Dollar Thrifty Automotive Group, Inc. Q2 2008 Earnings Call Transcript

Dollar Thrifty Automotive Group, Inc. (DTG)

Q2 2008 Earnings Call

August 5, 2008 11:00 am ET

Executives

Todd Dallenbach – Executive Director of Investor Relations

Gary Paxton – President and Chief Executive Officer

Scott Thompson – Chief Financial Officer

Analysts

Christopher Agnew – Goldman Sachs

Michael Gallo – C.L. King & Associates

[Arie Briger] – Hillmark Capital

Michael Millman – Soleil Securities

Miguel Fidalgo – [Balpost Group]

Emily Shanks – Lehman Brothers

[Jordan Hidelwitz] – Philadelphia Financial

[John Healy] – FTN Midwest Securities

Presentation

Operator

Welcome to the Dollar Thrifty Automotive second quarter earnings conference call. (Operator Instructions) I would now like to turn the call over to your host today, Todd Dallenbach, Executive Director of Investor Relations.

Todd Dallenbach

Welcome to the Dollar Thrifty Automotive Group second quarter 2008 earnings release conference call. Your hosts for today’s call are Gary Paxton, President and Chief Executive Officer; and Scott Thompson, Chief Financial Officer.

Let me remind you that some of the comments contained in this conference call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed in forward-looking statements due to many factors. These factors include among others matters that we have noted in our latest earnings release and filings with the SEC. Dollars Thrifty Automotive Group undertakes no obligation to update or revise forward-looking statements.

Today, we will use certain non-GAAP financial measures, all of which are reconciled with GAAP numbers and can be found in our press release posted to our website. Listeners are advised that an audio replay of this conference call will be available via the corporate website, www.dtag.com for one year.

Now, I’d like to turn the call over to Gary Paxton.

Gary Paxton

The second quarter was a continued challenge for Dollar Thrifty. We experienced improving trends from Q1, but results came in below the expectations that we had going into the quarter. Demand and pricing were softer than we anticipated, and the vehicle depreciation expenses were above our expectations. The combination of these factors resulted in a loss for the quarter. On a non-GAAP basis, the loss was $0.23 per share compared to a profit of $0.36 per share in last year’s second quarter. Corporate EBIDTA during the quarter was a positive $2.7 million and on a trailing four quarter totaled $50.4 million.

I want to focus my comments this morning on five key areas: Consumer demand and pricing, fleet, our ongoing cost control efforts, our revenue initiatives, and our liquidity position.

First, regarding consumer demand and pricing. As I mentioned, we saw softness in both demand and pricing in the quarter relative to our expectations. According to the Air Transport Association, domestic enplanements were down approximately 5% in the second quarter compared to last year. Some of this decline and the resulting softness in demand was no doubt linked to sluggish economic conditions impacting consumers. That said, our total rental day volume for the second quarter of 2008 was basically flat with last year’s second quarter, and we saw limited decline in pricing of a little over 1% on a year-over-year basis. This could imply that our airport market share is growing as consumers shift towards value in this economic environment.

Let me turn next to fleet, and I’ll start with vehicle depreciation costs. On a per car basis, vehicle depreciation expense increased about 28% in this year’s second quarter over last year. This was above our prior expectations, primarily related to a softer used car market than we had originally anticipated. We delivered on our promise to run a tighter fleet this year as indicated by the 4.4% decrease in average rental fleet for the second quarter. This of course is more than simply running a smaller fleet year-over-year, as it is a part of a greater effort to run a more efficient fleet across all of our locations. The success of that effort is measured in part by a strong utilization rate. Vehicle utilization was a record 85.7% in this year’s second quarter, an increase of 3.6 percentage points over last year’s second quarter. We continued with the implementation of our Pros Fleet Optimization software, and we’re very pleased with the output of the system and the direction that it is taking us. Key recommendations have included adding more non-program cars to the fleet and lengthening the average holding periods. We believe that the considerable actions we have taken in this area during the first half of the year will show benefits in the vehicle depreciation line item in the income statement as the year progresses, even though in the short-term there’s been some additional expense due to the dynamics of the used car market. As you know, another important aspect of fleet management is our relationship with Chrysler. We continue to work closely with them and other OEMs on the terms of the 2009 model year fleet buy, and I expect that we’ll have more to report on that in our Q3 call. I’d like to note that Chrysler Financial notified us that it will not renew its $150 million line of credit with us; and as a result, the line will begin to amortize in September 2008. As Scott will discuss, we do not believe this will unduly impact our vehicle financing capacity or planning in 2009. I also want to underscore that it does not reflect any negative change in the business relationship between our companies. It’s more about Chrysler’s own efforts in dealing with today’s credit markets. It’s important to note that we’re continuing our aggressive efforts toward fleet supplier diversification by expanding our relationships with other manufacturers and establishing new relationships. Our efforts to diversify supply fit will with Chrysler’s strategy to sell fewer cars to the rental car industry.

Moving on to our cost control efforts: Given the uncertainties in the marketplace today, we continue to maintain absolute focus on those areas that we can control or influence. We’ve already rolled substantial non-fleet cost savings this year into our full year forecast. This is related to cost actions that we took this year to help mitigate the impact of a slowing economy and higher vehicle costs. While we have always strived to be a low cost provider, we continue to find even more creative ways to improve our business model to make it more efficient. Helping with that effort is our launch of Lean Six Sigma which provides us a proven methodology to address our initiatives of growing profitable revenue while being a low cost provider.

On the revenue side of the business, let me assure that we also continue to have our eye on our customers and on maximizing our revenue potential with them. We continue to make strides in many of the initiatives that we’ve discussed previously. We maintain our focus on being the leader in the Internet reservation area. Our re-launch of Thrifty.com for the fall of this year is on schedule, and we’re excited about sharing that with our customers. In addition, we have recently announced that our Thrifty brand has joined Dollar in the Southwest Airlines Rapid Rewards Program in mid July, and as of August 1^st is now a preferred supplier to Expedia along with our Dollar brand. These two actions expand our presence in these two very important marketing channels. Our efforts to expand our strong relationships with inbound international tour operators, especially at a time when the value of the U.S. dollar relative to other currencies make the U.S. a travel bargain are ongoing. We continue to show very positive growth for the year with rental days coming from this segment up in the mid teens for the six months of the year. Our initiative to focus on attracting value minded small to medium sized corporate accounts continue to gain momentum. In spite of a travel slowdown for many companies, our contracted corporate business was up approximately 10%. We’re finding companies very receptive to a value alternative to meet their car rental needs as they try to keep their travel costs in check. Finally, our Customer-Driven Experience Pilot Program in Houston that we launched in April continues to impress us. The feedback that we’ve received has been encouraging, and we’re looking forward to rolling out to the top 25 volume locations on a schedule a bit later than the end of this year as we had indicated earlier.

Finally, we took positive steps during the quarter to enhance our liquidity and financial flexibility. I think there’s a fair degree of confusion about this, so we’ll be spending more time than usual on the balance sheet topics today. Let me point out first and foremost that we are now through our peak fleet financing season and had more than enough financing capacity during this period. Second, we continue to have substantial corporate liquidity available to us through a combination of unrestricted cash, excess cash enhancement in our vehicle financing, and unused revolver capacity. Third, we remain in compliance with all debt covenants.

Scott Thompson, our Chief Financial Officer, is going to spend more time on these issues in just a few minutes. Scott has been a valuable asset to us during his first two months at DTG, and we’re pleased to have him as a member of our team.

Looking at the balance of 2008, we expect that our operating environment will remain challenged. It remains to be seen exactly how and to what extent the economy will continue to impact demand and pricing and, as you know, visibility in our industry is rather limited. It’s important to remember that we do have the ability to adjust our fleet capacity, both up and down, within a relatively short period of time and therefore the flexibility to adjust to changes in the operating environment. For us, we do expect to see further improvement in fleet management as we increase the number of non-programmed units in the fleet, lengthen the holds on vehicles, and more fully utilize our fleet management software. We will continue our efforts to achieve improvements in revenue diversification, fleet utilization, productivity, and cost control. The benefits of all of these initiatives should positively impact our performance. In today’s operating environment, our focus is on making responsible business decisions geared toward the long-term interest of shareholders and maximizing cash flow.

With that, let me turn it over to Scott Thompson.

Scott Thompson

To our investors this morning on the call, thank you for your attention and support. I’m going to talk to you about key items effecting our income statement and then discuss the Company’s financing capacity and liquidity in detail.

Let me start by underscoring three key points about the quarter. First, the decline in profitability was due to a decline in vehicle rental revenue of 1.6% combined with a 20.8% increase in vehicle depreciation expense. Although we successfully reduced SG&A expense, adjusted for mark-to-market of certain benefit plans by 8.5 million or 13.2%, we were unable to absorb these increases in vehicle depreciation in a negative pricing environment. Second, despite this unacceptable performance, corporate EBITDA is a positive $2.7 million in the quarter and on a trailing four quarter basis is $50.4 million, which is a level sufficient to comply with all of our debt covenants. Third, during the quarter, we took actions to enhance our financial flexibility, including reducing our $50 million capital budget by 50% amending the covenant on our senior secured debt that relates to a monoline event and reducing our senior leverage ratio to below returns.

Now let me go through the detail. Please turn to Table 1 in the press release. Total revenues for the second quarter 2008 were $445.7 million, down 1.3% as compared to the second quarter of last year. Vehicle rental revenue decreased 1.6%. This was due primarily to a decrease in revenues per day, which was down 1.3% and a decrease of 30 basis points in the number of rental days. We continue to realize positive revenue growth in tour revenue which is being offset by a decline in retail revenue, which is being offset by a decline in retail revenue. As Gary mentioned, we experienced very favorable fleet utilization as we more tightly managed the fleet. Fleet utilization during the second quarter was up 360 basis points to 85.7%. Average rental fleet decreased 4.4%. We expect this favorable trend to continue.

Now let’s turn to the expense side of the income statement. Direct and vehicle and operating expenses, DVO, was $224.2 million, down $1.3 million or 60 basis points in the same period last year. Gasoline expense increased $2.3 million in the quarter, which offset other positive expense reductions in DVO. Increased cost in gasoline is generally fully recovered from the customer and accounted for in revenue. Vehicle depreciation expense was $146.6 million, up approximately $25 million or 20.8% for the same period last year. This was driven by a monthly average depreciation cost per care of $369, an increase of 28.1%. The impact on our income statement was somewhat mitigated by a 4.4% decrease in average rental fleet. This significant increase was above the Company’s original expectation due to increased appreciation adjustments taken relative to a weak used car market and reduced gain and remarketing of our risk vehicles. In the second quarter of 2008, we realized gains of approximately $600,000 on remarketing our risk vehicles. This compares to gains of $12 million for the same period last year.

The used car market continues to be volatile as customers preferences are changing and supply demand factors are not imbalanced for some models. We are observing what you would expect, residual curves declining on large vehicles and increasing but at a slower rate on fuel efficient vehicles. My point is: We expect volatility in used car market until the supply and demand within [inaudible] stabilizes. I should note at quarter end, about 60% of our fleet is risk and only 4.9% of our risk fleet is full sized SUV.

SG&A expenses represented 12.3% of revenue for the quarter, down from 13.3% for the same period last year. As we have discussed before, the change in market value of assets and deferred compensation retirement plan impact the SG&A line with an offset in other revenue, resulting in no impact on our pre-tax. The change in market value related to these plans this quarter was a positive $3.5 million. Excluding the impact of the change of market in these plans, SG&A expense declined $8.5 million or 13.2% the same period last year. The improvement reflects our effort to increase productivity at the corporate level. Interest expense during the quarter was $29.7 million, up slightly from $29 million for the same period last year. Weighted average interest on vehicle debt outstanding at June 30^th was 4.8%, and our rate on our non-vehicle debt was 4.5%.

Please turn to Table 3 of the press release. GAAP earnings per share for the second quarter was a profit for $0.49 versus $0.63 per share for the same period last year, a decline of approximately 22%. As you can see, the Company realized significant benefits from the increase in the fair value of its interest rate swap arrangement as interest rates increased as compared to the first quarter of 2008. Non-GAAP earnings per share was a loss of $0.23 as compared to a profit of $0.36 per share for the same period last year. As most of you know, non-GAAP earnings per share does not include the change in fair value of the Company’s interest rate swap.

Moving on to key balance sheet items on Table 2 of the press release: Revenue earning vehicles net of deprecation totaled $2.6 billion, down 18% from the same period last year as we extended fleet, focused on utilization, and operated fewer program vehicles. Vehicle-related debt declined significantly to $2.3 billion, reflecting our current fleeting strategy. Non-vehicle corporate debt totaled $188 million, declining $62 million or 25% as we lowered our debt to tangible capitalization. At June 30^th, about 60% of our debt outstanding was fixed rate, continuing our past practice of hedging the majority of our debt against fluctuation and short-term interest rate. During the second quarter of 2008, we spent $8 million on non-vehicle capital investment. As I mentioned earlier, we have significantly reduced our 2008 capital budget and now expect it will total approximately $25 million for all of 2008 with about 40% of that to be spent in the back half of the year.

Turning to liquidity at our quarter end: Cash and cash equivalents were $80 million, down $56 million from the end of first quarter, primarily due to voluntary prepayment on our senior secured debt, which I’ll discuss in just a minute. Restricted cash and investments totaled $252 million and are primarily restricted to acquire vehicles. In addition to the $80 million of unrestricted cash, we also had about $60 million in excess cash enhancements in our vehicle financing program. Lastly, we have approximately $180 million of unused letter of credit capacity in our revolving line of credit. As you know at the beginning of the quarter, we had $248 million of outstanding under our term loan. Currently the required leverage ratio on that debt is 3.5 times trailing fourth quarter corporate EBITDA.

Under our leverage test, we receive an offset for up to $50 million of unrestricted cash against the level of the senior secured debt outstanding. So for leverage test purposes, we began the quarter with $198 million of net debt. That’s the $248 million outstanding less the $50 million credit and thus we needed approximately $57 million of trailing fourth quarter EBITDA to comply with the test. As you know, the Company had a supply delivery problem that materially impacted operating performance in the fourth quarter of 2007 and the first quarter of 2008. This combined with our recent soft second quarter made the leverage test a potential issue.

During the quarter, we decided to use some of our excess liquidity to purchase $60 million of our senior secured debt. This payment reduced the level of our senior secured debt outstanding to $188 million at the end of the quarter, then adjusting it for the $50 million offset credit for unrestricted cash in the quarter with $138 million net debt for leverage test purposes. At June 30, 2008, our trailing fourth quarter EBITDA was $50.4 million resulting in a favorable 2.7 ratio versus the required 3.5.

I know want to address the actions that we took to mitigate potentially negative impact on our liquidity and vehicle financing capacity if the monolines were to experience a bankruptcy or insolvency event as defined in our debt agreements. On July 9^th, we entered into amendment to our senior secured credit facility to give us additional flexibility if we were forced to deal with a monoline event. To be clear, this would be an event outside of the Company’s control and would have nothing to do with the Company’s operation for financial [inaudible]. In return for some new liquidity convents, the amendment allowed us to avoid a cross default in the event of an insolvency of one of the monolines, thus allowing us to manage our fleet financing over time.

I also want to discuss two other issues impacting vehicle financing capacity. As Gary noted, Chrysler Financial, as they adjust their capital structure, notified us that they do not intend to renew their $150 million of credit with us. This line will begin to amortize in September 2008 over a 14-month period as the underlying vehicles are sold in the ordinary course of business. In addition, we have received indications that $150 million line of credit will probably not be renewed and also will begin to amortize September 2008 over a 12-month period. The combined lines represent just 13% of our $2.3 billion vehicle financing at June 30^th. Consistent with our normal practice, discussions are underway with other financial institutions and OEMs to replace part or the entire 300 million vehicle financing capacity. I would like to point out that at June 30^th we had access fleet financing capacity of approximately $300 million. Our intention as you know is to run the fleet tight with the longer hold period with more risk vehicles. All three of these factors combined with a less robust operating environment reduced the need for vehicle financing. Overall, the Company continues to monitor developments and credit and capital markets. Based on current facts and circumstances, including everything I just reported, we believe we have sufficient financing capacity to operate our business normally.

Turning to outlook for the remainder of 2008: Given the lack of visibility in the current operating environment, we’re not going to provide specific guidance on non-GAAP earnings or corporate EBITDA. On an ongoing basis, it’s our intention to continue to fully discuss and provide perspective on management’s operating strategy, the business model, and current market trends. We now expect the vehicle rental revenue to be down 1% to 2% for the full year. We estimate the vehicle depreciation cost on a per vehicle basis will be approximately 15% higher for the full year 2008 compared to 2007. This is assuming no disruption in vehicle deliveries from our suppliers and a stable used car market.

That concludes our prepared remarks.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Chris Agnew of Goldman Sachs.

Christopher Agnew – Goldman Sachs

Just touching on what you recently just said about rent revenues down 1% to 2% for the full year, I mean I think recently back in June you were talking about promising advanced reservations for the peak summer travel. Given your running together fleet is the full year expectation you’ve just given more driven by the first half of the year, and how does it play out with what you’re currently seeing?

Gary Paxton

I think you can look at our first half of the year performance that we’ve already reported on those trends and if you look at the first half, what are we down now?

Scott Thompson

We’re down 1.3% in total revenues in the first six months.

Gary Paxton

First six months, so we’re looking for the back half to be pretty consistent with the front half.

Scott Thompson

It’d just give you maybe a little more detail on that. I think if you’re looking at the third quarter, we would expect it to be solid and similar to last year and we’re probably anticipating and are anticipating some weakness in the fourth quarter that would bring that average more in line with 1% to 2% down.

Operator

Our next question comes from Michael Gallo of CL King.

Michael Gallo – C.L. King & Associates

I wanted to discuss the depreciation cost, obviously up 28% in the quarter. The guidance implies, I think it was 15% or so up the year, which implies flat in the back half. Given that the year throughout the year has been much, it’s kind of been much higher than you expect and certainly the use car market doesn’t look it’s gotten any better. What gives you the optimization that the second half of the year that there’s going to be such a significant improvement on a deprecation for vehicle basis? Is it something that you’re seeing change? Is it that you trued up a lot of the depreciation already or just help us as to why it looked the second half of the year would be somewhat flattish.

Scott Thompson

Okay, let me give you a little more granular information on that. Our perspective is that we would expect it to be for the year up 15%. We would expect in the third quarter, we probably will continue to have some inflation or negative trend on depreciation and we would expect the benefit coming through in the fourth quarter. Now your question is: Well why do we think that? If you remember last year, we held the GDP card, which are the more expensive cars, in the fourth quarter longer than we traditionally would. That would be one factor which is making us feel confident about the fourth quarter fleet cost. The second is the extension of the fleet will receive most of the benefit in the fourth quarter, that would be the second part of the benefit, and I think we’ve gotten a little more intelligent about our buys from our newly formed business intelligence group and I think we’re buying vehicles a little more prudently than we might have in the past.

The main driver to the problem in the cost has been the movement of the residual curves and to the extent we have stable residual curves, we should be able to handle those costs. We had to have some catch-up in the depreciation expenses in the first quarter and the second quarter and that we started out those depreciation expenses a little light compared to where the residual curves ended up for the model ’08 year.

Operator

Our next question comes from Arie Briger of Hillmark.

Arie Briger – Hillmark Capital

I have a couple of quick questions. One, the $60 million in excess cash enhancement, is that part of the restricted cash line item?

Scott Thompson

No. Well, excuse me, it is part of that line item. But I think if you’re looking for the way we look at our liquidity, I would take the unrestricted cash of $80, I would add $60 to it, which is the money that come out of the securitization to the corporation, and I would come up with $140 million in excess cash. But obviously I have to have money to run the business and that would $50 million. So I think the number you’re probably trying to get to is $90 million of excess cash that could be used to pay down debt or other things in your analysis.

Arie Briger – Hillmark Capital

The $60 million, if there’s a decline in residual values in your existing securitizations, can that be…

Scott Thompson

The $60 million has been computed in a very conservative fashion and we could receive that money next week if we wanted to or we could leave it in a secured fashion. It could be a larger number depending on the future and the size fleet that we have to run. But the $60 million is a good solid conservative number.

Arie Briger – Hillmark Capital

The conduit that you renewed, what was the size of that again?

Scott Thompson

Around $500 million. Let me see if I got the exact, $492.

Arie Briger – Hillmark Capital

Is there any circumstances under which that could be terminated over the next 364 days?

Scott Thompson

Any?

Arie Briger – Hillmark Capital

Any reasonable?

Scott Thompson

The total is $493 million. It’s a typical loan agreement that has covenants and requirements. As you might guess, we have gone through all of our debt agreement in detail looking for issues that we might face and we think we have addressed all of the issues that we see on the horizon.

Arie Briger – Hillmark Capital

Last quick question: What is your minimum required purchase from Chrysler Automotive for your fleet? Do you have to buy a certain percentage of your fleet from them, correct?

Gary Paxton

Our supply agreement requires us to purchase 75% and any model year purchases from Chrysler with no minimum number.

Operator

Our next question comes from Michael Millman of Soleil Securities.

Michael Millman – Soleil Securities

I guess regarding Chrysler, what we hear is that their used car prices continue to be weak and so maybe you can address what you’re seeing currently and why you’re assuming that those prices will stabilize going forward? Also, could you talk about what happens if Chrysler should be bankrupt, how that affects actually your ability to operate and maybe in what conditions can you get out from under Chrysler, if you have any alternatives? On the marketing side, maybe you can talk about what you see; for example, Hawaii is a very important market and we understand that that’s weakened. On the tours, if you’re getting any pushback by concerns about all the news that’s been floating around about financing and about Chrysler. Thank you.

Scott Thompson

When you took your opportunity for one question and got four out of it and I’ll try to take the easy ones and give the hard ones to Gary. Let me talk about residual curves in general. If you were to look at the Aspen residual curve, which is a large Chrysler vehicle that doesn’t get very good gas mileage, outstanding product but in the current environment not as popular as it used to be. You would see that a 50% drop in the residual curve and that’s one of the things we’re having to absorb from an accounting standpoint. But at the same time, if you were to go look at a car that gets better gas mileage like the Avenger, you would see that it actually has gone up in price like 9%. So what you’re seeing in the used market is a supply and demand imbalance primarily related to gas mileage vehicles. It’s customer’s preferences have changed quickly. Before about end of June, all we saw were decreases for what I call the heavy metal cars that don’t get very good gas mileage and really were not seeing increases in the light metals, the more fuel efficient cars. We have begun to see increases in the prices on the fuel efficient cars. We think that will be beneficial for us in the future.

Related to Chrysler, our relationship with Chrysler has been a very good one long-term, and we would expect to continue to be. Our concentration is disclosed clearly in our 10-K and in fact we have enhanced some of the disclosure on the 10-Q that we filed after lunch.

Gary Paxton

Regarding the affects of the Chrysler bankruptcy, that question you touched on, I’m not going to speculate a) if that occurred what type of filing that would be and what agreements that we would choose to honor and which agreements they’d choose to reject. There’s a lot of different variations as you can well imagine there that we thought through. There’s a lot of different outcomes from those different variations, so it’s pure speculation what would happen to us. We really wouldn’t know until we saw the full deck of cards, if you will. I will say we’re encouraged by Chrysler credit’s ability to renew to get $24 billion of financing here this week that they announced. I don’t believe that the residual value of Chrysler products is impacted nearly as much by the consumer’s concern about Chrysler’s financial health as it is about the miles per gallon issue that all of the manufacturers are facing. I think that’s the critical issue in front of the consumer is gas is $4, how many miles per galloon am I going to get, and I’m going to buy a car that’s got high MPG. Did I miss any?

Scott Thompson

I think the only other question he had was directed towards Hawaii and I guess what say on Hawaii, it’s clearly been soft, but San Francisco’s been very good and all that has been baked into our perspective when you gave the 1% to 2% down revenue number for the balance of the year.

Gary Paxton

As regards to Hawaii, as I think you all know, we had two airlines go bankrupt in Hawaii this year. They are fewer seats servicing Hawaii and the cost of flying to Hawaii has gone up and Hawaii’s number one market is California which has been pretty heavily impacted by the mortgage crisis. So there’s a lot of things working against Hawaii, but we have adjusted our fleet. We have outstanding utilization in Hawaii here in the second quarter as you see for our total utilization. We’ve been able to make the adjustments and we’ve got Hawaii rebalanced but at a lower level as I believe the entire industry does.

Operator

Our next question comes from Miguel Fidalgo of Balpost Group.

Miguel Fidalgo – [Balpost Group]

A couple questions if I may. The first one is the $300 million in excess vehicle funding capacity, could you break that down for me?

Scott Thompson

In what format would you like it broken down in?

Miguel Fidalgo – [Balpost Group]

For example, as it’s still available in your conduit X million, capacity still available in your CP Program Y million, et cetera.

Scott Thompson

In the Commercial Paper Program call it $100 million of capacity. In the vehicle floor plan debt arrangements call it $60 million. In the Canada floor plan facility call it $130 million.

Miguel Fidalgo – [Balpost Group]

The Canada floor plan facility can only be used for Canadian vehicles correct?

Scott Thompson

Correct.

Operator

Our next question comes from Emily Shanks of Lehman Brothers.

Emily Shanks – Lehman Brothers

I was hoping you could just give a little bit more clarity around your commentary around Daimler essentially terminating those lines, if you could just recap the amount, confirm that that in fact is under your line item other vehicle debt described in your filing. Then just comment if that also is going to relate to the existing program vehicle relationship that you have that are funded under your ADS debt, in other words will you continue to be able to put those vehicles back to Daimler over next year?

Scott Thompson

I think I can handle 75% of that. Chrysler Financial line is included in the other vehicle financing debt. It’s total balance is $150 million. Starting 2008 we will amortize that line in the normal course of business as vehicles are sold. I’m not sure I fully understood your last part of your question.

Gary Paxton

I think I understand it. I think the question was will we continue in the ’09 model year to have been with the Chrysler GDP Program in our asset back line and the answer is yes.

Scott Thompson

Yes, those two have nothing to do with each other.

Gary Paxton

The Chrysler line or lack of line is totally disconnected from the ABS line.

Scott Thompson

Or the GDP Program.

Operator

Jordan Hidelwitz from Philadelphia Financial, your line is open.

Jordan Hidelwitz – Philadelphia Financial

You said that program cars are 60% at this point.

Gary Paxton

For risk cars are 60%.

Scott Thompson

Risk cars right now are about 60%.

Jordan Hidelwitz – Philadelphia Financial

Are you required… Let me ask the question differently. Because of the slowdown in the Chrysler, are they questioning you to take even more risk cars versus program cars? So if you wanted to, could you dramatically increase the percent of program cars you wanted to?

Gary Paxton

We could if we wanted to. We frankly have the fleet balance that and the fleet orders in that we think are best for the Company to operate it and our orders for ’09 are not, our plan for ’09 is not negatively impacted by any requirements or restrictions within the supply agreement.

Operator

Our next question comes from John Healy FTN Midwest Securities.

John Healy – FTN Midwest Securities

Big picture question in terms of market conditions and what you see in the past downturns. Gary, I was hoping to get your thoughts in past slowdowns, how you’ve seen leisure in commercial reservation track? Does one group over the other have a tendency to lag into a slowdown and how do they kind of come out of the slowdown? Then my second question was just on the pricing environment, if you could give some color on how you saw pricing track throughout the quarter.

Gary Paxton

Generally leisure is slower to react to economic pressures and individuals generally continue their travel plans. They still have birthdays and anniversaries and family reunions and graduations and weddings and all of those things and funerals and all those things going on in life that cause us to travel and vacations. American consumers are pretty protective of their vacations. They may adjust their vacation plan somewhat, but they generally take them. On the other side of the column, on the commercial traveler is much more controlled and, as you would imagine, a chief financial officer can reduce the travel budget by 50% for a corporation literally overnight and restrict travel. So we generally see commercial accounts, which we’re not a big player, first reduce their volume of travel and we generally see leisure reduce at much slower pace.

Having said that, we also see in our sector, we also see a benefit of people trading down, if you will, seeking value willing to compromise somewhat on the expressed services and some of the other services that they may receive in order to trade down in cost and get a better value per car rental. So we see a little bit of benefit offsetting that.

Operator

Our next question comes from Chris Agnew of Goldman Sachs.

Christopher Agnew – Goldman Sachs

One question here: Your fleet was down on average 4.5% for the quarter, but was it down by more at the quarter end? If I look at your balance sheet, the net vehicle value was down by a lot more, or maybe you could explain that. Was that more of the mix to risk vehicles? I promise is the same question. Were you expecting… Or by the end of the year, for example, would you expect your overall fleet level to be down by more than 4.5% on a year-over-year basis? Thanks.

Scott Thompson

If you look at 6/30/07 fleet, the average per car cost is $19,500. If you look at the ’08 fleet, that is $17,500. So we’ve had a significant decrease in the average cost of the car and that has to do with the holding the fleet longer and moving away from the GDP and moving to risk units. As for year-end, I imagine that’s going to be dependent based on the volume of business in the fourth quarter and our perspective on what we see going into ’09.

Operator

Our next question comes from Michael Gallo of CL King.

Michael Gallo – C.L. King & Associates

Just wanted to add a question on Canada, I know obviously it’s been a problematic area for you for some time, I was wondering if you could tell us what the loss in Canada was for the quarter? Can you give us any update on what your plans are for Canada in terms of fixing it, disposing of it, or getting it more profitable, or lowering the losses, et cetera?

Gary Paxton

Mike, our losses in Canada for the second quarter were about the same as last year, about $1.3 million but very similar to last year’s second quarter. So we’ve slowed the rate of loss there substantially from what it was in the fourth quarter of ’07 and the first quarter of ’08, and that’s kind of consistent with what you’ve seen in our U.S. operations also. We’ve taken many actions in Canada to reduce our expenses, many fleeting actions, personnel actions, closed a lot of stores that were either marginal producers or under producing, so we are taking actions to turn that situation around. We have a business plan on my desk that says we can actually achieve a breakeven in Canada next year. I’m a little skeptical about that, but we’re pushing hard to get that back to a breakeven or profitable situation. As far as any efforts to dispose of it, it’s not an easy disposal situation in carving out Canada out of our total operations. But we’ll continue to adjust it and tweak it wherever we can to bring it into profitability as rapidly as we can.

Operator

Our next question comes from Miguel Fidalgo of Balpost Group.

Miguel Fidalgo – [Balpost Group]

The 129,000 vehicles that you had in the quarter, what was the average reduction of residual value that you saw for those?

Scott Thompson

I don’t know. I don’t think we look at that way. The average reduction in residual value?

Gary Paxton

Are you talking about because of the used car market residuals falling?

Miguel Fidalgo – [Balpost Group]

Correct. So you mentioned specific models, so what happened to the Aspen and the Avenger and so on.

Gary Paxton

You have to take the 129,000 cars in the fleet and subtract out the GDP units, which aren’t impacted, don’t impact our P&L.

Miguel Fidalgo – [Balpost Group]

Right, so if you take the 60% that is at risk, we’ll do it on that basis, just what would be the percent decrease in residual you experienced in the quarter?

Scott Thompson

I’m sure it’s just the way we look at it. The car by definition is going to go down in value just naturally off the residual curve, so mathematically I think what you’re asking is how much did the residual curve shift down?

Miguel Fidalgo – [Balpost Group]

Correct.

Scott Thompson

I don’t know that number. We look at it on a model by model basis every month and we never aggregate them altogether. But in general, anything that had poor gas mileage went down 10% plus shift in the curve, and this is just off the top of my head so don’t hold me to it, and up through June the vehicles that get pretty good gas mileage were on what I call their natural residual curve. I think what I was telling you before was what we’ve begun to see is that the cars that get good gas mileage that they’re residual curve, their natural residual curve have actually begin to shift up slightly, if that helps. I’m sorry I don’t have the number you’re exactly asking for.

Operator

Our next question comes from Michael Millman of Soleil Securities.

Michael Millman – Soleil Securities

Just following up on that question, what you show is the value of the cars on the balance sheet I presume is taking into account depreciation so it kind of mark-to-market. Secondly, can you talk about how prices were in July and demand in July and what you’re seeing in August for prices and volume?

Scott Thompson

You’re right about the vehicles that are on the balance sheet are at the depreciated accounting value.

Gary Paxton

Michael, July has been a better month than the second quarter. We’ve seen fairly decent demand in July and pricing has been, I wouldn’t call robust, but I would call it relatively firm. We believe that all of the competitors in this industry have got their fleets in balance with demand and we’re seeing some pretty rational supply demand in pricing factors play out in July. We saw that in July. July was okay. August builds look like it’s a continuation of July.

Operator

Our final question comes from Emily Shanks of Lehman Brothers.

Emily Shanks – Lehman Brothers

As it relates to may question around program vehicles, specifically I wanted to know as you’re conducting model year 2009 discussion, are you seeing Daimler and can you comment as well on other OEMs that you may be utilizing in effect they will be providing your program vehicles for next year.

Scott Thompson

Without question.

Gary Paxton

Without question Chrysler is providing program vehicles as are other manufacturers.

Emily Shanks – Lehman Brothers

Is that amount down on a year-over-year basis?

Gary Paxton

With Chrysler we’re down but that’s our choice, and it seems relatively stable with the other manufacturers.

Operator

I’d like to turn the call back over to you, Gary Paxton.

Gary Paxton

Thank you all for joining our call this morning. As you know, we had our challenges in the second quarter and the balance of the year looks less robust that we had originally forecasted. We continue to focus on the items in our business that we can control such as maximizing revenue per day, vehicle utilization, cost reduction, and service delivery. Our focus in today’s tough economic environment is on executing every day, every market with every consumer. Thank you for your time today.

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