the first quarter. It’s about 30% in Q2 and 3 and about 23% in Q4. So you’re generally going to lose money at NRT. The operating leverage is very simple; you have a fixed base of costs so every nickel of revenue above that goes to profits and everything below that doesn’t really help you in terms of mitigating the loss. And that’s exactly what we’re forecasting for the 1st quarter. We think to some extent that that is also a function of the media, which is reporting on a daily basis that the real estate market is going over the cliff. That may have convinced buyers to become more cautious. Anecdotally we’re being told that. In terms of your second question, we think we can take out about $50 million of costs initially. That requires some office closings. It’s not a dollar for dollar benefit because you do have some breakage and so you do lose some of the benefit of having the agents in those offices who may leave and work for the person across the street because they like that particular location. But we think that there’s probably about a $50 million cost reduction overall that we should be able to accomplish that will start taking impact in the 2nd half of the year.

Operator:

Our next question is from Jeff Kessler with Lehman Brothers.

Jeff Kessler.

Thank you, Henry. , call breaking up on cellular phone.

Henry Silverman.

Jeff, unfortunately, you broke up and we couldn’t hear any of your question but…

Jeff Kessler.

Can you hear me now?

Henry Silverman.

Yes. You’re still breaking up. I would suggest if you can send us an email Jeff.

Scott Schnaber.

Henry, this is Scott Schnaber I’m with Jeff, can you hear me?

Henry Silverman.

Yes, very well.

Scott Schnaber.

The question Jeff was trying to ask was if you guys could provide some type of free cash flow guidance for 2006 and give us an update on where you stand with NOLs. What remains and when that will be done.

Ron Nelson.

Let me take a crack at that. We probably have somewhere after we redeem the debt and pay off the costs between $500-$600 million of NOLs to use on the consolidated return. We will more than likely not be a cash tax payer other than foreign and certain state taxes through the first half of this year. And then following the spin off, we do expect that the real estate company and the hospitality company will be cash tax payers. Car rental will not be a cash tax payer and TDS will be a lower rate cash tax payer because most of their income comes from offshore sources and is taxed at a lower rate.

Scott Schnaber.

Thanks. On free cash flow can you guys come up with for total corporation I know it’s going to be separate but, for looking ahead to the year, can you give us an idea of where you think that number will be and if not so, maybe a guidance relative to the EBITDA?

Henry Silverman.

I think what we’ll do is present some of that detail on investor day on March 21st. we really have not done a rollup of free cash flow for Cendant consolidated for this year because its an irrelevant calculation because their won’t be a Cendant consolidated for this year.

Scott Schnaber.

Okay, thanks. The $256 million, we know that it was primarily e-bookers, but I imagine that there’s a sizeable amount of other in there. Could you guys specify what that might be?

Henry Silverman.

Well, it is good will generally in the online assets and you know you look at it as a group Scott and then you write down your good will in total without allocating it to any given asset. So it’s not…while the majority of the intangible write-off is certainly related to e-bookers, which you can specifically identify, the goodwill write-off is only attributable to the measurement group which in this particular case is the b-to-c group or essentially the online assets globally.

Ron Nelson.

Let me try to help you with that. For those of you who are on the buy side on the call and are not accountants as I am, I’ll try to give you an analogy that I was told by our chief accounting officer works. And that is, assume your portfolio for the year was down 1%, that means that you failed the test and that you would then be measured on all of your positions in which you had a loss, without taking into account your performance based on those in which you had a gain. So even though you might be down only 1% on an absolute basis, your portfolio might be marked down for example 25%, based on the calculation. That is effectively what FAZ142 requires you to do. So I hope that’s helpful for those of you who are non-CPA’s.

Scott Schnaber.

Thanks. Turning to another area that we’d like to talk about a little bit – corporate relocation – I imagine that’s probably doing pretty well and that wasn’t highlighted too much in the write up. Can you guys comment on that at all?

Henry Silverman.

It’s a highly competitive business as you know. It’s very strategic for us because it’s still a big carrot and stick for our real estate franchise businesses as well as for NRT. It provides some volume in our mortgage company, it’s an important part of the value circle. But it is a low-growth business. It grows in the single digits, topline, bottom line so it makes sense for us to own because of the reasons that I just identified and it represents about 10% of the EBITDA of the real estate group in total.

Ron Nelson.

The other thing I would add to that Scott is that mobility used to receive some income from PHH, which for the predominance of this year with PHH being spun, it didn’t receive that income. It’ll anniversary that going into this year. But if you factored out the income in the 4th quarter that PHH used to pay, they would have had up revenues during the quarter.

Jeff Kessler.

The final question is about, with so many acquisitions in NRT in the latter part of the year, when it’s not profitable, is that what occurred to exacerbate the NRT decline in EBITDA in the latter part of the year?

Henry Silverman.

Yes it did. We have 83 more offices in Q4 than we had in Q4 of 2004.

Jeff Kessler.

You have 83 offices which presumably don’t make money more in the 1st quarter than in the 4th quarter. So you have 83 more offices in Q1 that are unprofitable than you had last year. But will be more profitable in Q’s 2 and 3.

And that will cycle back over the next year?

Henry Silverman.

Say it again?

Jeff Kessler.

It will cycle over the next year?

Henry Silverman.

That’s correct.

Operator:

Moving on, we’ll now hear a question from Justin Post with Merrill Lynch.

Justin Post.

Thank you. First, on your comments I think you said 21% domestic growth for online travel and in the release I think said 16. Can you reconcile the difference there?

Henry Silverman.

I have to go back to the source Justin to see what number you’re really talking about before I comment on it. If you have another question we’ll chase it down.

Justin Post.

Sure. I think also in the release you said maybe some incremental e-bookers investment might lower the range for the travel distribution to lower end. What types of investment is that? Is it marketing or is it more technology-focused?

Henry Silverman.

Well it’s both as a matter of fact. It is. We’re clearly spending some more marketing in the first quarter of this year. And actually, have started to see some up ticks in conversion and transaction value in the last few weeks, which is in encouraging. The second place is technology. Some of the platform costs we’re incurring get charged to the P&L and so that is pushing earnings down. And then, in the 3rd area, we’re looking to beef up our hotel supply staff in the international markets and so that’s what’s causing that. I would say generally, we’ve got a management group that is being very conservative about how they approach their forecasting this year, after the challenges that we had last year. On your questions of the 21 versus 16, the organic total of growth was 16%, domestic was 21%.

Justin Post.

Great. Then a last question, could you maybe comment on your GDS outlook for next year? It looks like in the quarter bookings were solid, up 6%, but revenues were actually down year over year. What’s your outlook for just the GDS industry next year? I think Sabre has indicated that revenues can be kind of be stable next year. Can you give us any comments on that?

Henry Silverman.

Well, I think revenues are going to be stable after everyone concludes their negotiations with BFS2 carriers. You know, Sabre has concluded 2 agreements. It’s hard to sort out because there are a lot of puts and takes as to where they actually ended up. The encouraging part of it was that they were both 5 year agreements, so that should provide some stability to the revenue line. The FAA is projecting employments are going to be up 4-5% for the next 3 years. And, you know, in our particular case, Galileo has actually reversed a share loss trend in the past year and gained share modestly in both the domestic and the international market.

Justin Post.

Did you sign some new contracts or is it just because your mix is more international in the GDS business?

Henry Silverman.

No, it is account wins.

Justin Post.

Great. Thank you.

Operator:

Kirk Caras with Relational investors has our next question.

Kirk Caras.

Yes, this is Kirk Caras. Question, last year at the investor day back in December when you guys provided guidance, you guys provided guidance of about $3.1 billion for ’05 and for ’06 guidance of about $3.7 billion and yet, obviously you’ve fallen quite short of that for ’05, about 8% if you exclude the charges. And also now providing guidance for ’06 is coming in just about south of $3 billion, which is about 20% short of the original guidance. So, with yesterday’s disclosure that the executive management team is receiving performance bonuses close to what looks like their original targets of 200% of based salary, I was wondering if you could provide a little bit more color on what exactly the performance criteria the comp committee uses in awarding those bonuses. And also, provide a little bit more color on what the decision process is going forward on Henry’s performance bonus compensation and why that decision hasn’t been made yet. Thank you.

Henry Silverman.

I’ll answer the question about me. It hasn’t been made yet because we haven’t finished all the metrics that are around my contract, my contractual benefits that are, as you know, were approved by both the court and shareholders last year. I would expect that to be done in the next few days and the comp committee to act on that. With respect to my colleagues, remember the bonuses were for 2005 and not 2006 and really don’t take into account performance in 2006 as the year obviously doesn’t count for a 2005 bonus. It looks at a variety of responsibilities. In the case, for example, of two o my colleagues, Mr. Holmes and Mr. Smith, their business has actually exceeded their budgets for the year, back in December of ’04. So, you know, I think this is something we’re happy to discuss with you offline, but we feel very comfortable that our comp committee acted appropriately.

Operator:

Moving on, we’ll now hear from Jeff Leung from Barclays.

Jeff Leung.

Hi, this is Chuck Leung from Barclays. Just to clarify earlier comments on the tender for your outstanding corporate bonds, can we expect the details of the tender to be announced sometime in July? Is that a reasonable assumption? And can we envision the scenario when tender plans are completely discontinued?

Henry Silverman.

Jeff, nothing’s changed about our debt refinancing plans. We’ve not yet concluded whether we’re going to tender or whether we’re going to take effect of our call rights and redeem the bonds. And, I think as we said on the last call, that we trigger the substantially all clause with the spin of the hospitality company, which would be…we’re forecasting will be sometime in July. So nothing’s really changed with respect to our plans for the debt.

Operator:

Our next question will come from Steven Kent with Goldman Sachs.

Steven Kent.

Hi. Two questions. Just to go back to the LBO question, instead of just a full scale LBO, could you just talk about are there any restrictions on a more aggressive share buy-back program over the next six to nine months? And then just on the management incentives for this current year, maybe you haven’t set them yet, but I guess the thing I’m struggling with is, what are the operating divisions’ management incentives to meet near term earnings goals for the next six months? It would seem to me working on other spin offs that the management teams like to set the expectations pretty low when they come out of the box. What prevents them from doing that this time around and making sure that in fact the goals that you’ve set today are in fact exceeded?

Henry Silverman.

Our management teams will not receive shares in their new companies until the spin offs occur. In the meantime, they all have significant restricted stock units in Cendant stocks. Cendant stock between now and the spins will go up or down based on performance. That certainly should be a significant incentive to maximize performance. Although I hope that we don’t really need to have… I don’t have any of these; I just have stock and options. But all of us don’t need any more incentive to perform to the height of our abilities. With respect to your first question Steve, the gating item on buying more stock back in addition to what we’ve announced is that we are in dialogue with rating agencies on what ratings the new co's will receive and obviously the more stock you buy back the less cash you have and/or the more debt you have that you have to then refinance. And that would be at odds with what we have presented and what we have told our investors. So it’s highly unlikely that we would increase our share buy back between now and somewhere in the 2nd quarter when the first spin occurs.

Operator:

We will now take a question from Michael Milman with Solé Securities.

Michael Milman.

I did want to follow up on Chris’s first question on the real estate, I guess the bottom line of it is we’ve…it’s possible that interest rates will continue to go up. It doesn’t seem that your projection takes into account some of the potential negatives and maybe you can discuss why you thought it was appropriate to come out with the forecast that you did. Secondly, following up on some of the questions on travel, I think you said that Gulliver’s was up; bookings were up 16% on a constant dollar basis. What’s surprising is that typically we’ve seen international bookings up more than double that, generally, for most of the companies that we analysts tend to follow. Maybe you can talk about why that seems to be below. And then on Sabre’s GDS, following up on that question, it seems clear that Sabre has very carefully crafted their deals to help them. I was kind of wondering if you had to go into some of the same deals if you would be as significantly disadvantaged. And then finally on travel, is the job considered highly desirable? Are you getting a lot of resumes over the transom for travel CEO? Thank you.

Henry Silverman.

Mike, let me address the search process because I’m basically accountable for that. We have a search firm that we’ve hired. They identified about 200 people that they thought would have the specs that we outlined for them in the job description. We probably narrowed that down to about 50 people. They contacted each of those 50 people. From that we ended up with a list of maybe 15-20 that we thought were both interested and interesting. There are obviously issues about relocation for certain people and a lot of other reasons why people do or do not want to assume something. But we have a very highly qualified list. There seems to be no objection. No one is saying I’m not really interested in either the business or in this position. In fact, we’ve been surprised by how anxious some people who we thought or who the recruiters thought might not be available, how anxious they are to pursue this. It’s very rare that someone is given a public company to run and it’s basically their company. Usually, you’re hired by a legacy board of directors. Here we don’t have that. There will be a new board of directors of a new company. Very intriguing possibility for what is still a growth business as we said on the call. We expect EBITDA to be up this year by 8, 9, 10, 12%. So this is not like a challenged business that I’ve got to fix, this is a business that’s growing and it’s growing nicely. I’ve got to accelerate the growth curve. We don’t think that this is necessarily something that is going to be a challenge at all. In fact the biggest issue I have right now is I’ve got too many qualified candidates.

Your first question was what? About sides and price?

Mike Milman.

In real estate.

Henry Silverman.

We continue to forecast a soft landing. We think sides will be off maybe 5, 6, 7, 8% in the market. The price will be up 3, 4, 5, 6%. The budgets are done very, these are not wild ass guesses. The budgets are done bottoms up. We started a consolidation or a combination of forecasts and Fannie Mae and Freddie Mac and a variety of other industry pundits. And then we overlay to that what we can do based upon franchising and NRT acquisitions to figure out what we think will be on price and sides and typically, as you know, our increase in price is typically twice the industry because we sell more high priced homes than everybody else and we’re about where the industry is on sides. So, these are very well calculated budgets. We don’t just make them up. There’s probably going to be more acquisitions and more franchising, if we have a down market. The impact of that is probably more of an ’07 impact because even if you sold more franchises, you have to assume you only get the benefit for 6 months. In NRT’s case, the more you buy in the first quarter, the more you lose in the first quarter. But we do think that those will accelerate.

If there’s a huge rate spike, Mike, we will redo the forecast. And we will tell people who are investors in the real estate company that we are assuming a gradual increase in mortgage rates but nothing that we think is going to have any real impact on the market.

Ron Nelson.

Mike this is Ron, let me handle your other two questions. Keep in mind with respect to Gulliver’s bookings that 70-80% of their business is the traditional tour operator business. So they’re not benefiting so to speak from a channel shift like the online growth rates that I think you’re referring to with Expedia and Travelocity and Priceline. Now octopus is benefiting from channel shift and their growth rate is in line with what they other online services are forecasting. And I think the third thing to keep in mind is that this is pure hotel. Gulliver’s does nothing in the air sector, so you’re talking about all hotel bookings.

Secondly, on the GDS side, as I said earlier it’s really hard to sort through the Sabre deal and understand exactly what they got and what they didn’t get. There was some pre-petitioned bankruptcy debt that was part of it. There was some litigation settlements that seemed to be part of it. So it’s hard to comment on whether we can live with it or not. We’re in active dialogue with all the airlines and we expect that over the summer we’ll have concluded our negotiations and I think it would be unwise for me to talk any more than that about the nature of those discussions.

Mike Milman.

Well, without getting specific, or maybe getting specific, do the airlines, Northwest and United air come in and say, here’s the deal we have. Match it or beat it?

Ron Nelson.

I think it’s a negotiation like all things in life. There’s a bid and an ask and you try and resolve your differences with all the levers that are at your disposal. So, I’ve not heard that anybody has come in and said take it or leave it.

Mike Milman.

So basically, you’re not looking or the industry’s not looking at the Sabre deals as setting the industry standard?

Ron Nelson.

Well, I can’t speak for the industry, I can only tell you how we feel. And, you know, we’re not entirely sure what exactly the deal was and even if we knew, I’m not sure that we would probably tell you. It’s only our deals that are relevant. And when we conclude our deals, we’ll be happy to share generally the terms of those.

Henry Silverman.

Mike, I think what’s important is that we have assumed the next round of negotiations in the forecast that we’ve given you for TDS and in the forecasts we’ll continue to give you at the second investor day for TDS. We’re not oblivious to the fact that there will be another GDS agreement toward the end of ’06. Nor should you be oblivious to the fact that 2/3 of our GDS business is out of the US. So we are a little different than Sabre in many ways.

Operator:

We will now take a question from Jim Wilson with JMP Securities.

Jim Wilson.

Thanks. I really just had one question left. Could you give us the number on same-store side sales without acquisitions for both the franchise and for NRT? Do you have that available?

Henry Silverman.

Could you repeat the question?

Jim Wilson.

I wanted to get the same-store side sale numbers for both franchise and for NRT if those are available.

Henry Silverman.

Well, we actually measure it in terms of dollars, which I think might be more helpful. Because sides it irrelevant. Meaning, if you did 10 transactions and the commission was $10,000 per transaction; wouldn’t you be better off doing one transaction where the commission was $300,000? So, we measure on a dollar volume basis, which as I said earlier drives revenue and profitability. And on that basis, we saw an increase in both NRT and in the franchise world on a same-store sales basis. Because we saw an increase in GCI of 11%. I think that’s the important number you need to focus on.

Operator:

Our next questions will come from Chris Gutek at Morgan Stanley.

Chris Gutek.

Thanks, just a follow up on the auto rental business. The volume growth continues to be really high and I assume that part of that reflects the strategic price reductions of Budget about a year ago. That should be pretty close to annualized by now and frankly that would almost seem to be irrelevant. The problem is that the volume growth is really strong, the company’s gaining share, why not grown in line with the market and be more aggressive leading the industry toward higher prices?

Henry Silverman.

Well, you know, I think that’s certainly a strategy Chris. But I think as long as we can continue to grab share and get pricing improvements and increase utilization and decrease turndowns by having the available fleet, we’d much rather take the growth and be profitable. I think at this juncture, the incremental growth is providing incremental margin to us. If that were to turn around, if our pricing were to have to soften in order to move the fleet, then we’d move pretty quickly to restrict the fleet and do something on pricing. But right now, we’ve actually been the price leader in the market for most of the last 6 months, both on the leisure side and on the corporate side. And your premise going into this is correct. We anniversaried the Budget price reduction back in October.

Chris Gutek.

Are you guys seeing any change in pricing strategy from Hertz, given the ownership change there? And what are you seeing currently from the auto manufacturers in terms of what you expect for the cost increases for your vehicles for the fleet for this year?

Ron Nelson.

I don’t think we’ve seen any change in pricing strategy since the acquisition of Hertz. They revised their terms and conditions a couple of weeks ago and I think the, you know, we’re looking very carefully at them and determining whether or not we’re going to match. It’s still a little early to talk about fleet for ’07. We haven’t yet begun those discussions.

Chris Gutek.

Thanks, Ron.

Operator:

We’ll now turn the conference back over to our presenters for any final and closing remarks.

Henry Silverman.

We’d like to thank you for the call. We hope to see many if not most of you at investor day on March 21st here in New York and thank you for being with us this morning.

Operator:

Thank you. That does conclude today’s teleconference and thank you all for your participation. At this time everyone may disconnect.

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Source: Cendant Q4 2005 Earnings Conference Call Transcript (CD)
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