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Hertz Global Holdings Inc. (NYSE:HTZ)

Q2 2008 Earnings Call

August 8, 2008 10:00 am ET

Executives

Lauren Babus - Investor Relations

Mark Frissora - Chairman and CEO

Elyse Douglas - CFO

Joe Nothwang - EVP and President, Vehicle Rental and Leasing, The Americas and Pacific

Michel Taride - EVP and President, Hertz Europe Limited

Gerry Plescia - EVP and President of Hertz

Analysts

Chris Agnew - Goldman Sachs

Rich Kwas - Wachovia

Michael Millman - Soleil-Millman Research

Michelle Ko - UBS

Emily Shanks - Lehmann Brothers

Declan Carlin - BlueBay

John Sykes - Nomura

Mike Lanier - AIG

Yoma Abibi - JPMorgan

Operator

Welcome to Hertz Global Holdings second quarter 2008 Earnings Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and -answer session. Instructions will be given at that time. (Operator instructions).

The company has asked me to remind you that certain statements made on this call contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of performance, and by their nature are subject to inherent uncertainties. Actual results may differ materially. Any forward-looking information relayed on this call. Any forward information relayed on this call speaks only as of this date, and the company undertakes no obligation to update that information to reflect changed circumstances.

Additional information concerning these statements is contained in the company's press release regarding its second quarter results issued yesterday and in the Risk Factors and Forward-looking Statements Section of the Company's 2007, Form 10-K and its Form 10-Q for the three months ended March 31, 2008. Copies of these filings are available from the SEC, the Hertz website, or the company's Investor Relations Department. I also want to remind you that this call is being recorded by the company.

I would now like to turn the conference over to our host, Ms. Lauren Babus. Please go ahead.

Lauren Babus

Thank you. Good morning, and welcome to welcome to Hertz Global Holdings second quarter 2008 conference call. You should all have our press release and associated financial information. We have also provided slides to accompany this conference call. You can access these documents at www.Hertz.com/investorrelations. The slides can be accessed using the webcast presentation link.

In a minute, I will turn the call over to Mark Frissora, Hertz' Chairman and CEO. Also speaking today is Elyse Douglas, Hertz' Chief Financial Officer. In addition, we have Joe Nothwang, Executive Vice President and President, Vehicle Rental and Leasing, The Americas and Pacific, Michel Taride, Executive Vice President and President Hertz Europe, Limited, and Gerry Plescia, Executive Vice President and President of Hertz, with us for the Q&A session.

Today, we will use certain non-GAAP financial measures, all of which are reconciled with GAAP numbers in our press release which is posted on our website. We believe that our profitability and performance is better demonstrated using these non-GAAP metrics. Our call today focuses on Hertz Global Holdings, the publicly traded company. Results for the Hertz Corporation differed only slightly, as explained in our press release.

And, now, I'll turn the call over to Mark Frissora.

Mark Frissora

Thanks, Lauren, and good morning, everyone, and thanks for joining us today.

Lets start if can with slide no. 5. Second quarter was indeed a challenging one for the rental industry. We have a difficult economic environment as evidenced by lackluster GDP growth and lower consumer confidence. These trends have particularly impacted companies related to consumer products and services.

In spite of the economic factors, we were once again able to deliver a solid performance on an adjusted basis in line with our second quarter 2007 results. We achieved record second quarter revenues of $2.3 billion, a 4.6% increase. We maintained a very strong focus on cost control and efficiency as well as cash management, which enabled us to offset the industry-wide softer volume and pricing pressures experienced in the quarter.

We began this process in September 2006 and since that time we have decreased headcount by over 11%, with both the US and international operations showing double-digit reductions. We continue to delay our operating structure, streamlined organizational decision making and centralized processes globally in our centers of expertise. This is an ongoing process. We are constantly reviewing our operations for further opportunities to improve our efficiency.

I would like to bring to your attention several major accomplishments we achieved during the second quarter. In the period we had strong levered cash flow; that is levered after tax cash flow, after fleet growth of $305 billion, driven by corporate EBITDA improvement, reduced corporate investment in fleet, [for equipment] rental and car rental.

This is an important lever for us as volumes come under pressure we can dispose a fleet, especially in car rental and generate cash. Unlike airlines and hotels we don't have to warehouse unused revenue generating assets. Also this quarter we were able to maximize car rental fleet debt, which results in interest savings and reduces net corporate debt.

A second highlight was the performance of US car rental, our largest operation, which made significant headwinds this past quarter. The US Rent-a-Car team executed on cost efficiencies, which improve the adjusted pretax margin by 100 basis points, year-over-year, and delivered double digit adjusted pretax income growth. And that's brought the decline in both transaction days and pricing for the quarter.

In fourth quarter 2007 we started experiencing volume pressure and the Rent-a-Car team took immediate corrective action, the benefit of which we realized in this past quarter.

One of our biggest accomplishments this quarter relates to fleet costs in US car rental. We achieved a reduction of 2.3% in depreciation per unit. We also reduced average fleet by 3.1%, which resulted in 70 basis point increase in fleet efficiency. We continue to believe that these improvements will be sustainable.

In Europe we are still expecting double digit fleet cost increases but managing our fleet mix and improving fleet rotation. We expect to reduce the impact of this cost increase yet this year.

Please turn now to slide 6 as I review our quarterly results. We achieved record revenues for the quarter of $2.3 billion, an increase of $100 million or 4.6% across our businesses. On a currency adjusted basis revenues increased by $8 million or point four-tenths of a percent.

I am encouraged by our performance in an environment where many other companies are experiencing lower year-over-year revenues. Elyse, will discuss our GAAP results shortly.

Corporate EBITDA of 378.3 million was 1.9% above Q2 2007 and represented 16.6% of revenues. Adjusted diluted earnings per share of $0.30 matched the prior period, while adjusted pre-tax income of 154.7 million and adjusted net income of 96.4 million were slightly below the 2007 levels. Levered cash flow for the second quarter was 305 million compared to 46 million a year ago. Prior to our initial public offering in November 2006, we established a three year target to deliver at least 1 billion of levered cash flow.

I am pleased to report today that we've already achieved that target generating $1 billion of levered cash flow since September 30, 2006. In the quarter cash flow came primarily from Corporate EBITDA and reductions in both equipment rental capital expenditures and the car rental net fleet equity requirement. The later is the result of resolving timing issues related to our ability to fully utilize fleet financings which reduced Q1 cash flow, but let deposit of cash flow in Q2.

Working capital days outstanding were negative 42.8 days, down slightly from negative 44.3 days but still a very strong performance. As we are purchasing less new fleet for HERC, we have lower payables and this impacts the calculation. We continue to work to improve payment terms and have increased our focus on the collection of receivables. Negative working capital is a great benefit. Basically this signifies that we are collecting from our customers faster than we are paying our suppliers.

Please turn to slide 7. In worldwide car rental total revenues grew 5.2% driven by 1.4% increase in transaction days, and a favorable foreign exchange impact of 4.4%, which offset the 1.9% decline in pricing. As in previous quarters part of the RPD or rental rate revenue per transaction day, decline relates to the change in mix towards leisure and off-airport rentals which are typically longer in length. In the US the mix shift from airport to off-airport accounted for about a third of the overall RPD reduction.

In the equipment rental business, our total revenues were $443 million an increase of 2.4%. The foreign currency benefit on revenues was 3.4% offsetting at a volume decline of 1.7% and a pricing decline of 1.1%, compared to the prior year period. Given the overall weak economy, I am very pleased with our consolidated performances past quarter. I attribute a good portion of our success to diversification of our revenue base, the execution of our strategic initiatives and the global nature of our brand which positions Hertz ahead of the competition.

Turning to slide 8. On a consolidated basis 37% of our reported revenues come from international operations compared to 32.4% a year ago. International revenue grew 19.5% on a year-over-year-year basis without foreign exchange the increase was 6.5%. Our product and market diversification also supported our revenue in the past quarter. International car rental operations experienced revenue grew of about 18.6% driven by transaction day growth of 9.9% in foreign exchange. This helped offset some of the softness we saw domestically.

In the US, total transaction days were down to 2.2% year-over-year with airport rental activity down 3.8%. We continue to benefit from a 16.7% increase inbound revenue, as the weaker dollar attracted international travelers to the US. This represents 14% of our total US airport revenue. The US off-airport market generated $244 million of revenue in the quarter driven by an increase of 1.9% in transaction days, with growth in the commercial, leisure and overall replacement sectors.

In the second quarter 2007, our insurance replacement transaction days increased 12.5% versus 2006. This made for a difficult year-over-year comparison. But our insurance replacement transaction days in the second quarter 2008 were consistent with the prior year. We made additional inroads in the number of insurance companies with which we have relationships, currently, 183 of the top-200 or so while working to increase our share of their rental business. We believe that the insurance replacement market has been impacted by the economy and higher fuel prices.

According to the Federal Highway Administration, Americans are driving less, some $30 billion fewer miles through May, a 2.4% decline from 2007. The decline in May alone was 3.7% this should result in pure accidents. In addition, feedback from some of the insurance companies, indicate that in this economy, their customers are collecting on their claims, but delaying the actual the repair work.

Our equipment rental initiatives including HERC plant services which is our industrial division pump, power generation and trench shoring, continue to show steady year-over-year growth, offsetting the slowing of our base non-residential construction business in the US.

Internationally, our HERC operations in Canada and Europe reported 23.5% revenue growth including foreign exchange driven by our Canadian operations and Quilovat acquisition in Spain. Although, the rate of growth has slowed from the first quarter, rental activity in Canada is still quite strong. Further, in its international presence, HERC open for business in China on July 1st. Although we've only completed our first month of rental activity, we are very excited about the market reaction and our prospects in that part of the world.

Rent-A-Car now has an operating manager on the ground in China and we expect to start renting cars by early 2009. During the quarter, we continue to win new commercial accounts and re-signed existing customers. Our new fuel initiative in Rent-A-Car about which I will speak shortly is particularly attractive to corporate customers. As you know, our partnerships with many airlines and a wide array of travel industry participants are a significant source of business for us.

Successful renewals of existing partners are as important as establishing new relationships. In the second quarter, we signed new agreements with North West Airlines and CarRental.com and we re-signed with ebookers, Air Berlin and Intercontinental Hotels on a multi-year basis. We are very proud to report that Hertz just won the Car Rental Partner of the Year award for 2008 from Vacation.com, the biggest network of traditional travel agents in the US. This is a coveted travel industry prize.

We continue to penetrate the online leisure market as demonstrated by the 10% year-over-year increase in Car Rental revenues booked through Hertz.com and third-party websites with strong growth in both the US and abroad. This represented over 30% of our worldwide car rental revenues.

In the second quarter, HERC continue to enhance its customer base by signing or renewing 12 major national accounts with companies in diverse industries.

Now I'd like to discuss our fleet. Last quarter, we talked about how we manage our fleet with the opportunities become more efficient in acquiring and disposing of our rental equipment in both businesses. This is a major focus and we continue to gain traction.

Please turn to Slide 9. On the disposal side in the US in the second quarter, we more than doubled the number of car sold through dealer direct and web-based channels, including online auctions. We now sell about 33% of the fleet this way which allows for faster sales and better payment cycles. When we sell cars directly and not through auctions, the savings is estimated to be $225 per vehicle.

Our fleet for the summer is fairly well balanced. In the US, about 14% of our vehicles are compacts, 32% mid-size, 16% full-size, 13% regular and large-sized SUVs, and about 15% smaller SUVs, crossovers and vans. The average age of our active US fleet at June 30th was eight months. Internationally, our fleet mix is weighted more heavily towards smaller vehicles. Our customers while increasingly interested in fuel efficiency still have diverse needs and preferences to rental vehicles, particularly during the summer and we strive to meet those requirements.

Elyse will provide an update on car sales, but our SUVs are predominantly purchased on a program basis which limits our exposure to this segment of the used car market. Equal acquisitions in US for 2009 model year are going well, while not yet finalized we've been negotiating with the manufacturers to obtain a diversified fleet weighted toward more fuel efficient, somewhat smaller vehicles at comparative terms. Reducing the complexity, that is the number of different models and configurations in our fleet, helps us reduced our fleet and operating cost.

Please turn to Slide 10 and I'll update you on our cost savings program. A few minutes ago, I mentioned that we continue to execute with discipline on our efficiency initiatives cascading best practices through the Hertz improvement process, implementing business process reengineering throughout the company and working with our outsourcing partners.

During the second quarter, we took an even harder look at how we save cost. At least in each operating unit reviewed the respective financial statements to identify additional opportunities for revenue generation and cost savings. In Equipment Renal, for example, we instituted a delivery fuel charge that will cover increases in fuel cost. Overall, we have met our internal cost savings targets for the quarter despite the load and forecast volume and we instituted additional spending cuts across our businesses. We reviewed the operating performance of each location and closed those that were underperforming and reevaluated new openings.

In each business however, we were sure to maintain the footprint necessary to service our existing customers and attract new ones. This quarter, in Equipment Rental, we closed 24 stores globally and added 6 in areas where we have revenues growth opportunities. International Car Rental operations added 18 corporate locations on a net basis. Similarly, in the US off-airport market, we opened 62 locations and closed 24 for a net increase of 38. For the second half of the year, we expect to add on a net basis at least 20 US off-airport locations. To augment our physical footprint, we have teams in place to deliver cars within a certain radius of our existing locations, which totaled 1,665 at the end of the quarter.

In addition, we reduced our staffing in line with current business activity. Our productivity as measured by revenue before foreign exchange in fact per employee increased 4.5% growth wide year-over-year with improvement in each of our operating units. We are also delaying certain capital spending projects that should not impact our brand image or service quality. We also outsourced three additional business processes relating to human resource and document services in the quarter that will help us to deliver savings.

For the full year 2008, we now expect to take $300 million out of our cost structure which is an increase of $50 million above what we previously reported. Unfortunately, there are offsets to the savings which will affect our profits. We expect the impact of reduced rental rates, cost inflation for cars, fuel and other business services, and additional reinvestment in Hertz will use up these savings.

Hopefully, market conditions will improve and in the future, we'll be able to report that some of the savings will flow through to adjust the pre-tax income. Have we not cost, the impact of the adverse cost factors would have hurt profits even more.

Let me remind you that this $300 million is in addition to the $187 million of savings announced in 2007, bringing projected cumulative savings in 2008 to about $490 million. We are still on target to achieve projected cumulative savings of $800 million into 2010, which includes the estimated benefits of out sourcing and process reengineering that we have previously discussed with you.

Even with these measures, we will continue to invest back into the company. We acquired two car rental licensees in Slovakia, and the Czech Republic, which we expect to generate about $16 million in annual revenues.

In the Equipment Rental side of the business, we acquired Seco Construction in the state of Washington, an aerial and material handling company which is expected to add about $4 million in revenue per year. In the second quarter, we spent an additional $17 million on our facilities, brand and people excluding flow of advertising spend into the third quarter.

At Hertz, we measure customer satisfaction on a real-time basis using the net promoter's core program, where we survey renters on a real-time basis and how lightly they would be to recommend Hertz. I am pleased to report our continued year-over-year improvement. North American Rental Car is 3 point, 4 points better and Europe Rental Car dramatically improved by 11 points. We have been able to improve our service level even while reducing cost is impressive.

In the US, when we analyzed the feedback from renters, the two most frequently sided areas for improvement relate to gasoline and customer wait times. To further improve our customer satisfaction levels, we launched two new initiatives addressing these areas.

We are now on slide 11. On July 1st we changed our refueling options. We led the industry by revamping the cost of our fuel service charge option. Now when a vehicle is returned with less than a full tank of gas, the customer is charged the local market pump price per gallon and a flat refueling service fee of $6.99. In the fuel purchase option, which is the pre-purchased of a full tank of gas at the time of rental, we lowered the per gallon cost to $0.15 below the local market pump price. As you would expect, these new programs have been well received by the media and customers. Several business blogs usually critical of travel industry practices have been just as positive.

Bob Sullivan who oversees the Red Tape Chronicles blog MSNBC.com wrote on June 20th "Hurray for Hertz". "Consumers should consider renting from the company even if rates are slightly higher because they won't be on the hook for the refueling "gotcha" any longer. It will be interesting to see if the company actually benefits from doing the right thing. I hope so." solemnly included.

From a financial perspective, we believe that we will be able to manage the product mix to have a neutral impact on revenues and pre-tax income. Our second innovation is the online check-in guarantee. On July 1st we began guaranteeing service within 10 minutes at 50 major airports and we back that guarantee up with a $50 rental coupon. Eligible customers need to book in advance and check in online at www.hertz.com. After arriving at our facilities customers proceed directly to their Hertz Express Kiosks or Express Q where they will be served in less than 10 minutes guaranteed.

Customers can still select ancillary products such as NeverLost, SIRIUS Radio, refueling options and various insurance products. This extends the speed and convenience of number one; Club Gold service to a greater proportion of our customers. Our performance record has been very good. We have only issued about $250 credits which is less than 1% of our total online check-in since July 1st.

Online check-ins have proved to very popular with our customers since June 24th. We have processed over 37,000 transactions worldwide over the Internet, another service unique to Hertz. To further promote the more consumer-friendly Hertz in July, we implemented a massive advertising search. During this five-week period, we expected to reach over 90% of our target audience 10 times with 900 television spots and major print ad campaign.

As part of our leisure market strategy, we are trying to attract the infrequent and less affiliated renters to Hertz. Rent Hertz put you in the driver seat. It is especially important to introduce these rentals to the superior Hertz experience. The Internet has increased pricing transparency with its focus on rentals rates without any distinctions for quality or service. Educating consumers about the benefits of renting from Hertz with help us maintain and grow our market share.

We estimate that these innovations and the increased advertising could boost leisure revenue by as much as 5 points over time. This concludes my strategic review. Let me now turn the call over to Elyse.

Elyse Douglas

Thank you, Mark, and good morning, everyone. Once again I'll focus my remarks today on the operating environment and outlook for Car Rental and Equipment Rental.

Let's start with the second quarter operating highlights for the Rent-A-Car division on Slide 12. Transaction days in the US decreased by 2.2% year-over-year driven by a 3% decline on airport days which was partially offset by a 1.9% increase in off-airport volumes. Hertz domestic rental car pricing in the second quarter as reflected in RPD, finished below prior year by 0.9% for the quarter. The pricing change was driven by decline of 0.7% on-airports and 0.7% off-airports and the increase in the proportion of off-airport rental activity in the overall mix.

Airport RPD in the second quarter would have been slightly positive if it once to the impact of the shift to a more online leisure mix which Mark mentioned earlier. We are encouraged by the improvement of pricing in Hertz over the course of the quarter. By June, our airport pricing was slightly positive year-over-year as a result of price increases we took as the industry tightened supply in this summer peak approached. Pricing for the summer months to-date is even more positive.

The corporate account pricing environment remains very competitive, particularly with larger accounts. But otherwise we have been able to negotiate low single digit price increases with the majority of our accounts that came up for renewal in the quarter.

Another important operating metric, average rental length in the US increased by 3.7% in the second quarter with growth across almost all major customer categories. This reflects the shift to online leisure rental sources, strong growth from international inbound customers, growth in the off-airport business and the lower proportion of commercial rentals.

Although we are seeing overall volume weakness some key sectors are growing, including the longer-term retail rentals, off-airport business and US inbound business. International Car Rental produced year-over-year revenue growth of 18.6%, which was driven by foreign exchange and strong transaction day growth in Europe in all customer categories, business leisure, vans and replacement rentals throughout most of the quarter.

In June, we saw leisure and van business slowing down while commercial business continued to exhibit steady growth. In Australia and Brazil, rental volumes were also very good this past quarter. RPD for International Car Rental was 5.1% lower primarily due to pricing pressures with some impacts on business mix.

Looking forward, which Europe now experiencing economic headwinds and airline seeing a similar drop-off in traffic, we expect our consolidated car rental volume and pricing to remain under pressure until the fleet is in line with the lower demand.

Slide 13 highlights worldwide fleet efficiencies, which is defined as the percentage of days a vehicle is rented. This metric improved by 70 basis points year-over-year, reflecting overall better fleet managements. Both the US and international operations showed improvement on this important metric.

Let me next address the issue of rental car residual value. I'll start with the US, the Manheim Index quarterly average for the second quarter declined by 5.8% year-over-year. This index is not representative of our car rental fleets, because it reflects all makes and models of vehicles across the wide range of vehicle age.

We experienced an increase of almost 1 percentage point in the average residual value as a percentage of the initial cap cost on the 46,900 cars we sold in the second quarter. These results were achieved even while lengthening the average age of car sold from 14.5 months to 15.6 months.

Our performance versus the Manheim Index is the result of having a younger, diverse fleet with limited exposure to any single manufacturer or model, such as SUVs, and the ability to age and sell our fleet more selectively through a variety of channel.

At June 13, 2008 the percentage of non-program cars in the US fleet increased year-over-year from 62% to 65%. The slight decline from the first quarter in the proportion of non-program vehicles does not represent a strategic shift on our part. There are seasonal fleeting patterns for specialty and other vehicles and we utilize program vehicles to address the summer demand which allows us to de-fleet quickly at the end of the seasonal peak rental period.

Internationally, the percentage of non-program cars is 53%, compared to 46% a year ago. We are also working to develop additional channels abroad for selling our cars where most sales are done directly to dealers and merchants or exporters. This should offset some of the pressure we are beginning to see in other used car markets, particularly in Europe.

While we originally expected US car rental depreciation expense per car to be in the range of 2% to 4%, we now forecast an increase of only 1% to 2% year-over-year in 2008. In Europe, we expect fleet cost to be up about 10% in 2008 before foreign exchange, although the absolute dollar vehicle depreciation per unit for Europe remains below that of the U.S.

We have not had any issues obtaining adequate fleet in any geography or achieving our target mix of program, non-program cars. In the US, for the 2009 model year, we are once again not committing our full fleet requirement to the manufactures to give us additional flexibility.

Before we move off Rent-A-Car, another positive in the quarter was the improvement in ancillary revenues which include such products as NeverLost, fuel and insurance products and totaled $302 million in the quarter. We achieved a 12.3% increase year-over-year which outpaced our rental revenue growth. A strong revenue management focus has increased our penetration of these products, which are contributory to our profit.

Let's now turn to Worldwide Hertz, starting on Slide 14. In the operating environment, we continue to be impacted by the softening US construction market. This was offset by strong demand in Canada and steady growth in industrial and specialty equipment, such as power generation. In North America, revenue from residential and non-residential construction dropped from 49.5% of total revenues to 47.6% year-over-year and industrial revenues increased from 19.7% to 21.8%.

Our operations in France and Spain show sequentially slower growth throughout the quarter. Power generation continued strong but construction was dramatically impacted. As a result, in July, we closed six locations in Spain that do not service power or industrial customers. For the second quarter, our worldwide same-store growth was down 1.1% year-over-year reflecting these revenue pressures.

From a macro perspective, based on several external forecasts, we expect to see continued weakness in the second half of 2008, driven by economic conditions in the US and Europe, as well as slowing growth in Canada.

As we head into 2009, US non-residential construction start and industrial spending are anticipated to weaken as is non-residential construction in Europe. Continued growth is forecast for non-residential construction in Canada. In this environment, we expect the pricing pressure we saw in the first half of the year to continue. HERC will look to offset these economic headwinds through its increased industrial focus to capitalize on what is still a growth opportunity.

Niche markets strategic development, such as power generation and pump, and development of our position in emerging markets, such as Asia. Compared to second quarter 2007, worldwide pricing declined only about 110 basis points, driven by a 1.5% decline in the US and a smaller decline internationally. This demonstrates the steps taken by the industry as a whole to write tightly relative to current demands and maintain reasonable pricing.

During the quarter, we continue to age our worldwide fleet to 31.9 months, a year-over-year increase of four months and an increase of one month when compared to fleet age at March 31. With our current fleet plan, we expect the average age of the fleet to increase by a few more months in 2008. This should not impact our maintenance cost or our customer service.

In the second quarter, net CapEx for HERC was $41 million, which included a $2 million impact from foreign exchange. For full year 2008, we still expect total equipment rental fleet net capital expenditures to be well under a $150 million.

At HERC, we have traditionally disposed of equipment primarily through direct sales to end users, or to wholesalers and manufacturers with limited auction activity. These markets have remained relatively stabled with some pressure continuing on earthmoving equipment. During the quarter, equipment sales on a first class basis totaled a $109 million.

HERC fleet efficiency metric calculated by dividing the total HERC revenues less equipment sales and other revenues by the average fleet acquisition cost was 2.6 percentage points below prior year, as we continue to rebalance our fleet away from earthmoving equipment. This calculation understates efficiency due to the impact of the decline in pricing on revenues. Nevertheless, we have several initiatives underway to improve fleet efficiency.

As a result of our fleet plan action, and based on current demand level, we are targeting to have the fleet right size during the third quarter, with US first moving fleet at that point representing 25% of the fleets, down from 29% a year ago. We expect this percentage to decline through the balance of the year.

Let me now turn to our consolidated financial results for the quarter, shown on Slide 15. Looking at our gas metric, pre-tax income was $93 million and net income was $51.2 million. On a diluted earnings per share basis, we earned $0.16 compared to $0.26 in the prior year period. This year-over-year decline was due to higher restructuring and restructuring related costs this year.

Non-cash charges to write-off certain deferred debt cost and a benefit recognized from a change in the vacation accrual reserve in 2007. On a non-GAAP basis, adjusted diluted earnings per share were $0.30 this past quarter, the same as in the second quarter 2007.

While we are achieving our targeted cost savings, direct operating expense and selling, general and administrative expenses on an adjusted basis increased 40 basis points year-over-year due to negative pricing in US Car Rental and Worldwide Equipment Rental and inflation in our operational costs, such as fuel and vehicle damage.

As a reminder, pricing has three times the impacts on profitability that volume has in all our businesses. In a neutral pricing environment, these expenses would have declined as a percentage of revenue. And for those of you not as familiar with our financials, we report the collection of funds from the axillary products such as NeverLost, fuel, airport concessions and Hertz new equipment and supply sales in revenue and the cost of these products in direct operating expense.

These differences flow into pre-tax income. This treatment is in accordance with GAAP accounting and needs to be considered when looking at the absolute level of direct operating expense year-over-year.

Total cash interest expense for fleet debt and corporate debt was $184.2 million, slightly below last year. The improvement as a percentage of revenues was 50 basis points.

I would now like to turn to Slide 16 and discuss the strength of our balance sheet and overall liquidity position. At June 30, our consolidated leverage ratio was 2.9 times and a consolidated interest expense coverage ratio was 3.9 times. These are improvements over the prior 12-month period and well within the covenant limits set in our financing agreement. The cushion we have under our tightest covenant for corporate EBITDA is $748 million. For indebtedness, the cushion is $4.3 billion and for interest expense, $470 million.

Subject to borrowing base availability at June 30th, we had additional funding capacity of $4.5 billion, consisting of $2.2 billion in fleet financing, $1.5 billion in corporate credit facilities and $811 million in cash. We believe we have more than ample liquidity to support future repayments as well as anticipated growth.

For the remainder of 2008, we have no further stated debt maturity. However, we have $645 million of normal fleet amortization, which should occur later this year relating to fleet debt with a 2009 expected maturity date.

Looking at our debt portfolio at June 30th, we estimate that a 1% change in interest rates would produce a $23.4 million change in net income over a 12-month period.

Now let's go to Slide 17 and I will discuss our various financing initiatives. In July, we completed an international fleet financing transaction, Hertz's first rental fleet securitization in Europe and Australia. Funding from the issuance will reduce the outstanding balance on the existing international fleet financing established in December 2005. This was sold as a private placement to our three existing lenders in the international facility and represents a significant milestone for Hertz, particularly in light of the current credit markets.

We were able to achieve this multi-jurisdictional fleet securitization transaction in a difficult market. While the terms didn't meet our original expectations, such as the advanced rate being lower than anticipated, this financing provides cost savings and gives us the mechanism for funding across different markets.

At our May Analyst Meeting, we announced that we were working on a new two year US ABS conduit facility. Let me update you on our progress. The facility is currently sized to provide between $600 million and $1 billion of additional financing. The structure has been reviewed by the rating agencies. We are now in documentation and expect to close later this month.

Just to reiterate what we said at the Analyst Meeting, the expected advanced rate is 73% compared to the current base level of 80% and the borrowing spread is expected to be 150 basis points higher than our existing variable funding note structure. On an all-in basis however, the cost today will be about the same as our existing fixed rate term notes.

I would like to address investors' concern about the monoline insurer's performance and the impact on our US ABS debt which was wrapped by Ambac and MBIA. The downgrade of item monoline by the rating agencies has virtually no impact on our existing fleet financing. If a monoline were to go bankrupt, our bonds would initially go into a controlled amortization period, which mean that as cars are sold, proceeds from vehicle dispositions would go to repay bondholders. Bondholders' rights do not extend to Hertz revenues from the rental of cars or equipment.

Given the nature of the risk fleet, we have the flexibility to extend the holding period of the cars, thereby delaying that repayment for a period of time. If this were to occur, the most likely outcome would be a refinancing or a negotiation with the bondholders to eliminate the amortization.

In any event, we have ample corporate cash and excess corporate equity as well as cash within our Like King Exchange program, [the fund you prefer].

Moving to Slide 18, in the second quarter the GAAP effective income tax rate was 38.8%. The full year GAAP effective income tax rate for 2008 is projected to be approximately 38%. The 4 percentage point increase from the previously projected full year effective tax rate of 34% is mainly attributable to increase losses in non-US jurisdictions that receive no tax benefit.

Cash income taxes paid in the second quarter were $6 million and are projected to be about $60 million for the full year. Total company net capital expenditures for property, plant and equipment, that is investments in our facilities, systems and service vehicles were $47 million for the quarter, a decrease of $5.9 million year-over-year as shown in the levered tax flow in the press release. We expect to spend about $200 million in full year 2008 to maintain our facilities, MIS systems and operations.

Please turn to Slide 19. As Mark mentioned earlier, an important focus for Hertz is cash flow and de-leveraging. As you have seen, we generate cash flow from earnings, but it is important also to note that we generate cash as de-fleet in response to reduced rental demand. Mark already reported on the second quarter improvement and levered cash flow. I will review a trailing 12 months period compared to the prior year period which captures the seasonality of our business.

Levered cash flow for the 12 months period ended June 30, 2008 was $455.9 million, compared to $911.3 million for the same period a year earlier and net corporate debt declined by that amount. The prior 12-month period was impacted by three unique factors. During the period, a $110 million of incremental fleet financing was obtained. The mix shift to a higher percentage of lower cost risk cars resulted in a one-time benefit to fleet net equity and working capital improvements provided $250 million of cash flow which we did not expect to repeat in the current period.

In the current period, year-over-year corporate EBITDA improved by $88.6 million and HERC fleet growth was lower by $55 million. Working capital was a $70 million use of funds in the period.

For full year 2008, we expect the Car Rental net fleet equity requirements continue to be a use of fund and the ageing of the Hertz fleet and working capital to generate fund, albeit in a case of working capital at a lesser level than in 2007 when we affected certain one-time changes that had that big impact on cash flow.

We have a strong focus on working capital management here at Hertz, all the way down to the local operating unit level and we should drive continuous improvement. The current economic environment is a tough one and we are keeping focused and working diligently on cost control and cash management to improve and maintain our profitability.

And now let me turn the call back to Mark.

Mark Frissora

Thanks, Elyse. Our initial guidance for the full year 2008 was weighted toward the third and fourth quarters based on expectations that the economy would strengthen in the second half of the year. We've not seen evidence of this happening and believe the current weakness may well continue. Further, we didn't expect the European economies to react the way they have recently. The current environment is particularly volatile and it is difficult to forecast with great confidence given that economic indicators and our own trends have been changing week to week.

Our Car Rental and Equipment Rental operations in Europe, both have seen precipitous volume declines over the past 45 days. We were hopeful that this volume contraction would be temporary but have grown concern that the decline may be protracted. Accordingly, we believe it is prudent to reduce our guidance at this time.

We are comfortable with these projections and believe the ranges are realistic. Based on our current visibility, we are now forecasting total revenues to be between $8.7 billion and $8.8 billion with Car Rental revenue growth of 1.5% to 2.5% and Equipment Rental revenue declining 3% to 4%.

Corporate EBITDA is projected to be between $1.4 billion and $1.465 billion. We expect adjusted pre-tax income in the range of $550 million to $600 million and adjusted net income to be between $340 million and $375 million. Using our normalized tax rate of 34% and 325.5 million shares, the number of diluted shares outstanding as of the year ended December 31, 2007 adjusted diluted earnings per share is expected to be between a $1.05 and a $1.15 per share. On the positive side, we affirm our earlier guidance with levered cash flow to be between $550 million and $650 million in 2008. This was certainly a challenging quarter for Hertz but our management is driven to succeed.

We experienced price and volume pressures as the economic headwinds dampen demand of both Car Rental and Equipment Rental. International economy started to be impacted as US continue to slow and expectations for second half improvement weakened. Hertz is focused on cost efficiency and revenue diversification, strategies that we've been following since before the company's initial public offering have enabled us to perform in this difficult environment.

With our outsourcing and process reengineering programs in effect, we view we're in a good position to weather the second half of the year. Our business model is quite variable in cost and we continue to operate profitability even if demand is constrained and generates strong cash flow when we de-fleet. We've demonstrated our ability to manage our fleets with a strong component of non-program cars and we're getting better at it every day. We've executed with great discipline closing down locations that already dragged on our performance.

Although we still believe there are great growth opportunities for Car Rental and Equipment Rental, it is only prudent to slow our network growth until the economy gets stronger. We continue to expand geographically in Asia, but we do so in ways that involved capital investment. Our continued investment in the Hertz brand, our facilities and our people will enable us to succeed in difficult times and drive in a more robust economy. We believe our liquidity is and will continue to be strong.

Historically, Hertz has been a leading indicator of the economy with Car Rental slowing early in the cycle as corporate and discretionary travel slows and then being one of the first sectors to recover and response to pent-up demand for Car Rental. While we were disappointed to lower our guidance, we believe we will continue to deliver strong operating results in both of our businesses.

And now operator, we will take questions.

Question-and-Answer Session

Operator

(Operator Instructions). We will go to Chris Agnew with Goldman Sachs. Please go ahead.

Chris Agnew - Goldman Sachs

Thank you very much. Couple of questions. First of all, can I clarify if I am hearing you correctly that the weak pricing in Europe in particular impacted the direct vehicle cost disproportionally. And if I am correct there, how quickly can you adjust your fleet there with environment getting worse and how much are you thinking about reducing or are you considering reducing fleet into 2009? Thanks.

Mark Frissora

Well, I mean, you heard correctly, and I guess, and talking about the fleet issues in Europe, they have been there in all year. We've talked about them in the first quarter and the second quarter. Car costs in Europe due to the OEM's pricing structure there, it had been up 10% to 12% and they continue to be up in the second quarter. And what we have done is put together fleet plan, rotation plan that does reduce that increase moving into 2009. So, we grew confidence saying we will have to reduce fleet cost on a year-over-year basis moving into 2009. I don't know if I am being very specific to answering your question but that's the best I can give you right now.

Chris Agnew - Goldman Sachs

Well, I think more on the direct vehicle cost side rather than the fleet cost side and because I mean you grew your fleet there 10% year-over-year and obviously see demand environments deteriorate much faster. How quickly can you actually start reducing your fleet to try and get better pricing?

Mark Frissora

Very quickly. And I guess it's a same, the trends are similar to what you saw in the US. In the US which you saw from us is a precipitous volumes drop up in November, December of 2006 and then the second quarter, we just announced the US which is the biggest business unit had double-digit pre-tax growth and improvement in margin of over a 100 basis points, right. So we were able to, over the period of about a 120 days, reduce fleet right sizes, start driving with tighter fleets, better pricing and the cost efficiencies took place.

In Europe, we would expect to see things similarly develop. In other words, we have a pressure, if you will, in the third quarter and fourth quarter and those pressures have driven around right sizing the fleet than as you right size that you are throwing more cars into the markets so residual suffers. So you have a double whammy for a short period of time. What's a short period of time for us, let's say it's a 120 days roughly that hits operating results.

So moving into the end of the fourth quarter, beginning in to the first quarter of 2009 and we have an improvement similar to what we saw in the US. We have more program cars in Europe right, so 55% plus program cars. So that helps us in terms of residual value issues. So the impact is not as great on a residual issue because of the higher content of program cars in Europe. Does that the answer your question better?

Chris Agnew - Goldman Sachs

Yes, thanks. And one more question. Previously, you've talked about stress testing your model on 10% swing in revenue. I think you said you can hopefully hold your EBITDA margins in the high 30s.

Mark Frissora

Higher than that Chris, I mean we can hold on to 42 or better is what I would tell you right now. Gerry, do you want to comment on that?

Gerry Plescia

Sure, yeah. We had talked about a worldwide decline of 10% still hoping a low 40s EBITDA. We're not predicting that level of the decline, but we're still comfortable with that or higher.

Chris Agnew - Goldman Sachs

Okay, great. Thanks.

Operator

We will go to Rich Kwas with Wachovia. Please go ahead.

Rich Kwas - Wachovia

Hi, good morning.

Mark Frissora

Hi, Rich.

Rich Kwas - Wachovia

Mark, on the compact cars side, or US rental car, are you concerned about getting a sufficient number of compact cars and faster cars for year '09, given that there is a severe lack of availability at the retail level right now?

Mark Frissora

The answer is decidedly, no. We are not concerned at all and we're getting everyone that we want. So our mix vehicles that we've been able to acquire for the next year, we're pretty much locked down in the US any ways all of our fleet needs, where we're very happy and don't have a capacity issue at all.

Rich Kwas - Wachovia

Okay. So despite the lack of retail availability and the margins likely being better, selling to retail, you're not concerned with OEMs pulling back?

Mark Frissora

Rich, no, and I would tell you right now the plan is done. We're pretty much done with our plan by making model and we have everything we want and we could more if we wanted. So we have built in flexibility in the fleet plan for next year. And if we wanted to find more compacts, we could. So we're actually more in '09 than '08 on small cars. We've actually moved to a higher mix of small cars in '09 than in '08 so, and even with that move to higher mix content, we were able to satisfy everything that we wanted.

Rich Kwas - Wachovia

And does the SUV mix drop dramatically going forward over the next year and where it is now?

Mark Frissora

Rick, it drops. You say dramatically, I don't have the numbers in front of me here but it drops, but we use a special equipment to generate higher revenue per day, right. We get $80 to $90 RPD on some of like an SUV, like a navigator Lincoln and that special equipment is what people want on vacations. So you want to make sure you give what they want. So mini-vans, big SUVs, on seasonal peaks in our business we have to have that, otherwise we don't drive a higher RPD rate. It has come down.

But when people travel on vacation with their families, they've got to have a bigger vehicle to transport their families and it doesn't make sense to have two vehicle when they can do with one given the RPD on it. But we're still comfortable with the mix that we have. And as you saw fleet cost in the second quarter, Rich, those fleet costs went down year-over-year and all the competitors as you know are going up. So we feel pretty good about ability to manage to fleet in tough environment.

Rich Kwas - Wachovia

Okay. And then moving over to Equipment Rental strong growth internationally that implies US was down in the quarter. It sounds like there is some weakness occurring in Europe. How should we expect to see the difference and the changes in kind of revenue growth regionally speaking over the next couple of quarters?

Mark Frissora

Well, as I mentioned in the guidance information I gave you on the outlook section, we talk about growing somewhere between 3% and 8% and now we calibrated that growth rate on an annualized basis. Let me find the exact, minus 3% to 4%. So the new range is minus 3% to 4% versus a positive growth rate that we had expected. So you can obviously do the math on that.

Gerry Plescia

And is driven by the US and Europe continuing to slow.

Mark Frissora

Yeah. Our assumption, Rich, is that the US and Europe will continue slow.

Rich Kwas - Wachovia

And then incrementally, I mean US get much worse or is it kind of Europe getting worse than US?

Mark Frissora

They are both getting equally worse.

Rich Kwas - Wachovia

Equally worse.

Mark Frissora

Almost in equal installments.

Rich Kwas - Wachovia

Yeah.

Mark Frissora

Europe, I think you read the news, I mean the Europe economy has significantly slowed in the last 30 to 45 days and then you know we saw evidence of that. And so the question is it going to sustain? Is it going to continue to continue to contract? I don't have a crystal ball. Our assumption and guidance was, yes, it is. It's sustainable.

Rich Kwas - Wachovia

Okay. And lastly, just on the guidance, how comfortable are you with it at this point, what would be kind of the triggers that would make things worse or better kind of second half? What are thinking of it as the main drivers?

Mark Frissora

It's exactly as I detailed, I mean honest. I can't, I don’t know how more I can comment on it. Based on our current visibility, and assuming that the contraction in the marketplace that we have seen in Europe and the contraction that we have seen in Rent-A-Car continues through the end of the year, we are comfortable with guidance.

Our hope is that the current contraction rates that we have seen over the last 45 days stopped and improved, I mean and we will look at guidance every single quarter and determine whether or not we can improve it or we have to bring it lower. But based on our current visibility, we are very comfortable with that guidance.

Rich Kwas - Wachovia

Okay. Thank you.

Operator

Our next question comes from Michael Millman with Soleil. Please go ahead.

Michael Millman - Soleil-Millman Research

Thank you. Just continuing on that last guidance on the HERC the minus 3% to 4%, is that for '08 or is that annualized for the second half and I guess the same thing in RAC?

Mark Frissora

That's for all other rate, Michael.

Michael Millman - Soleil-Millman Research

That was going from plus in the first half to minus? Okay.

Mark Frissora

Right.

Michael Millman - Soleil-Millman Research

In terms of the RAC pricing, to what extent is the mix impacting particularly the compact as you go down in size, obviously you get less for that, and what I am looking for is some comparison of price to cost of car rather than just a peer RDP number?

Mark Frissora

Well, I mean, the best way I can answer that is kind of talking about two things. One is that RPD decline that we saw in the US, a third of that decline was build around mix shift. So, it had nothing to do with actual pricing going down, right. So a third of that was built around the mix shift.

Michael Millman - Soleil-Millman Research

And that mix was the car or the off-airport mix shift?

Mark Frissora

Both the mix shift to off-airport as well as the shift to leisure. We have a higher percent of business that’s going to leisure channels now. Go ahead, Joe.

Joe Nothwang

Yeah, the demand for compacts and subcompacts has not materially changed the pricing mix at all, because we've been able to get pricing increases on those compacts, so there is no impact on the pricing.

Michael Millman - Soleil-Millman Research

So does that make those products then more profitable because you're getting increases there?

Mark Frissora

I don't know if I'd say more profitable but I mean that's profitable. I mean obviously our pre-tax margin in the second quarter for US Rental Car went up. The margin actually went up. I mean obviously you saw our competitors, all their margins went down, all their pre-tax went down in the US, they are all US based for the most part.

Our margins went up a 100 basis points and our pre-tax was double digit. So to answer your question, I think you can see by that pre-tax improvement that we didn't have a profit margin squeeze if you will due to a move to lower compact cars. Again the other issue is transaction. And when we look at the length, our length improved significantly. In US what is length improve to, Joe, in the US Rent-A-Car division length improved by how much?

Joe Nothwang

In the second quarter, length improved by 3.7%

Mark Frissora

3.7% which offset if you will some of the RPD decline.

Joe Nothwang

The other thing Michael I could add that the shift to subcompacts and compacts is relatively small and what drives the needs of our customers is the utility of the vehicle, four doors, large trunk, all that sort of things. And if you are taking customers on a comp cars and that sort of thing, you're not going to do it and focus.

Michael Millman - Soleil-Millman Research

And just quickly, on the ancillary revenue, I think you said it was up 12.3%. But I assume a large part of that is international and OpEx. It looked like the US numbers were sort of mid-single digit as I did the arithmetic. I was wondering why that rate of growth seems to be decelerating?

Joe Nothwang

The rate of growth in the US is pretty comparable to the worldwide number. What you might be referring to might have our airport concession fees built into it and that is not reflected in the statistics that we quoted earlier in Elyse's presentation.

Michael Millman - Soleil-Millman Research

I was looking at the other, so other includes airport fees?

Joe Nothwang

It does, other and our revenue base does include airport fees but it is not ancillary revenue.

Michael Millman - Soleil-Millman Research

I see.

Joe Nothwang

We are talking about the insurance products and baby seats ski racks, NeverLost, GPS all of that products.

Michael Millman - Soleil-Millman Research

Okay. Thank you.

Mark Frissora

Thank you, Michael.

Operator

We will go to Michelle Ko with UBS. Please go ahead.

Michelle Ko - UBS

Hi, I was just wondering of the 300 million in cost savings that you anticipate this year, how much do you anticipate the flow through to the bottom line after reinvestments? And also --

Mark Frissora

As I mentioned in the script that we just read, I mean it's zero. Obviously if you look at the pre-tax and the EBITDA guidance, it essentially goes down year-over-year, none of it will flow through. So that's our current expectation based on where we see the trajectory in the market.

Our hope is that the market improves, as I mentioned and if it does improve then we will see some flow through toward. At this point we are not forecasting that we will flow through. It's just going to offset the inflationary pressures that we have. The pricing pressures that we have and the buying contraction we have in our businesses.

Michelle Ko - UBS

Okay, great. And in terms of shrinking the fleet, to what degree will the new offer per rental sites offset the reduction in the same star fleet. So what would be the overall change in the fleet?

Mark Frissora

I don’t think we've forecasted the change in the fleet. We said that our fleet was down in the second quarter though in US Rent-A-Car about 3% and equipment rental business, the fleet continues to, in terms of the way we rotate it get better and better, leaner and leaner. Gerry, you want to talk about that?

Gerry Plescia

From the equipment rental side, we started the year up over 8.5% at the end of June worldwide. We are only about 2.5% up driven by Canada and other strength in Europe originally. The flip side of that will happen in the back half. So this thing can turn year-over-year to negative high single digits to double digit negative and by the end of year as we continue to balance that fleet against the demand that we discussed.

Mark Frissora

Michelle we will improve the Rent-A-Car efficiencies. You are going to see continued improvement and utilization improvement, and that will be driven probably by lower fleet levels, as well as just better using lean sigma and our efficiencies improvement initiatives.

Michelle Ko - UBS

Yeah Mark this is Michelle speaking,

Mark Frissora

Yes go ahead, Michelle, please.

Michelle Ko - UBS

I thought, I would highlight important point of previous question from Chris Agnew. When he was asking, and up to the point of fleet efficiency, I just want to say to everybody while the European economies are flowing and our rate of growth as well, we are already in July above last year in terms of fleet utilization, and our forecast for the rest of year is a further improvement. So it's not that we are behind the curve, we are already ahead of the curve. We have saw it coming.

We have delayed fleet additions, we have canceled orders and that we accelerated our divisions, so that already in July in Q2 by the way our utilization was flat with last year. And, in July with the decline, it's already ahead with last year, and again we are planning a further improvement for the rest of the year, and I think that’s absolutely achievable, and we made it in July, I just wanted to point that out.

Mark Frissora

Thank you Michelle.

Michelle Ko - UBS

Any addition to that, we're embarking another project to indeed reengineer completely the way, we it's quite complex. We pull our locations and as Mark said generate new efficiencies, which give us huge opportunity for the years to come in terms of fleet management as a whole.

Mark Frissora

And Michelle also to go back to your question about where the fleet is going in US we're at to be specific we were down 3%, excuse me, in April our fleet was down 1%, in May our fleet was down 3% and in June the most recent month of the quarter that we just announced our fleet was down 5%.

Michelle Ko - UBS

Okay great thank you.

Operator

We’ll go to Emily Shanks with Lehmann Brothers. Please go ahead.

Emily Shanks - Lehmann Brothers

Good morning.

Mark Frissora

Good morning.

Emily Shanks - Lehmann Brothers

I had a quick question around the equity enhancement side, I am just wondering around the actual mechanics of it. There are certain enhancement levels obviously in your ABS debt, how does that work in terms of valuation, is that means that’s done on a quarterly basis, and then let's just say residual values were decline for your fleet. I recognize that you didn't, where you guys this year, this quarter but at some point in the future is it on a quarterly basis that you need to inject more equity in order to maintain the enhancement levels or is it done rolling basis or how does that work mechanically?

Elyse Douglas

We actually have two tests within the U.S. ABS facility and they are performed monthly, and one is market value test, so we look at the sales of the cars relative to the book values. And if there is a continued selling below the book value there is a credit enhancement adjustment.

Emily Shanks - Lehmann Brothers

Okay perfect.

Elyse Douglas

And we do that monthly.

Emily Shanks - Lehmann Brothers

Okay. And then, just if you wouldn’t mind going over one more time what the reason was for the lower net fleet equity investment this quarter?

Elyse Douglas

It was really, I think if you’ll recall in the first quarter we - there were some timing issues. We didn’t get enough of the cars particularly in Europe into the borrowing base under the fleet facility that was one issue.

We had a timing issue related to a ramp up of the sale lease pack in the UK. So at the end of the first quarter, our advanced rate was much lower because of the inefficiencies of getting those cars including the borrowing base, and that basically is the time we set up. We correct itself in the second quarter, and that’s what we're seeing.

Emily Shanks - Lehmann Brothers

Okay. So it was simply the correction of that issue, it wasn’t something more?

Elyse Douglas

Right correct.

Emily Shanks - Lehmann Brothers

Okay. All right perfect thank you.

Operator

And we’ll go to Declan Carlin of BlueBay. Please go ahead. Declan Carlin your line is open.

Declan Carlin - BlueBay

Hi, just a question on your Rent-a-Car business. A few questions only on the domestic on airport section, could you say whether you gained or lost market share in the first half? And secondly, just on the international business and I guess focusing on the European market, recently quite a heavy price decline. I'm just wondering whether there was anything specific to your business or was the industry as whole over slated and suffer from weakening demand.

Mark Frissora

I guess market share in the US, we look at airport and off airport, it's a $20 billion market. And my guess is, I don't have the, on airport you have more precision around market share. The data right now is only good through April and only it was about, I mean, 80% airport of the airport was reporting through April.

Then off airport, what we do is we measure the growth rates of insurance replacement, so that's our growth rate. And what I would tell you is that we think market share in both those markets is probably essentially flat on a year-over-year basis. We increased market share in the off airport markets. In the off airport market, we increase share, in the on airport, we probably loss through this shares.

We yield manage into the second quarter. What we did was we tried to tighten our fleet and get higher revenue per car by keeping the fleet tight. As I told you, we took the fleet down 5% in June, so we're running the fleets tight in order to do yield management.

Its typical what you do and when you see some volume contraction. It's a prudent thing to do, and then you loosen the fleet as you begin to see volume improvement, but, so that kind of answers that question. The other piece of your question dealt with Europe, I guess right?

Declan Carlin - BlueBay

I'm just, a question on the, the price decline seems, the price decline which you report, the minus 5.1% I understand that's on a constant cost currency basis but it seems quite a severe decline, and especially as you mentioned the softening came over really over the last 30, 45 days. I was just wondering whether there is anything specific to your European business or it's just an industry wide over fleeting period?

Mark Frissora

I am going to let Michel answer this. The price decline of 5.5%, again it will offset by a lot of what I call linked growth as well. It's important you look at those two things together. Going back to the US, we did improve our price in the US, 2.2 points.

So again that's why again tightening the fleet gives you better pricing. Going back to Europe for a second, Michel would you answer his question about the price decline of 5.5 and what other factors we should consider when we think about that.

Michel Taride

Yes, absolutely. Mark is correct. When you look at our revenue for transaction, which factors into the length, actually since the beginning of the year and even now as we speak, our revenues transaction has been positive, which means down the line has more than offset declining RPD.

RPD is not just pricing. It's an effect of length as well. So it's essentially a mixed thing, I would say. Also the fact that our, off-airport business in Europe is growing faster than the airport business understandably and traditionally the off-airport business is at a lower RPD, but higher length than the airport business.

So it's, I would say 80% of it is a mixed issue. Certainly I would agree that the pricing is currently under some pressure even though I would hope that going forward and I don't think it's the effect of over fleeting yet. But I think, going forward I would hope the trend would improve as these fleet tightened. But so far, it's essentially a mixed effect.

Declan Carlin - BlueBay

Thanks.

Mark Frissora

Okay. Next question.

Operator

And we will go to John Sykes with Nomura. Please go ahead?

John Sykes - Nomura

Yeah. Hi, Good morning.

Mark Frissora

Hi.

John Sykes - Nomura

I guess, I am still a little bit confused in terms of how the lower residuals are impacting your business? It didn't sound like that was having a major impact on you, am I correct?

Mark Frissora

It's having zero impact. Our reschedules actually improved in the second quarter by 1%. So it is having zero impact and we don't forecast it to have any impact. So, I guess, why is that you might ask.

John Sykes - Nomura

Well, that's the question, why?

Mark Frissora

Let me explain it. It has to do with the fact that are SUVs, again we buy those on a program basis for the most part, which means we have no residual risk when buy it from an OEM on that basis are very little reschedule risk. And then the subcompacts and the compacts, we are getting better pricing on, then we have got year-over-year, month-to-month, quarter-to-quarter. So, we did adjust depreciation rates also in Q1 which helped us levels that if you will in the second quarter. But again we feel really good about residuals. They are actually improving. So, and again the Manheim Index is not at all anything like our business.

John Sykes - Nomura

Okay.

Mark Frissora

Manheim is all used cars.

John Sykes - Nomura

All right.

Mark Frissora

We have new cars. I mean we buy cars new and we are selling cars let's say within a year roughly. So, our used car population is much different than their index, and I mean the profile is totally different and that we are able to manage the mix. We are able to rotate fleet differently. We have a better mix of vehicles in the Manheim Index represents because we buy only the popular selling cars. And again, we have been moving into over the last 12 to 18 months a lower mix SUVs and a higher mix of compact, subcompacts, that's helping us.

John Sykes - Nomura

What's the big three composition of our fleet right now? The big three, GM, Ford, Chrysler. What percentage of your fleet is GM, Ford and Chrysler?

Mark Frissora

Yeah. Chrysler is like 3% of our fleet. I think Ford, if I remember right, it's around 23%, guys, is that about right?

Gerry Plescia

Right now 26.

Mark Frissora

26% right now. GM is probably in the neighborhood of about 20%, 22%.

John Sykes - Nomura

Okay.

Mark Frissora

So that gives you the mix. And then we have fleet from Toyota's the largest customer in the world. That's been increasing as a mix of overall vehicle mix. They both probably represent together, and so those two brands are 13%, let's say roughly. We have BMWs, Mercedes in our fleet. Honda is also now actually a higher percent of our mix than it was a year ago and Nissan as well. Both are higher percents of our overall mix. What does Nissan represent, do you have any ideas? 10% now.

John Sykes - Nomura

I know you can't go forward too much, but if I'm looking a year out, the composition of our fleet is going to be more and more the Japanese big three fad, is that a fair assumption?

Mark Frissora

It has been, I mean it's been moving in that direction and I will assume it will, yes. Going forward, it will be a bigger piece of our mix, absolutely. If you compare our fleet profile versus any of our competitors we're vastly different, I mean we have a much more diverse fleet than anyone else. And that becomes a huge competitive advantage for us. That's why our fleet costs are down year-over-year in the second quarter and everyone else's were up double-digit. And what we said in the call was that we expect that to continue, in fact, maybe even improve. That gap will widen we believe based on both fleet efficiencies as well as the diversity of our fleet. Okay?

John Sykes - Nomura

Yeah, that's good. I appreciate that. Thank you.

Operator

We'll go to Mike Lanier with AIG. Please go ahead.

Mike Lanier - AIG

Thanks. I was curious on the financing side, what you see as your next couple of milestones when you're going to get this facility put together in August, and then what's the next couple of things that you are, as you look down the road, that you have to take care of?

Elyse Douglas

Yes. We're already looking at that. We know we have some maturities coming up in '09. And so we're already in discussions with a number of players looking at different structures to refinance some of that ABS that comes due next year. That's really the next thing in the horizon, trying to turn that out.

Mike Lanier - AIG

And that's about a year away?

Elyse Douglas

It's about, yeah.

Mike Lanier - AIG

And then, obviously some of the competitors on the car rental side are doing not nearly as well as you are. Are you going to be able to take advantage of their problems or is it pretty much business as usual?

Elyse Douglas

You're asking from an operational perspective or a financing perspective?

Mike Lanier - AIG

Just operational primarily.

Elyse Douglas

So could you repeat the question just so we have it clear?

Mike Lanier - AIG

Well, it seems like some of your primary competitors are really struggling, at least, let's say they stock and bonds are struggling. And I was wondering if that creates an opportunity for you?

Mark Frissora

Absolutely. I mean we feel our fleet cost issue because we have such an advantage. That’s a competitive advantage that allows us to price competitively and even take share, if possible. So we think that fleet cost advantage will continue for the foreseeable future. You can't move your fleet mix overnight. So we'll take advantage of that competitive advantage. We've announced some new service policy guarantees, gas policies and we're on the offensive, I'll put it that way. Hopefully, as the economies globally come out of recession, this would just accelerate and separate us from the past.

Mike Lanier - AIG

And I guess the last question, I knew your financials were a little better than a few, but when I look at the EBITDA on table 3 of the segment analysis, the EBITDA at car rental and equipment rental, let's say, for example, on the six-month period is pretty flat. But when you back up, go and look at the income line, the equipment rental is down significantly. Did they have that much larger of a depreciation charge?

Elyse Douglas

As you might recall, the corporate EBITDA is calculated in two different ways for Rent-A-Car and for equipment rental. So the equipment rental is the traditional where you add back depreciation and interest and in Rent-A-Car, we treat it as an operating expense.

Mark Frissora

So it's above the line versus below the line as it is in equipment rental?

Elyse Douglas

At the end of the day, Hertz has a larger percentage of our overall EBITDA because of the way it's calculated.

Mike Lanier - AIG

Okay. And then, finally, what are you looking for on the on-airport side? When you give your guidance, what kind of employment number are you embedding in that number here, what are you looking for on-airport here in the second half?

Mark Frissora

Employment number is coming off variety of sources, but we assume the worst case scenario that's out there in the market today. So our assumption that we build into our guidance is it will be down over 5%, 6% that range on employments. Okay?

Mike Lanier - AIG

All right. Thank you.

Mark Frissora

Thanks a lot. We'll just take two more questions now. Okay?

Operator

Okay. We'll go to Emily Shanks with Lehman Brothers please go ahead.

Emily Shanks - Lehman Brothers

Thank you for letting us present. Two very brief follow-up question. You referenced your model year 2009 discussions with the OEMs. Can you speak at all about what your expectations are for cost increases for model year 2009?

Mark Frissora

Overall flat to down.

Emily Shanks - Lehman Brothers

Okay. And then, around the Hertz business you cited the industrial business mix. Is that increase in mix just due to the slowdown in the other segments or are you guys actually acquiring new accounts or expanding organic growth?

Gerry Plescia

Hi, Emily, this is Gerry. No, we're actually growing the industrial sector. In the second quarter, the actual revenue growth was double-digit in North America through new account acquisitions and just growing our share.

Emily Shanks - Lehman Brothers

Okay. And what type of end markets are those accounts then?

Gerry Plescia

Most of them are in the petrochemical areas, steel, other manufacturing, but the largest growth component is in the petrochem area.

Emily Shanks - Lehman Brothers

Great, thank you.

Mark Frissora

Okay. One more question.

Operator

And our final question comes from [Yoma Abibi] with JPMorgan. Please go ahead.

Yoma Abibi - JPMorgan

Thank you. There are two questions for me. The first question is the reduction in corporate debt in this quarter, what debt was paid down?

Elyse Douglas

We have an ABL facility as part of our corporate debt. It's a revolving credit facility that funds our Hertz business primarily.

Yoma Abibi - JPMorgan

Yes, okay. That was their pay down?

Elyse Douglas

Yeah.

Yoma Abibi - JPMorgan

And then my second question is in terms of your outlook for debt reduction, corporate debt reduction for the balance of the year and views there?

Elyse Douglas

It should be in line with our cash flow guidance. And our cash flow guidance is $550 million to $650 million.

Yoma Abibi - JPMorgan

Great, thank you.

Mark Frissora

Okay. So once again everyone thanks for joining us today. We appreciate your interest and look forward to updating you after the third quarter.

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.

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Source: Hertz Global Holdings Inc. Q2 2008 Earnings Call Transcript
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