Avis Budget Group Q1 2008 Earnings Call Transcript

| About: Avis Budget (CAR)

Avis Budget Group Inc. (NASDAQ:CAR)

Q1 2008 Earnings Call

May 7, 2008 9:00 am ET


David Crowther - Investor Relations

Ronald L. Nelson - Chairman of the Board, Chief Executive Officer

F. Robert Salerno - President, Chief Operating Officer, Director

David B. Wyshner - Chief Financial Officer, Executive Vice President


Chris Agnew - Goldman Sachs

Manav Patnaik - Lehman Brothers

William Truelove - UBS

Christina Woo - Morgan Stanley

Frank Jarmin - Goldman Sachs


Welcome to the Avis Budget Group first quarter earnings conference call. Today’s call is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to Mr. David Crowther, Vice President of Investor Relations. Please go ahead, sir.

David Crowther

Thank you, Tanya. Good morning, everyone and thank you all for joining us. On the call with me are our Chairman and Chief Executive Officer, Ron Nelson; our President and Chief Operating Officer, Bob Salerno; and our Executive Vice President and Chief Financial Officer, David Wyshner.

If you did not receive a copy of our press release, it’s available on our website at www.avisbudgetgroup.com. Before we discuss our results for the quarter, I would like to remind everyone that the company will be making statements about its future results, which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Statements are based on current expectations and the current economic environment and are inherently subject to significant economic, competitive, and other uncertainties, contingences beyond the control of management. You should be cautioned 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 facts that could cause actual results to differ materially than those in the forward-looking statements are specified in our 10-K and earnings release issued last night.

Now I would like to turn the call over to Avis Budget Group’s Chairman and Chief Executive Officer, Ron Nelson.

Ronald L. Nelson

Thanks, Dave and good morning to everyone. I am sure a number of companies join us today in our pleasure at being able to formally put the first quarter behind us. It was, to say the least, an unusual quarter; a period of contradictory demand indicators and a period where the negative emotions of the market didn’t really sync up with what was happening in the business.

To complicate matters, we had an early Easter and a leap year thrown into the first quarter so the comparisons could be just as confusing as the underlying demand patterns. And then of course Passover and Spring Break stayed in the second quarter just so that April could be just as much of a challenge.

We entered the first quarter with declines in pricing as bad as we have seen in -- but exited the quarter with competitors feverishly trying to outdo the other with price increases. We entered our quarter with our primary driver, enplanements, trending flat to down and while they generally remained that way through the quarter, rental day volume was pretty good, especially in January.

Even more confusing was that leisure volume was noticeably stronger than corporate. While there may not be an agreement as to whether we are in a recession, those that believe we are universally lay it at the doorstep of the consumer, not the corporation.

From an earnings standpoint, it was not our finest hour -- but then the first quarter rarely is. I can honestly say that over the last few quarters, we are growing stronger and gaining momentum. The core strategies are working and we continue to be optimistic that this will be reflected, not just over the long-term but this year as well, both in our results and in our share price.

We’ve had the opportunity to meet with many investors over the past eight weeks to discuss the progress we are making on executing on our core strategies and to listen to the questions investors have about our business. During the call today, we are going to try and address many of the recurring themes that came out of those meetings -- pricing and demand, used car market, financing, our strategic initiatives, particularly our cost savings program, truck business, and how all these impact our results for the quarter and our outlook.

The headline is that in all those areas over which we have some measure of control, such as performance excellence, we are achieving success. In those areas where we don’t have control, we are competing aggressively and meeting the contingencies as they arise.

Before we get into those topics, I want to spend a minute talking about our first quarter results -- in particular, the $35 million domestic EBITDA decline from last year. Because while on the surface, an earnings decline is never good news, it was in fact entirely consistent with our expectations. It does not affect our forecast of increased revenues and profits for the full year.

First off, let me remind everyone the first quarter is our seasonal low point in terms of profits. Historically, it would not be unusual for us to operate at close to break-even, or even at a small loss this quarter. So any shift in pricing year over year, such as what we experienced this year, can have a magnified effect on earnings.

Here are the simple facts -- one, as we said in our release, our results actually tracked slightly ahead of our plan for the quarter, including the mark-to-market interest rate hedge impact.

Two, fleet cost increases were moderate at 3% per unit, utilization increased by 45 basis points, used car dispositions were both as expected and consistent with the [inaudible] experience.

Three, $13 million of the decline was due to mark-to-market on interest rate hedges. The fall in interest rates that produced the hedge loss is expected to reduce our interest expense in the coming quarters and the Q1 mark-to-market hit will be more than offset by lower interest expense, and therefore higher EBITDA, in the remaining nine months of the year.

And four, and finally, the balance of the decline, about a $20 million number, was a real decline in domestic EBITDA, owing almost exclusively to a 2% decline in pricing.

We expected pricing to be soft in Q1 and we weren’t disappointed. [A drop of] two points on time and mileage revenue of nearly $1 billion single-handedly reduces EBITDA by around $15 million, which rose to $20 million in the face of even modestly increasing fleet costs. It’s not much more complicated than that.

I think the most important point is that this was not unforeseen. Our 2008 business plan anticipated these events. When we spoke in February, we cautioned that we expected the first quarter was going to be down largely because pricing weakness from December had persisted into January and the early part of February.

But as demand strengthened due to seasonal patterns, pricing improved dramatically. To be specific, pricing was down about 7% year over year in January, improved to down 1% in February, and was up 2% in March, aided a bit by an early Easter. Commercial pricing was reasonably steady so the swings in Q1 largely reflect the heightened volatility in leisure pricing that we have expected to see.

We don’t expect down-pricing for the remainder of the year or even for the year as a whole, including the first quarter. As a result, and this is a critical point, the items that caused the year-over-year decline in first quarter EBITDA should not be viewed as a harbinger of things to come. In fact, while we are not counting on a substantial amount of price to make our numbers, we remain reasonably optimistic about the pricing environment, particularly in light of the last few weeks, which Bob will provide you a little more color on in a minute.

At the same time, demand in both commercial and leisure segments remained surprisingly solid throughout the quarter, with leisure rental day volume growth actually outpacing commercial by a factor of almost two to one.

Rental days were up 3% on airport an 13% off airport, or 4% overall and we benefited from an increase in our average length of rental. Keep in mind that both off-airport growth and longer LORs tend to have a dampening effect on the composite T&M per day that we report, so you can conclude that airport pricing alone was probably somewhat better than the composite number we reported.

When you consider the activity level during the quarter against a backdrop of widespread concern about the macroeconomic environment and consumer confidence statistics that deteriorated rapidly, you do get a sense that the travel environment, while not robust, may likely sustain itself through the all important summer months.

And that is why, in fact, we feel pretty good about the outlook for all of 2008. In our last call, we talked about 17 reasons why owning our stock is a good idea and I can probably add two or three more since then.

Since that time, we adapted the 17 reasons into eight measurable goals, divided between cost savings initiatives, revenue growth goals, and free cash flow targets and linked this into the compensation plan for our senior officers. All of these related directly or indirectly to our strategic initiatives. Let me go through where we stand on a few of these.

One of our goals is tied to our performance excellence initiative. We committed to you to deliver $40 million to the bottom line in 2008 alone and I am pleased to say we are ahead of that target. In fact, by the end of the first quarter, we had run-rate savings of over $25 million, or better than half of our goal. While the actual contribution to hit our P&L in the first quarter was only a few million dollars, we more than doubled our trained staff dedicated to this initiative during the quarter and expect the P&L contribution to begin to catch up to the run-rate.

The replication process, which is key to reaping the benefits of process improvement across our many rental locations, accelerated tremendously over the quarter. Replication teams, which we trained at the beginning of the year, are now out in the field, each averaging two replications per month.

In addition, performance excellence has not been confined to our domestic operations, as we have launched the process improvement program in our international and truck operations as well. We are pleased that these efforts are not only generating cost savings but are also bringing about other benefits, such as helping us improve customer service, reducing our environmental footprint. Bob will also touch on our performance excellence initiative in a little bit.

One of the goals is to expand our revenue from partnerships, affiliations, and global inbound travel. There is a very important reason why we place such a high degree of emphasis on partnerships and affiliations. Despite the fact that Avis and Budget are leaders within their segments in customer loyalty, our overall consumer base is still characterized by a significant percentage of people who do not have any strong rental car brand preference. Many of these people are making purchase decisions based on price. However, many of these people do have strong brand loyalties, the airlines where they aggregate their frequent flier miles or to associations that aggregate travel benefits, such as AARP.

So when these people view rental car offers within the context of the brands and affiliations to which they are loyal, it helps create repeat business from people who would otherwise have no rental car brand preference.

As a result, we have set a very high growth goal for the sales group that manages this area, but they enter the second quarter with the wind at their back. As of last month, Budget is now a preferred supplier on Expedia, the largest online travel agency. We have already seen a four-fold increase in daily transactions booked through Expedia and expect this will provide significant incremental volume going forward. We also signed new or expanded relationships with Hilton Hotels, Northwest Airlines, the National Association of Realtors, RCI, and for the off-airport segment of the market, Pep Boys.

International inbound volumes were up 12% in the first quarter and based on the momentum we see should only accelerate as the year moves into the summer vacation season. Clearly the weakening dollar has caused us to ratchet up our efforts in this space and we expect a year of record growth.

We also launched this quarter an Avis gift card, the first in our industry. Gift card business has become a multi-billion dollar industry in the last few years, with cards taking on the character of a currency rather than simply representing a traditional gift.

While we are still new to the marketing of this product, we have already distributed several million dollars worth of these cards and are eagerly anticipating sell-through data to learn how, when, where, and why they are being used.

Our off-airport expansion continues to progress well and represents another of our growth goals. Although the incentive portion of the plan is tied to insurance replacement revenue, overall off-airport revenue was up 14% for the quarter, which in fact was fueled by insurance replacement growth of 31%. We continue to add new insurance companies to our roster of relationships and we also opened 24 new locations this quarter.

Ancillary revenue growth is an important growth objective and the first quarter saw continued robust growth. Revenue increased 13%, led by Where To GPS rentals and a nearly 20% increase in coverage sales in five large test markets where our employees who received specialized sales training.

Our goals in this area include a revenue growth target from counter up-sells, insurance, and GPS rental, and a specific take-rate target on the GPS. Our next generation Where To product starts its rollout this month and with the benefit of its MSN direct connect capabilities, customers will be able to access airport information, weather reports, and news and stock updates, to mention a few.

As an aside, electronic toll collection, where we have been the leader in rolling out new technology, recently had its 3 millionth transaction since the launch of this product.

So I hope you take away from this the observation that our 2008 goals not only reflect our long-term objectives of revenue growth but each one is accompanied by an increased profit contribution per rental day.

Finally, let me spend a minute on truck rental. We believe that the trajectory in truck rental has turned, or at least flatted out. We are projecting a meaningful increase in truck earnings this year, even though it won’t be apparent until later in the year because of seasonality. The new management team has worked extremely hard to drive improvements in every aspect of the business and the results are beginning to show from these initiatives. The shift to more balance between commercial and consumer rental activity is providing stability to our utilization rate and growth in rental days, even though much of it isn’t apparent because of the pricing declines in consumer rentals, particularly one-way.

While we are always anxious to take price when and where we can, our mid-teens market share means that the pricing we achieve is subject to the competitive pricing conditions that exist in the market.

On other truck fronts, our same-store corporate locations had 7% transaction growth, proving our thesis that well-placed corporate owned locations could better serve the market and our addition of cargo vans to the fleet have been a home run, with these adding nearly $2 million in revenue.

Our new relationship with public storage is also starting to pay dividends as we have now repositioned the existing fleet to over 200 public storage locations. Our fleet continues to be relatively young, with an average age of 2.5 years and our sales efforts are adding and expanding relationships with commercial accounts such as Procter & Gamble, Lockheed Martin, and the federal government, with more to come.

So while victories abound, it is difficult to deny our principal brand image as a consumer oriented truck rental company. Until the consumer part of our business, or really the self-moving market, starts to turn around, even though we expect to make great progress in our initiatives, we would not anticipate a return to the more normalized margins we expect of 12% to 14%.

So how is all this going to pay out for the rest of the year? The tale of the tape, as always, will be the third quarter and all indications are that we should see strong pricing over the summer as the industry constrains fleet growth due to the risk program mix shift and the limited availability of short-term program cars. As one would expect, pricing improves when demand outpaces supply, which is usually the case during the summer peak. And this year we suspect that everyone will be cutting the peak a little more than usual. Recent pricing actions would support that contention. In mid-April, we instituted an important and promising price increase only to be matched and re-raised by Hertz a week later. The option rates on both increases are encouraging and consistent with what we would expect.

Despite the difficult pricing in January and February that we fully expected, we do remain optimistic about our prospects and about how our operations are performing. We are delivering on the key initiatives that we as a management team control, our performance excellence process improvement, ancillary revenue growth, off-airport growth, and retaining our customers with world-class customer service. Based on everything we see, we continue to forecast full-year revenue and earnings growth in 2008 versus 2007.

With that, let me turn the call over to Bob.

F. Robert Salerno

Thanks, Ron and good morning. Today I am going to discuss some positive trends for our company with respect to the used car market, as well as our performance excellence initiative, and finally how we see the second quarter shaping up from a demand and pricing standpoint.

There seems to be a growing interest in how the used car market will affect our business and it is important to keep in mind that we are not new to this market. Although we have taken advantage of the economics of program car offerings in recent years, our fleet team is led by people who have spent decades effectively and efficiently selling cars in the secondary market.

We understand the dynamics and we are innovators. In fact, we believe we were the first company to begin selling online in bulk sales, which has been a growing success.

As Ron mentioned, the prices we realized on our car sales in Q1 were right where we expected them to be. We disposed of over 16,000 risk units in the quarter, principally through auctions but with 7% of our sales going through the online, direct to dealer wholesale channel we began using last year.

The used car market improved in March and April, as it usually does from January and February. It is important to note that market experts, including Manheim and Odessa, have stated that the types of vehicles that we bring to auction for our own account, one-year old used cars, are outperforming the used car market as a whole. So while new car sales are declining and certain segments of the used car market are experiencing some softness, our vehicle portfolio is doing fine.

Let me provide you some context on how we are doing. We compared the actual monthly cost per car on the risk units we sold to what our expectations were for these monthly costs when we originally purchased the car from 12 to 14 months ago. While we do adjust depreciation rates on a quarterly basis, our actual depreciation costs were within 3%, or about $7 per car month less than our initial assessment.

In addition, the auction houses provide an index of how cars are selling versus all risk rental units sold. Our results for the first quarter were 100.4% of the average. Simply put, we are doing better than the industry in terms of the amounts we receive at auction. Some of this could be related to mix but frankly, we look at these numbers every quarter and we usually are at or near the top of the industry.

Why are later model cars performing so well? There are a number of reasons. First, as we discussed before, the supply of these late model cars is decreasing as the rental car industry lengthens its vehicle hold periods and purchases fewer new cars. Second, the demand for these cars has remained reasonably solid. As credit has tightened, some consumers are having a more difficult time with the more stringent qualifications for new vehicle purchases and others are simply looking to trim expenditures.

The one-year old used vehicles, which dealers usually sell as certified pre-owned, typically are priced around 20% less than the same new car model. This is a value and affordability story that represents a win-win for both dealers and consumers in an otherwise challenging economic environment.

One final note on fleet -- 2009 model year negotiations are just beginning to kick off so we have nothing to report on these, but we will provide a progress report on our second quarter call.

Turning to our performance excellence initiative, I continue to be amazed at the opportunities for process improvement and cost savings that we have identified I have been even more impressed by the enthusiasm that our employees worldwide have shown in these efforts to make our company even more cost efficient.

Since the beginning of this year, we have taken steps to improve the processing of payables through our outsource provide , which saved us over $200,000; streamlined our title processing, saving $0.25 million this year; invested in a process developed in our Canadian operations that will allow us to reduce the amount of time and money it takes us to get cars from check-in to the ready line for rental. This is worth over $350,000; identified ways to speed up our [turn-back] program cars, which saved another $1 million; we also reduced the amount of printed material we automatically put in our vehicles by 100 tons per year, saving us nearly $4 million annually, not to mention 1,500 trees, which is an added benefit that makes a significant contribution to reducing our environmental footprint.

We’ve begun the implementation of our new fleet management software package and we’ve also moved our PECS initiative, as Ron mentioned, into Australia, New Zealand, Puerto Rico, and into Budget Truck.

We have already implemented improvements that will save us $25 million this year, thus we are over halfway to our goal of $40 million in savings for the year. Given our initial results, we are highly confident in our ability to achieve at least $100 million to $150 million of annual P&L savings within two years, and at the same time improve our service offerings to our customers.

We are looking for improvement in virtually every area of the company, from field operations to support functions to our relationships with service providers, and we are intensely focused on replicating best practices across our operations, particularly among our largest rental locations.

The last topic I would like to touch on is what we are seeing for Q2. On the fleet side, industry fleet levels were fairly tight compared to demand in late February and throughout March. This trend continued in April in certain areas of the country. Looking forward, we suspect that fleet levels will loosen up during May and early June as the industry grows its fleet for the summer. Despite this, we do expect that overall fleet levels will remain fairly tight for the summer peak.

While the absence of Easter in the first week of April provided tough pricing comparisons, pricing did improve each week of the month. We believe that pricing in Q2 will be better than it was in Q1, to be slightly positive year over year despite the Easter issue.

Consistent with our stated intention to move prices up where and when possible, we have been actively taking steps to improve our metrics in this area. Ron mentioned on April 14th we initiated a price increase of $5 a day and $20 a week in nearly all markets, with an effective date of May 19th. To date, this price increase has been followed in a majority of locations by our three largest competitors. On April 21st, Hertz raised most prices another $5 a day and $20 a week, which we in turned matched wherever we saw the increase occurring in all channels.

April volume was decent although the absence of Easter affected year-over-year comps. At this point, advanced reservations, which are mainly for our airport locations, are flat for the May/June period with increases already registering for the summer months of July and August. Pricing in all four months is showing nice increases. Given these trends and our belief about the fleet situation for the summer peak, we are comfortable in surrendering some volume in favor of price for now.

With that, let me turn the call over to David.

David B. Wyshner

Thanks, Bob and good morning, everyone. I would like to discuss our recent results, our strong financial position, and our largely unchanged outlook for 2008.

In the first quarter, revenue increased 6% to $1.44 billion, EBITDA was $31 million, and pretax income was a loss of $18 million. EBITDA declined from the $62 million we reported in first quarter 2007 due to domestic results that were impacted by mark-to-market hedge losses and weak pricing. As Ron discussed earlier, the fallen interest rates that produced the hedge loss is expected to reduce our interest expense and benefit our EBITDA in the coming quarters.

In our domestic car rental operations, first quarter revenue increased 5%, reflecting a 4% increase in rental days, a 2% decrease in time and mileage revenue per day, and a 13% increase in ancillary revenues. Our rental volumes increased despite flat enplanements, largely due to our off-airport growth.

Domestic EBITDA declined for the quarter as the revenue growth, increased utilization, and cost savings were offset by lower time and mileage rates per day, higher gasoline expense, and increased fleet costs. We believe the 2% decline in time and mileage rates caused by weak leisure pricing reflects typical seasonal dynamics. With the industry having more cars and less flexibility to shrink the fleet one month and then grow it the next to accommodate travel patterns, our business plan anticipated some softer pricing periods like most of Q1 would be softer than in the past, and that is what we saw.

Also impacting the reported time and mileage per day rate was our 13% growth in off-airport rental days and an increase in length of rental as both of these otherwise very positive trends had a modest negative affect on our average rate per day.

Fleet costs increased 3% on a per unit basis as our risk cars continue to perform well, as Bob discussed. Our direct operating expenses increased by 150 basis points year over year due to higher gasoline expenses and the decline in time and mileage rates, partially offset by cost savings.

Rising gas prices actually had two negative effects on our margins. The first is a real effect; our net gas expense -- cost less gas revenues -- increased by several million dollars year over year, including $4 million due to hedge gains in first quarter 2007. We are taking steps to try to increase our gas related revenues to mitigate this issue.

The second effect is just math, to the extent that gas expense increases and gas revenues rise to offset the higher costs, the numerator and denominator of our margin calculation are both grossed up. There’s not necessarily an impact on profits but there is an effect on operating costs as a percentage of revenues, an effect of 60 basis points in the case of Q1.

To recap this, as well as the issues that Ron discussed, our domestic EBITDA decline of $35 million was due to the mark-to-market interest rate hedge loss of $13 million, $15 million impact from lower T&M pricing, $9 million increase in per unit fleet costs, and a $7 million increase in net gasoline expense.

We were able to offset about $10 million of these items primarily through increased ancillary revenues.

The important point is that we expect the benefits of higher ancillary revenues to continue and cost savings to accelerate, but the negatives associated with hedge losses and pricing that is down year over year should be largely contained to the first quarter.

Turning to international car rental operations, revenue increased 20% in Q1, driven by a 4% increase in rental days, 13% increase in time and mileage rates per day, which was all due to foreign exchange, and increased ancillary revenues.

EBITDA increased 25%, driven by moderating fleet costs which were flat on a per unit basis excluding the impact of exchange rates, increased ancillary revenues, lower shuttling expenses, and increased employee productivity.

In our truck rental segment, revenue declined 6% in the quarter due to a 10% decline in time and mileage revenue per day, offset by a 2% increase in rental days, lower fleet costs, and operating cost savings. The decline in T&M per day reflected lower pricing across all channels, magnified by a decline in the proportion of one-way rentals, which typically carry the highest daily rates.

Corporate and other had a $4 million EBITDA loss in the first quarter. This principally represents unallocated corporate overhead associated with being a public company to should be fairly steady at this rate over the course of the year.

We continue to invest in our brands and our infrastructure. Capital spending totaled $23 million in the first quarter, primarily for rental site renovations and information technology assets, where our non-infrastructure spending has been prioritized based on anticipated ROI.

We have demonstrated over the years that we can turn technology innovation into incremental revenue and profit and that is the context in which our IT CapEx should be viewed.

Our free cash flow for the quarter was $81 million, reflecting both our efforts to focus on cash generation and a typical assortment of timing issues, which were actually net favorable in the quarter.

We continue to believe that over time, our free cash flow should approach our pretax income. 2008 we expect to pay cash taxes at $20 million to $25 million. Our capital spending will be a bit higher than our depreciation and amortization expense. We will pursue opportunities in working capital management and the structure of our vehicle programs [to try] to have free cash flow exceed 85% of pretax income.

Based on our projection for earnings growth in 2008, our free cash flow target translates into a free cash flow yield on our equity in the mid-teens.

With respect to taxes, we do not expect to be a regular federal cash tax payer for several years but we could become a partial cash taxpayer in 2010 or ’11 under the AMT. Our GAAP tax rate for 2008 is expected to be right around 40%.

Turning to our financing strategy, we continue to be well-positioned in what is an unusually difficult credit environment. We completed a new $800 million vehicle backed financing in February at attractive rates. Our ability to do so speaks volumes about our lenders understanding of our ABS structures, significant amount of over collateralization we provide in those structures, our strong bank relationships and the stability of our business model.

We further expanded our borrowing capacity in April by arranging for a new lease facility through which we can finance up to $300 million of program vehicles.

As a result, our existing funding commitments will fully satisfy our fleet financing requirements in 2008. In fact, as of March 31, we have $1.9 billion of available capacity under various vehicle-backed financing structures. We continue to have no borrowings under our $1.5 billion corporate revolving credit facility.

In short, while we continue to watch developments in the credit markets very carefully, we will seek out opportunities to further expand our liquidity, we have successfully taken the steps needed to make the financing of our business and our fleet an issue in which we as management and investors can take considerable comfort.

With respect to our outlook, we continue to track in mind with the assumptions we discussed last quarter, which include modest economic growth with no major travel interruptions, positive domestic enplanement growth for the year. We expect that our on-airport rental day growth will approximate enplanement growth and benefit from Budget’s increased presence on Expedia. We expect off-airport volumes to continue to grow rapidly, bringing our overall increase in domestic car rental days to 3% to 5% year over year.

The domestic price assumptions call for a modest increase in daily time and mileage rates. While leisure pricing has been challenging, we have achieved price increases on commercial account renewals in 2007 and thus far in 2008 that will benefit us throughout the year.

At the same time, our growth off-airport, where length of rental is longer but daily rate is typically lower, will drag the average price down a bit.

On the ancillary revenue front, our revenues from Where To GPS rentals increased $9 million year over year with pretax margins north of 70% in the first quarter. We look for continued growth.

We are also focused on growing other high margin ancillary revenue streams, such as from electronic toll collection, gas, and insurance products. We piloted new frontline up-sell training in five markets in the first quarter and the results were tremendously favorable, indicating that we indeed have a substantial opportunity to increase revenues and profits from customers that have already booked with us.

Our domestic fleet costs for the quarter increased 3% on a per unit basis, slightly below our full year range of a 4% to 6% per unit increase due in part to the timing of less expensive risk car additions versus program car additions.

We continue to forecast that our full year per unit cost increase will be between 4% and 6%, with per unit costs in the second quarter that will be higher than this range.

We also expect growth in our international and truck rental segments. In truck rental in particular, we expect increased commercial rentals, a relationship with public storage, lower fleet costs, and the revenue generation and cost reduction actions we’ve taken over the last year will all provide benefits so that truck rental EBITDA will improve in 2008.

Based on these assumptions, we expect to grow our revenues, EBITDA, and pretax income in 2008 despite a softer macroeconomic environment in the first half of the year. We also expect to have the benefit of a low interest rate environment in Q2 and Q3 with the forward curve suggesting that LIBOR will average around 3% over that period. While we are not going to provide specific projections at this time, similar to our approach in 2007, we want to reiterate that the first quarter decline in domestic EBITDA is not reflective of how we expect our full year results to unfold.

In particular, we believe that our leading market position, fleet management strategies, and process improvement work will allow us to grow our revenues and earnings in 2008. As a management team, we remain focused on executing against those opportunities we can control. We are eager to take advantage of the many growth opportunities that we are identifying.

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

Question-and-Answer Session


(Operator Instructions) Your first question is from Chris Agnew with Goldman Sachs. Your line is open.

Chris Agnew - Goldman Sachs

Thank you. Good morning, gentlemen. First question, could you comment on what specifically caused the weakness in pricing in January and sort of reiterate why you are confident we are unlikely to see a repeat of that through the rest of this year? Thanks.

F. Robert Salerno

My opinion is that as this industry shifts to more and more risk units with less and less fleet flexibility, that you are going to begin to see these troughs and as the industry changes, the comps are changing and they are a little bit different. I think that’s really what it was. As you came into the season, winter seasonal places, you can see that our RPG, our pricing began to go up and what’s most impressive is that as we came out of that, pricing -- we took pricing increases, people matched us and others increased them again. So I think there is a lot of desire in the industry to move the pricing up but I do think there will be these seasonal troughs in my opinion caused by the amount of risk fleet that is around.

Ronald L. Nelson

I would add to that -- if you [inaudible] then Hertz followed again in late April, so all of them have had pretty good adoption rates -- I mean, well beyond what you would expect given three prices increases [in two months]. So I think that combined with tightness in fleet that we see over the summer gives us some encouragement that pricing -- you know, that January was just as Bob explained, that pricing is going to tighten up over the course of [inaudible] --

Chris Agnew - Goldman Sachs

Sorry, Ron, I think you might be cutting out a little bit on the phone. I’m not sure if it’s just my line. Next question is just on leisure and I guess thinking about volumes -- I mean, you had relatively strong volume growth I guess versus what data points we are seeing elsewhere in the economy. And I know you can break the leisure business up into many different segments and even geographies. Is there anything in particular that surprised you in terms of why you were seeing stronger volume growth than maybe you would have thought, just if you are looking at the broader economy and that also, as we look forward into the summer, makes you confident in your advanced reservations? Thanks.

Ronald L. Nelson

I think -- well, you put your finger on it. It was surprising and I think what was more surprising in fact about the leisure was that a lot of it came from longer length of rental and not just -- there was transaction growth but there was a fair amount of length of rental growth that added to the number which is surprising in that that number generally doesn’t move around all that much.

It is tempting to say that our volume growth was promulgated by price but if you look at the airport market share statistics, we and Hertz gave up share over the course of December, January, February and March. And so I don’t think that you can point to the numbers and say that is was just simply out-and-out a share grab. But again, I would say that what gives us encouragement about leisure pricing turning around is simply the fact that everybody -- you know, all these price increases, by the way, are leisure market increases. They don’t have anything to do with commercial pricing, so I think the fact that there’s been good adoption rates means leisure pricing [has turned around] and strengthened over the course of the [second and third quarter].

Chris Agnew - Goldman Sachs

Great, and one final question just on commercial -- why was pricing weaker in the first quarter and are you getting any, when you are going in for contract renewals, what are you customers saying to you in terms of how they are thinking about their travel budgets? Thanks.

Ronald L. Nelson

Well, on the second part first, we haven’t heard nor have we really seen any major cutbacks. Obviously there’s been a little bit of trimming here and there on the commercial travel. As far as pricing, it’s been a challenging environment in the first quarter. There are people out there looking to garner commercial business and making it challenging to increase prices. Having said that, we continue to get increases in our renewal rate, while not as robust as it’s been in the two to three range, it’s just -- it’s at right around the 2% range. And also as the leisure pricing was lower in January, you get a lot of commercial people who book on the leisure rate versus their commercial rate. We call it flipping and that has obviously a negative effect on it.

As we look forward and think about pricing renewals, we continue to renew our contracts above the 98% rate that we’ve been telling you about and we continue to think we can get some lift in the pricing overall as we go forward.

Chris Agnew - Goldman Sachs

Great. Thank you very much.


Our next question, Manav Patnaik with Lehman Brothers, you may ask your question.

Manav Patnaik - Lehman Brothers

Good morning, guys. I guess a big picture question maybe for Bob -- given your last industry experience with the car rental business, how would you gauge the economic environment obviously specific to car rental today compared with the tougher times that you’ve been through in the past? I guess with respect obviously you mentioned to some extent pricing, the used car market -- just generally speaking, how would you maybe rate this or characterize this with respect to how much harder or much of the same it is?

F. Robert Salerno

I will tell you when I look back at the times that we’ve been through over the last several decades, I would not say this is the toughest of economic times. I would say that from a competitive standpoint, it is a very different time in that there are -- you know, there’s recombinations in the industry and there are new competitors out there with different strategies and plans, so it is very highly competitive.

As far as the economic end of it, we’ve seen it before. We do have the ability to manage a lot of our costs up and down and that’s what we’ve been doing. We are not in crisis mode at all. People are still traveling. Our numbers say so and so I think economically, we’re okay. It’s just a challenging competitive time.

Manav Patnaik - Lehman Brothers

Okay. I mean, I guess what I was trying to get to is I know you guys are not going to give a specific guidance. I was just curious as to do you guys have obviously your own internal numbers that you are meeting to and what does it take to provide ranges in the guidance to the investor community? Is it just because the visibility is just not there for the rest of the year and therefore you are just being prudent and holding back on giving out numbers, or because the -- I guess just the better fiscal year 2008 over 2007 sort of leaves the range open for a wide range. I just want to see if there is any way to narrow that down.

David B. Wyshner

You know, we have really tried to get out of and stay out of the guidance business, at least with respect with specific numbers. And we are going to continue to try to do that.

With that being said, I think we have tried to be clear about what assumptions we are making for the year and that is the 3% to 5% rental day growth in the domestic business, the modest improvement only in pricing in that business, some significant growth in truck rental EBITDA, and growth in the international segment as well. So I think we are trying to point, you know, give people our views and make sure that they are directionally right. But we really think the advantage of doing that and only that is that we can spend time on calls like this and investor meetings focused on what is going on in the business in comparison to year over year, rather than spending a lot of time talking about changes versus our initial expectations, which is obviously the risk or the pitfall associated with earnings guidance.

Manav Patnaik - Lehman Brothers

Fair enough and finally I guess could you just give us a quick update on the [Kerry] limo and what progress you guys are making with them?

David B. Wyshner

Absolutely. The business continues to be performing generally in line with our expectations. We are seeing some economic issues in the March and April numbers there but nothing out of line with broader trends in the marketplace. I think the real issue is that strategically, the investment continues to be very attractive. The assumptions that we had going in that there could be significant cross-selling opportunities available to us is absolutely coming to bear and we are moving forward on delivering on that promise as we continue to work more and more closely with the Kerry folks and our sales force working more closely with theirs. So we are excited about the prospects and with that being said, our expectation for this year has been and continues to be that it won’t have a meaningful impact on our results, given the amount of leverage that exists on their business.

Manav Patnaik - Lehman Brothers

Great, thanks a lot, guys.


Our next question, William Truelove with UBS, you may ask your question.

William Truelove - UBS

I want to confirm something that you said on the call, just to be sure -- you said that the unit costs were going to be above your annual projections of the 4% to 6% in the second quarter, at the same time you are starting to see some price increases. Is that correct?

F. Robert Salerno

Yes, the issue on second quarter fleet cost increases is that we just face a difficult comp in the second quarter, combined with the seasonality of when different types of vehicles, particularly program versus risk vehicles, roll into our fleet.

William Truelove - UBS

Okay and the second question is about the ability to flex the fleet, given that everyone is now using more at-risk vehicles. Is it possible that we could see a lot of program cars just in the peak seasons that could produce pricing in the third quarter? That just seems to be a risk that keep thinking about, since everything depends on the peak season.

Ronald L. Nelson

No, I really don’t think so, unless something very, very strange happens, which we don’t foresee. The ability to get seasonal cars is really moving past us and the manufacturers just aren’t making them available. Especially, if you think about it, very short-term cars at that time of the model year, the pricing they’d have to charge on it would be, even if they were going to do it would be enormous. So no, I don’t think that’s going to happen at all and I think that’s why you see troughs now where people are holding on to cars and kind of growing in anticipation of the summer. And it’s also why I think you won’t see large summer fleets.

William Truelove - UBS

Okay, great. Thank you.


Our next question, Christina Woo with Morgan Stanley, you may ask your question.

Christina Woo - Morgan Stanley

The first question has to do with the interest rate hedge. You reported $31 million of EBITDA, which is suggested for the hedge costs, sort of then $44 million. With your EBITDA guidance, should we look at that $31 million for the first quarter or the $44 million?

David B. Wyshner

We were talking about that last night. When you are looking at year over year comparisons, how is first quarter ’08 versus first quarter ’07, we think adding it back makes sense. But when you are looking at building out the quarters for 2008 and how e think about our guidance, the negative impact in the first quarter reverses in other quarters, so it probably -- the right way to get the quarters to add up for the year is going to be to include the $13 million impact in the first quarter numbers so that --

Christina Woo - Morgan Stanley

You get all the benefit later on.

David B. Wyshner

-- in future quarters, gets you to the right total. Does that make sense?

Christina Woo - Morgan Stanley

It does, I just wanted to clarify that, so thank you. The second set of questions has to do with enplanements. I’m wondering what gives you the confidence that enplanements will actually be up year over year? And if there are any leading indicators that you track.

David B. Wyshner

We look at the same sorts of ATA and BTS statistics that come out, as well as what some of the airlines are saying. We saw a flat first quarter amid a significant amount of concerns about the macroeconomic environment and I think what we are looking at is the fact that it was flat, that enplanements were flat in what was thought to be a relatively weak time. And in that context, that is why we are hopeful that enplanements will turn out to be up modestly this year because the economy is expected to improve over the course of the year.

On top of that, we also have the advantage of increased inbound travel. The weak dollar is making it very attractive for folks to come to the U.S. and we expect that business, which is not part of the domestic enplanement figures, to provide a boost as well.

Christina Woo - Morgan Stanley

Okay. Somewhat related to that --

Ronald L. Nelson

You know, I would add to that -- look, I think if there is one thing that we do worry about, it’s going to be the enplanements, given what is going on with fuel prices. But I think you have to consider that it’s just -- it’s simply not that easy for airlines to take inventory out of their cycle and they are probably not going to take it out of their fleet over the course of the summer months and we have the advantage of being downstream from their more challenged ability to inventory out because what they will typically do is start to discount pricing to fill up the seats, notwithstanding whatever the fuel costs are. That tends to have an ameliorating impact on enplanements.

But as David said, I think we probably would have thought going into March that enplanements for the quarter were going to be down and actually they were actually flat for the quarter. And you couldn’t get any worse consumer confidence numbers than you had in the first quarter, so I think we are watching it and we are concerned about it but as I said, that combined with the shot in the arm from the rebate checks we think might well hold up travel over the summer.

Christina Woo - Morgan Stanley

Okay. Somewhat related to that, I’m wondering if you could talk about your flexibility in your fleet purchasing. I understand that you have flexibility to de-fleet and go to market, but if enplanements were to be flat or down, what sort of flexibility do you have in fleet purchasing? What lead times do you have to put your purchase orders in?

F. Robert Salerno

Fleet management, as I told you the last time we talked, is really half art and while I don’t think the way we’ll go at it, if volume is softening, clearly we’ll take down future purchases but at the beginning of a model year, you want to buy as much as you can because they are the cheapest cars of the model year. The way we would manage the fleet is with deletions and our fleet plans are built for the contingency.

Christina Woo - Morgan Stanley


Ronald L. Nelson

The other thing you might want to look at is if you go back actually even to the early 80s and look at the FAA statistics in enplanements, when enplanements are down during periods of weak economic activity, you are talking about 4% to 5%. You are not talking about 10%, 15%, or 20% on enplanements. And fluxing the fleet 4% to 5% for us, while it’s a number, it’s not a gigantic out of the ballpark number.

F. Robert Salerno

That’s right, Ron, because even if we don’t change our purchases at all, a 4% change in our fleet size translates into only half a month change in our average life -- average hold period.

Christina Woo - Morgan Stanley

Okay. Great, one last question on the share buy-backs -- you had done quite a bit of the share buy-back authorization during the first quarter. Might we expect greater than the $50 million authorization or are there certain limits as to how much a buy-back your board can authorize? Thanks.

Ronald L. Nelson

Well, I think we are always going to balance our buy-back in the context of our ratings, particularly in this environment where credit is up in the air. Our board has authorized $50 million at this juncture. We haven’t expended the full amount of the $50 million yet, so we will probably address that issue when we do exhaust the authorization that we --

Christina Woo - Morgan Stanley

Okay, thanks.


We only have time for one more question. Frank [Jarmin] with Goldman Sachs, you may ask your question.

Frank Jarmin - Goldman Sachs

Thanks, guys. Just a couple of questions on the ABS front -- you talked about the $1.9 billion of availability you have today. As I think about more specific items, I think you have a $600 million deal wrapped by [Fijic] and you have the $1.5 billion seasonal conduit rolling in October, which I believe is currently utilized by some of your ’08 term maturities. Can you just provide me a little more color on how you guys see these two events unfolding over the course of the this year?

David B. Wyshner

Sure. With respect to the conduit that rolls in October, our plan and our expectation is that we would roll the conduit at that point in time. Based on the discussions we’ve had with the conduit lenders, we do expect the cost in terms of the spread to LIBOR that we pay will increase upon the renewal there, but we don’t anticipate any issues with respect to the renewal and continuation of that funding, other than the increase in costs to reflect the current pricing of risk.

With respect to [Fijic] wrapped and other mono-line wrapped paper, we continue to look at that and are actively exploring opportunities that we have to mitigate any risks that we see associated with that. We’re just not in a position to talk more about the details there at this point in time.

Frank Jarmin - Goldman Sachs

Okay and then on the $300 million lease deal, can you give me a sense for what the pricing looked like on that particular deal?

David B. Wyshner

Sure. We expect the all-in pricing on that to be less than 6%.

Frank Jarmin - Goldman Sachs

Okay. That’s all I had. Thanks.


For closing remarks, the call is being turned back over to Mr. Ronald Nelson. Please go ahead, sir.

Ronald L. Nelson

Thank you. I want to thank you all for joining us today. If you’ve gotten a sense of cautious optimism from our discussion today, it is because we are satisfied with our current results and prospects, but only in the context of the environment that we are operating in. In an absolute sense, we still have a way to go. Our longer term margin target of 9% remains intact, as does our long-term growth rate range of 8% to 12% annually. Our core strategies are all aimed at these targets and remain very much on track. We think we are achieving success in creating new sources of revenue, optimizing our two strong brands, and capitalizing on profit opportunities.

The performance excellence process improvement initiative is delivering both cost savings and consumer benefits. We are continuing to grow high margin GPS and other ancillary revenues. We are getting growth in our Affinity relationships.

All of this, combined with our ability to generate free cash flow, will contribute meaningfully in 2008. In addition, our deep and experienced management team has a track record of having grown this business through all types of economic environments.

So thanks for joining today and I look forward to talking to all of you during the quarter or on our next call.


This concludes today’s conference. You may disconnect.

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