Avis Budget Group, Inc. Q2 2009 Earnings Call Transcript

| About: Avis Budget (CAR)

Avis Budget Group, Inc. (NASDAQ:CAR)

Q2 2009 Earnings Call

August 5, 2009 9:00 am ET


David Crowther – Vice President of Investor Relations

Ronald L. Nelson – Chairman of the Board & Chief Executive Officer

F. Robert Salerno – President, Chief Operating Officer & Director

David B. Wyshner – Chief Financial Officer & Executive Vice President


Jeff Kessler – Imperial Capital

Brian Johnson – Barclays Capital

Emily Shanks – Barclays Capital

[Yoma Abebe]


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

David Crowther

On the call with me are Chairman and Chief Executive Officer Ron Nelson, our President and Chief Operating Officer Bob Salerno and our Executive Vice President and Chief Financial Officer David Wyshner. If you did not receive a copy of our press release it’s available on our website at www.AvisBudgetGroup.com. Before we discuss our results for the quarter I’d like to remind everyone that the company will be making statements about its future results and expectations which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act.

Such statements are based on current expectations and the current economic environment and are inherently subject to significant economic, competitive and other uncertainties and contingencies beyond the control of management. You should be cautioned that these statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements. Important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements are specified in our 10K and in our earnings release issued last night.

Also, certain non-GAAP financial measures will be discussed and these measures are reconciled to the GAAP numbers in our press release which is posted on our website. Now, I’d like to turn the call over to Avis Budget Group’s Chairman and Chief Executive Officer Ron Nelson.

Ronald L. Nelson

This morning we’re all going to comment on various aspects of our second quarter results, our cost savings initiatives and our outlook. Before I do that though I want to share a broader view of where we stand by reminding you of the issues that were an overhang on our stock and frankly an anchor on our company earlier this year then provide you with a sense of the progress that we’ve made on these particular issues. So you don’t misunderstand, we’re not declaring victory by any margin, there’s still a lot of work to be done to restore profitability to acceptable levels but, we are confident we’re on the right track and even more confident we will ultimately get where we need to be.

Let me get to the issues, at the start of 2009 there were widespread concerns about our ability to achieve the cost savings we were targeting, our ability to meet our financial covenants, about used car prices which had declined sharply in Q4, about the potential for severe impacts from OEM bankruptcies, our fortitude to keep fleet levels in line with weak demand, refining our access to liquidity in the ABS market. The headline on this is that these concerns are largely in our rearview mirror at this point.

It would be silly for me to say that all these were unjustified, to be sure, several of these were simply not in our control but they did evolve the way we expected them to and for those that were in our control, well I believe we went after them about as aggressively as any management team could. First, on the cost savings front, we are well ahead of the projections we made when we developed the five point plan in the fourth quarter of 2008. We have increased our targets sequentially over the last two quarters and continue to look for incremental opportunities.

Second, in the area of covenant compliance, I’ll spare you the [Mark Tain] quote about premature reports of our debt and simply say that we expected our second quarter to be our tightest from a compliance standpoint and we actually exceeded our minimum EBITDA requirement for the quarter by 63% giving us approximately $60 million of cushion going in to the back half of the year. Third, the used car market has rebounded from its fourth quarter lows even more quickly and more dramatically than we expected. It is actually stronger today than it was a year ago. Bob will share some additional thoughts on this including the cash for clunkers impact in a few minutes.

Fourth, while both Chrysler and GM did end up seeking bankruptcy protection, our dealings with them continue to be business as usual as we expected it would as both companies have resumed our contracts with them as they emerged from Chapter 11. Fifth, while we have managed fleet levels as we said we would but it did end up being more difficult than we expected largely because we didn’t expect the first quarter volumes to decline as much as they did. Between selling cars early and negotiating our way out of purchase commitments, we eventually aligned the fleet with demand but, it was not without costs as you will note from our per unit fleet cost increase so far this year.

Thankfully, it’s now largely behind us and we will return to a more normalized fleet costs in the back half of the year. But, not coincidentally, our aggressive fleet management has contributed to our ability to achieve the laser price increases we have all year. Lastly, on the liquidity front, we’ve laid out our plan for refinancing our 2010 vehicle debt maturities and are executing against this plan. Our recent $450 million term ABS offering was very well received by the market. When you combine this with our lease transaction announced in May, it means that we have already taken care of a significant portion of our non-conduit related domestic needs. David will discuss this further but I want to emphasize that we believe if the current environment doesn’t change, we can be fully financed for 2010 well before the end of the year.

When we look back at this we’re excited about the developments and achievements that have helped us address all these issues even as the economic climate and travel volumes have remained week. Maybe, the more honest way to say this is that we are relieved about the developments and proud of our achievements. Either way, this forward momentum positions us well as conditions improve.

Before we talk about the way forward though, let me relate some of these positive developments to our second quarter results, how they impacted or in the case of OEM bankruptcies, didn’t impact our quarter. A few months ago when we looked ahead to the second quarter, all signs pointed towards rental day volumes being down significantly year-over-year as the trends we saw in the first quarter were poised to continue. This did turn out to be the case.

Demand for domestic travel services including car rental was weak. The fourth quarter of ’08 was weak, the first quarter of ’09 was even weaker and the second quarter essentially sustained the bottom of the first quarter weakness which occurred in March. A 22% year-over-year decline in domestic rental days was greater than it was in the first quarter as a whole but if there is a silver lining it is that demand clearly stabilized in the second quarter and began to show some signs of improvement as we moved in to the third.

While reported volume is an important data point, it is just one element in the overall equation and it needs to be viewed in the context of the other elements that make up the profit picture. For us, those include first leisure pricing, it was even more robust than earlier quarters with a composite pricing gain across both brands of 12%. Budget’s gain was higher than 12% and higher than Avis’ but both were substantial. It’s worth noting by the way that commercial pricing actually contributed modestly to overall RPD gains this quarter, up about 2% with most of the strength in the under $1 million accounts.

Second is ancillary revenues, on a per rental day basis our ancillaries were up 22% as we continue to see the benefits from the counter sales training initiative launched last year. Actually our greatest success in this area has been in the area of car class upgrades which is captured in our overall RPD stats, not in the ancillary revenue measure. Our estimate is that car class upgrades account for one full point of our RPD gain this past quarter.

Third, is headcount and fleet. Both were down significantly as we flexed our business model in the face of declining demand. At quarter end, we have now trimmed a total of 8,400 positions or over 25% of the work force and are running our fleet down 22%. To be sure, some of these are due to the variable nature of our work force but over 3,700 of these are reductions to fixed costs as part of our cost reduction initiatives.

The last impact is overall cost savings, much larger than we had forecast and driving improvements throughout our business. Our current forecast for cost savings across our business is now estimated to range between $380 and $440 million on a run rate basis by the end of 2009. We don’t need to look any further than our GAAP P&L with no adjustments necessary I might add, to see the evidence of these last two items. Our direct operating expenses are down some $160 million from last year and its ratio to revenue down by more than 200 basis points.

Our SG&A is similarly down by $40 million or 23% and its ratio to revenue is down by 90 basis points. All of this is despite a revenue decline in the second quarter of more than $250 million. David will take you through this in more details so I would encourage you to get your pencils ready. All of this is the payoff from the relentless focus, hard work and sacrifice of our people. Every layer from top to bottom in our organization has contributed to identifying and executing on our cost savings.

We’ve taken full advantage of the benefit of our business model by adjusting the size of our field organization to stay in alignment with volumes even at a time when volumes were declining at unprecedented rates. We are also addressing fixed costs and overhead and challenging the established ways of managing our business to generate additional savings and, the payoff from all of these factors is that our second quarter EBITDA exceeded our business plan and we have significantly added to the cushion against our 2009 covenant requirements. That’s despite a volume drop off that not only was substantially below prior year’s revenues but also a fairly significant shortfall from planned revenue as well.

That said, at some level volume is important but not all volume is created equal, not all our volume decline was market driven. Our guesstimate is that three or four points of our volume decline relates to intentional actions to limit unprofitable volume in our mix. You will recall, as part of our five point plan we were going to work hard at limiting certain types of business and customers whose rentals do not make a positive earnings contribution. The way we tried to do this was usually to increase the rate we were quoting in a particular channel for a particular rental, the primary objective is to win the customer at a contribution positive rate.

Failing that, we were okay with not winning the reservation at all since either winning at a higher rate or avoiding the transaction at a lower rate represents a profit improvement. At the risk of sounding facetious though, the important part of volume is called revenue. There is the reality that our revenue was down 17% during the quarter and while we were thrilled with the performance that we delivered at the lower revenue level, unfortunately not enough of it found its way down to net income. Realistically, we’re not likely to overcome a 22% volume gap with pricing, if we did the industry would be enormously profitable but the competitive dynamics are unlikely to allow that to happen.

Merchant volumes have been down close to 20% since the first of the year, leisure has not been much different partially reflecting our internal actions on unprofitable transactions but both are really more reflective of the depressed state of the travel market than anything else. The industry does need to see a recovery at some level to drive the volumes that will deliver the levels of profit necessary to sustain the capital investment. While we are confident it will recover and what is encouraging on this front is that with the cost reductions already in place, the level of pricing currently in the market and where we expect fleet costs to land next year, we can meaningfully increase our revenue profitability next year at much lower levels of revenue. Clearly, we will not have to narrow by any stretch the entire 22% gap.

Let me take a minute and talk a little bit about the third quarter, the rest of the year and perhaps some thoughts about modeling next year. Despite some signs that the worst may be over in terms of the recession, we do expect that 2009 will continue to be a challenging economic operating environment. Comps will certainly get easier as we move in to the September/December period and we’re moderately optimistic that the stimulus package will benefit certain key segments of the commercial market. But, the airline industry is continuing to show year-over-year declines in enplanements and capacity so I think it would be imprudent to expect a meaningful turnaround.

As an aside, our truck business has been stabilizing of late nationally showing an uptick in earnings notably in the more profitable one way segment as people move in pursuit of employment opportunities. Similarly in our international business, the year-over-year comparisons have been challenging largely due to the US dollar being about 20% weaker than a year ago. But, we are seeing unusually favorable pricing dynamics there too with increased pricing in our two largest markets Australia and Canada that started in Q2 and is continuing in to Q3. This is helping narrow the gap created by the fx translation issues.

While we don’t intend to give specific earnings projections, I do want to mention a few key points, some positive and some negative about our domestic business that may be important to those who model our results. First, the third quarter is shaping up much like we expected, fleets are tight across the industry and almost everyone is positing some kind of length of rental restriction or in certain markets suspending availabilities each week for the balance of the summer season.

This is obviously having a salient affect on pricing. We are continuing to see pricing gains though not at the same level as the second quarter throughout the summer. This is despite the high level of pricing gains we enjoyed last year. We are also continuing to sell cars and in so doing are consciously paying off some of the summer revenue fleet. Our July results would suggest that most of what we lost in revenue we’re picking up in pricing and utilization. Midweek utilization rates are higher than we have ever seen them across both brands as we manage the fleet as aggressively as possible.

Just to put a finer point on this, while we expect volumes to improve from the second quarter bottom, you should still expect them to be down double digits, probably somewhere in the mid to high teens. While we may be concerning about the top line somewhat in the third quarter given these actions, it should results in greater risk mitigation in the fourth quarter when the industry is typically over fleeted, selling cars in a declining used car market. We will still need to be selling cars but nowhere near the levels that we have over the last eight weeks and clearly nowhere near the levels of last year.

We do think however that the overall tightness in fleet level should bode well for keeping pricing rational as we move through the third quarter and in to the fourth. For the balance of the year we think fleet costs will improve fairly substantially for a few reasons. One is that the comps get far easier, last year’s fourth quarter may have been the worst quarter we ever have experienced for car sales and we were having to dispose some relatively inexpensive program cars to get the fleet aligned with demand which caused our retained fleet costs to rise. Another is what I alluded to a minute ago, we are well positioned on fleet levels and do not think we will be selling anywhere near the volume of cars we did in the early part of the year.

Both of these mean that fleet costs in the back half of the year ought to get back to somewhere close to the levels we would have originally expected in the low single digits. For the full year, we think fleet costs on a per unit basis will likely average between 7% and 9%. Next year, as you will hear from Bob, we are expecting a decline in fleet costs on the order of mid to high single digits. That combined with the cost reductions and the stable price assumption and only modest increase in volume from 2009’s depressed levels, should bode well for significantly improved profit performance for 2010.

Despite the current weakness in demand that we need to continue to manage through, as we begin to look ahead and potentially see some green shoots of economic recovery I am becoming cautiously optimistic. With that, let me turn the call over to Bob Salerno.

F. Robert Salerno

I’m going to focus my comments this morning on fleet, both the steps we’ve taken to reduce fleet levels and what we’re seeing in the used car market and also give a brief update on our 2010 negotiations. As Ron mentioned, we continue to manage the fleet down aggressively based on demand. Our average domestic fleet for the quarter was down 22% year-over-year in line with the decline in rental days and at quarter end our fleet was also down about 22%.

Shifts of this magnitude are not without costs, it’s important for you to remember that our fleet costs include depreciation, disposal costs and any gain or loss on disposals. These were up 17% on a per unit basis this quarter. Since we did not anticipate double digit volume drops when we signed the model year ’09 fleet deals last summer, the rapid decline in demand from the fourth quarter through the first quarter pushed up per unit fleet costs and this continued in to Q2 as we continued to right size our fleet.

The issue is that the least expensive month in a car’s life is often the last month. As a result, demand weakness that causes us to sell or turn back vehicles sooner than we had planned imposes an incremental cost on us. However, at this point the significant fleet cost increases are behind us as our projected overall 7% to 9% per unit fleet cost increase for the year indicates. We are expecting modest increases in the third quarter and a decline in per unit costs in the fourth quarter.

Compared to our competitors, our average fleet age is more than 15% younger though we expect our hold periods to lengthen going forward and we believe this dynamic will benefit fleet costs for the remainder of the year and in to next year. The improved conditions at the used car auctions will also benefit us going forward. While our forecast anticipated a rebound in the used car market, the market has improved even more so. During the second quarter we sold over 50,000 risk units and as the used car market continues to be strong we are continuing to sell cars at higher than planned volumes so far in the third quarter.

Our online vehicle sales in the quarter set another record with over 10% of our sales going through these highly efficient channels. In total, for the first six months of 2009 the Manheim Index of Used Vehicle Values increased more than 12% on a mix and mileage adjusted basis and it is now up 6% versus a year ago. I’d like to remind everyone that while the Manheim Index is generally a good directional indicator of what we are experiencing with our risk cars, it is not a perfect match for two principle reasons. First, the index is for the entire used car market and we participate only in the one year old used car market. Second, our mix of risk vehicles skews towards the small and midsized cars so to the extent that this sub segment diverges from the overall index which is more heavily weighted towards pickups and SUVs our results could differ.

But, as we discussed in the past, there are many factors that are contributing and that should continue to contribute to the strength of the late model used car market this year. We also do not expect the cash for clunkers program to change that. The key driving force behind the late model price strength is that we are purchasing nearly 30% fewer cars this model year than we did model year 2008 and the rest of the car rental industry appears to be acting similarly. Anecdotally, cash for clunkers buyers seem to represent a new demand to the market meaning that they wouldn’t have otherwise bought a car but for the incentive.

We’re not the only ones that are seeing minimal impact on residual values. Manheim was quoted yesterday as seeing the same thing. I guess the most important thing is that the program is not adding any additional supply to the used car market. We are well in to our 2010 model year negotiations at this point. Overall, things are progressing well with an ample supply of both risk and program cars available. Our model year 2010 buy is expected to be significantly smaller than our 2009 buy as we look to extend the average hold period and keep fleet levels in line with demand.

Our manufacturing mix will probably shift a little more towards the Asian fleet and less domestic as we continue diversification efforts we started four to five years ago. Most importantly, when we roll everything up, we expect that our per unit fleet costs will actually be down in the range of mid to high single digits for model year 2010. So, after certainly one of the most difficult periods I’ve ever experienced in this industry, I’m pleased by the positive developments in the used car market which should continue, by our own fleet management activities over the last few quarters which will also continue and by how our model year 2010 fleet is shaping up.

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

David B. Wyshner

I’d like to discuss our recent results, how our cost saving initiatives impact our earnings statement and our financing strategy. Starting with our results excluding restructuring cost of $8 million, in the second quarter revenue fell 17% to $1.3 billion. EBITDA was $67 million and our pre-tax income was $6 million. EBITDA declined modestly from the $77 million we reported in second quarter 2008 but excluding restructuring costs, our EBITDA margin was actually higher than it was a year ago.

In our domestic segment, EBITDA declined for the quarter due to lower volume and higher fleet costs per vehicle, the effects of which were partially offset by our cost savings initiatives and pricing gains. Second quarter revenue dropped 17% reflecting a 22% decline in rental days and a 7% increase in time and mileage revenue per day primarily data price increases for leisure rentals. We believe the increase in time and mileage rates is a testament to the car rental business model which has inventory flexibility that makes it quite different from the hospitality and airline industries.

As Ron mentioned, ancillary revenues excluding gas increased 22% on a per rental day basis. Direct operating expenses declined 300 basis points as a percentage of domestic revenue despite the steep decline in volume and SG&A declined 110 basis points as a percentage of revenue. These improvements demonstrate how we have attacked infrastructure costs in addition to reducing expenses to mirror declining volumes.

In our international car rental operations, revenue decreased 20% year-over-year driven by a 10% decrease in rental days and a 12% decline in time and mileage revenue per day which was entirely due to foreign exchange. Excluding the effects of fx, T&M per day was up 4% and ancillary revenues increased 6% per rental day reflecting our initiatives in this area. Fleet costs rose 8% on a per unit constant currency basis. In total, while reported revenue declined $7 million, $5 million of this decrease was due to foreign exchange movements and $1 million was due to restructuring costs.

In our truck rental segment, revenue declined 8% in the quarter versus last year due to an 8% decrease in rental days. Average pricing held constant year-over-year and EBITDA increased due to lower fleet costs, cost saving initiatives and a more profitable mix of revenue. We are managing our capital spending judiciously, expenditures totaled just $6 million in the second quarter which is a 75% decline versus last year. As I noted previously we are aggressively curtailing discretionary items and prioritizing projects based on necessity and those that generate return in less than one year. Capital expenditures will be higher in subsequent periods than they were in the second quarter as some larger projects including some airport mandated projects are scheduled for the back half of the year but the total for 2009 will be considerably below 2008 levels.

On a separate topic, several investors have asked us about how to see the benefits of our cost savings program in our income statement. Given the overlapping effects of volume declines, price changes, inflation and foreign exchange, the answers to this question may not be readily apparent from our consolidated results so I’d like to try and provide some clarity. For starters, our performance excellence program, our third quarter 2008 actions and our five point plan all primarily impact the operating expense and SG&A expense lines. But, our initiatives also affect revenue, fleet costs and interest costs.

Examples of why this is the case include our efforts to increase revenues for gas related recoveries under our [inaudible] project or our work to shrink unprofitable segments of our business which reduces revenues and costs of all types. Let me focus on our domestic car rental segment and provide a walk down based on the way we have discussed our business model in the past and the way I believe many of you think about our business and it’s sensitivities to changes in key metrics. A thing such as a year-over-year walk down can help crystallize the cost reduction benefits we’re realizing.

To start, second quarter 2008 EBITDA was $46 million, from there the EBITDA impact from the 22% year-over-year volume decline was -$82 million using the 30% drop through rate for volume we’ve discussed in the past and $1.24 billion as second quarter 2008 domestic revenue. A 7% increase in time and mileage revenue per day had a positive EBITDA impact of $46 million as pricing drops grew at nearly 90%. The 17% per unit fleet cost increase reduces EBITDA by $50 million as we mentioned in the earnings release. Gas margin improved by $10 million and per unit interest costs increases had a negative EBITDA impact of $12 million. Finally, growth in ancillary revenues per day had a positive EBITDA impact of roughly $13 million.

We will post all of this in a new investor update deck on our website so the numbers will be available to you even if you fell behind on your note taking. But, when you add these up and compare the sum to our second quarter 2009 EBITDA of $43 million excluding restructuring costs, you will see that we had net cost savings of $72 million for the quarter. It’s important to note that these are the net savings realized after overcoming inflationary pressures on the roughly $600 million of non-fleet costs that we had in the quarter.

If you do the same math for the year-to-date domestic results, it totaled $111 million in net cost savings. While our own tracking and analysis of cost savings is based on much more detailed data, I hope this top down approach is helpful to those of you who are struggling to find a way to parse our results to confirm that we are indeed achieving substantial cost savings. Please remember though that these numbers are for our domestic operations only and do not include the savings that we are generating in our international and truck operations as well as actions that impact pricing or ancillary revenues which are also part of our savings initiatives.

The last topic I’d like to cover is our financing strategy. Our cash balance at quarter end was $434 million. We had $315 million of available LC capacity under our corporate credit facility and we had $1.4 billion of available capacity under our vehicle financing programs. Our access to capital was more than adequate to meet our 2009 peak in fleet levels which occurred as it usually does in mid July. I mentioned during our last earnings call that our peak funding needs in 2009 were taken care of and the financing we’re doing is to prepare for 2010.

As of June 30, in our domestic car rental business we have $2.5 billion of existing vehicle backed debt that comes due over the next 18 months as does $1.1 billion of available but unused capacity. As a result, and based on our actual 2009 and estimated 2010 fleet levels, we estimate that our domestic vehicle funding capacity needs for 2010 will be $3.3 billion comprised of the annual maturity of our $2 billion plus bank conduit facilities and a little bit over $1 billion of ABS term debt maturity.

As we have discussed, our plan is to renew our conduits for approximately $2 billion although depending on our needs this could be a bit lower and we plan to have non-conduit funding of roughly $1.5 billion probably comprised of operating lease financing of $300 million and about $1.2 billion of term debt to be issued over the next 12 months or so. In May we completed an operating lease facility for roughly $325 million and in July we completed the first term asset backed securities offering by a rental car company since 2007 generating proceeds of $450 million.

So, as Ron mentioned, we have already made significant progress towards meeting our 2010 needs. In addition, we expect to have discussions in the fall about the renewal of our 264 day conduit facilities although they don’t mature until yearend. With respect to our recent ABS deal, I should note that it was not a TALF eligible issue but rather was structured to a A rating given us an advance rate of nearly 70%. The three year notes carry a 9.31% coupon which compares very favorably to some other recent transactions in the ABS market.

With Standard & Poors having backed away from rating car rental ABS transactions as they had for more than 10 years, we don’t know whether a car rental company will be able to meet the TALF requirement of two AAA ratings but the good news is that we were able to tap significant interest in our ABS debt even without the benefit of TALF. Our plan continues to be to take an opportunistic approach to investing our 2010 financing needs. We will be looking at several sources of funding including the asset backed market and operating lease structures.

Most importantly though, based on our recent experience, we believe there is an appetite regarding the A or AAA level for the ABS debt we want to issue to meet the rest of our needs and we will likely access the market again in the second half of 2009. Stepping back, we have highlighted how we believe key investor’s concerns are being resolved favorably. Our ability to achieve cost savings, the rebound in the used car market, potential impact from OEM bankruptcies and the management of fleet levels and fleet utilization are all areas that are largely behind us.

In terms of covenant compliance, we have met our requirements for the past three quarters and ended the second quarter with a $60 million EBITDA cushion. On the liquidity front we are executing against our financing plan and completed the first car rental ABS deal in two years. We remain focused on executing against opportunities that we control. We enter the back half of the year in a far better place than we began the year and we remain excited about our longer term prospects.

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

Question-and-Answer Session


(Operator Instructions) Your first question comes from Jeff Kessler – Imperial Capital.

Jeff Kessler – Imperial Capital

First question is about fleet, the needs for your fleet management and your holding periods, are we going to be seeing an era of 30,000 mile cars out there for the industry as a whole? And, do you think that the customer is going to be able to handle the increased mileage that is probably going to be needed to increase not just for you but for everybody?

F. Robert Salerno

I think this industry will see higher mileage units out there. I think as the manufacturer and the manufacturer programs become more rational if you will than perhaps they have been through the 90s, even the late 90s and early 2000s, I think the need to increase the mileage on the cars will go up as we hold cars a little bit longer. As you well know, for someone who has been covering this industry for a long time, we use to hold cars a whole lot longer. The cars today are really much more able to withstand the mileage than they maybe were 15 to 20 years ago.

Our belief is that if the car looks presentable, smells presentable and runs in a good fashion that the mileage actually up to a certain point is acceptable. So, a lot of our operational objectives right now revolve around the three things I said and so far we haven’t had much of a problem on this at all and prior to us reducing the fleet the way we have we were edging up there. As you will recall we had longer holds on the cars and I think that’s what we’re going to return to and I think it’s something that across the industry we’re going to necessarily have to do that to obtain the profits we need.

Jeff Kessler – Imperial Capital

This is my fourth go around with this industry and back in the late 80s, 20,000 miles and above was not unheard of at all in fact, it was fairly common. Normally you guys have a very aggressive program to changing your mix of cars back and forth between program and at risk in the third and fourth quarters to basically hone out your fleet the way you want it to at the end of the year. What are you going through right now to change your fleet and get it ready for the leader part of the year.

F. Robert Salerno

That’s an interesting question Jeff, as Ron and David talked about, some of the volume decline you saw in the end of the second quarter and even occurring right now has been self inflicted for two reasons, one we talk about unprofitable pieces of business that we had taken out but the other thing is we have spent the money to bring the fleet down exactly where we wanted it to be and it has allowed us to increase our pricing. So, some of the volume decline is because of that.

Having done that however, and as we continued in July and in August to sell cars in a really good wholesale market, we think as we get in to the late third and in to the fourth quarter that we don’t have a lot of pressure to dispose of risk cars, we will have pretty much done it at what I think might be the peak of the market. So, a long story short, I feel very, very good about the fleet as we turn the corner in to the winter months and in to next year and how we’re looking at the 2010 buy also looks very, very favorable.

Jeff Kessler – Imperial Capital

One other question and that is despite the fact that you guys have learned that you have to makes lots of money during the rental period, a lot more money during the rental period now than you ever have to offset the decline in volumes, nevertheless some of these like kind exchange programs that have been out there on the end of the car life are going to potentially expire in a year or two and I’m wondering if you guys are preparing or if you guys are looking at what type of accelerated depreciation or other types of like kind exchange programs may be in the works to supplement or replace what’s in the drawer right now?

David B. Wyshner

Jeff, the like kind exchange program really just impacts our tax treatment of the vehicles. So, from the perspective of how we manage the fleet I think what matters the most is the range of deals we’re able to enter in to with various manufacturers. As Bob indicated, I think those are going pretty well so far in model year 2010 and we continue to see manufactures being very willing to work with us to come up with things that work for us as a company, us as an industry and for them as an industry as well.

Jeff Kessler – Imperial Capital

Can you give us some idea of where you see foreign cars as a percentage of your mix in 2010? It’s obviously growing, the question is can you get just a little more exact?

David B. Wyshner

As you know we have been increasing the foreign manufacturer mix of our domestic fleet fairly consistently over the last five years and I think we will look for that to continue going forward.


Your next question comes from Brian Johnson – Barclays Capital.

Brian Johnson – Barclays Capital

A couple of questions, in light of the pricing you’re able to get on your ABS deal, how are you thinking about financing costs over the next 12 to 16 months? And, assuming that similar financing terms for your competitors, do you think that will be reflected in pricing or are we going to have to use some of your cost cuts to offset the interest rate increases?

David B. Wyshner

I think we are expecting interest costs to increase as debt that was issued several years ago matures and we replace it with new debt that reflects where risk is currently being priced in the market. I think the good news is that the impact of that, while we’re not going to project a number, the impact of that is likely to be significantly smaller than the benefit associated with having a several point decline in fleet costs. As a result, we can offset the impacts of higher interest costs either through pricing or through lower fleet costs and I think our hope and expectation is that we’ll have both avenues available to us.

Brian Johnson – Barclays Capital

Then lower fleet costs, the manufacturers always claim that they’re getting better pricing in rental but at the same time you’re talking about lower fleet costs is that just because you’re aging the car longer or are the negotiations far enough along that you’re actually thinking that you’re getting a better deal on model year 2010 versus model year ’09?

David B. Wyshner

I think there’s a bit of both going on. Certainly we are as Bob mentioned looking at holding cars a little bit longer which will help bring down the costs. Because volumes were light we didn’t hold cars as long as we had hoped or expected too which produces a year-over-year benefit that’s available to us next year. The real issue is that over the last two or three years we have seen very substantial increases in the costs we’re incurring for fleet. So, even if we get a few points back next year it’s still a case as the manufacturer have significantly, call it 40% to 50% in total increased the cost that we’re paying for vehicles compared to where they were three or four years ago.

Brian Johnson – Barclays Capital

Final question, could you comment maybe a bit on pricing vis-à-vis your competitors? Overall, you’re up compared to the larger competitor in the market, what are you seeing on the on airport and is their performance maybe not as strong on the on airport and if so is the business leisure or is it just simply a mix and work the other competitors doing vis-à-vis insurance and other lower price longer term rentals?

Ronald L. Nelson

I think the answer to that really lies in what your fleet strategy is. Clearly, if you have more fleet you’re going to be more aggressive at going after more volume. We’re the first ones to say that there is more volume out there to be had but it is certainly all on the leisure side and that’s spot volume and you can always get it back by adjusting your pricing. I think if you look at actions since really the fourth quarter last year I think everybody has been acting in the same way in terms of raising retail and leisure pricing. I think commercial pricing is still very competitive and you’re not likely to see any big gains in commercial pricing over the course of at least the next 12 months.

But, I think that you have to look at volume and price in tandem. There are always multiple ways to skin the same cat. I mean, our competitors volume was much better than ours but the pricing wasn’t as good and their fleet wasn’t down as much. On the other hand, our fleet was down pretty substantially, our volume was down equally but our pricing was up. I think it’s just a matter of where you want to position yourself with fleet and how you want to attack the marketplace.


Your next question comes from Emily Shanks – Barclays Capital.

Emily Shanks – Barclays Capital

I have just a couple of follow ups, specific to the OEM lease financing, the $325 million amount that was announced, is that a renewal or extension with somebody that was already in place or is that something new?

Ronald L. Nelson

The lease financing transaction was new.

Emily Shanks – Barclays Capital

Then can you update us on where you stand around outstanding shelf registrations? Specifically, I’m just wondering if you have the capacity right now to issue common or converts or if you have to file a shelf for that?

David B. Wyshner

We don’t currently have a shelf that is available to us.

Emily Shanks – Barclays Capital

Then my apologies but I missed the outstanding revolver availability currently, what was that?

David B. Wyshner

There’s available LC capacity under the revolver of $315 million.

Emily Shanks – Barclays Capital

But can you draw that?

David B. Wyshner

$175 million of it is available for borrowings and $315 is available for LCs.

Emily Shanks – Barclays Capital

The amount that was drawn on the revolver was that used to fund required collateral or enhancement requirements in the non TALF ABS deal?

David B. Wyshner

I guess cash is spongeable. We really look at the fact that our pretax income in the first six months of the year was negative. Our business generally speaking is a cash business so I actually think of the borrowing as being used to fund the working capital needs associated with having a pretax loss over the first six months.

Emily Shanks – Barclays Capital

Then maybe let me ask it this way, did you have to draw further on your revolver to fund required enhancement levels post quarter end?

David B. Wyshner


Emily Shanks – Barclays Capital

So availability is still kind of in that $175 million range?

David B. Wyshner

That’s correct.

Emily Shanks – Barclays Capital

Can you give me what your cash balance today is by any chance?

David B. Wyshner

Emily I don’t have that number on hand. We typically don’t, and I think we’re typically not going to talk about where we are from a cash standpoint during the quarter and it certainly varies a fair amount over the course of a month since as you know we pay rent essentially to [ASOP] on the 20th of the month so we have fairly substantial swings in our cash balances over the course of a month. But, our cash balance does continue to be fairly significant.

Emily Shanks – Barclays Capital

The updated slides, will it go through you had given some numbers around what your financing plans are, will that be covered in your slide deck as well?

David B. Wyshner

It will. We’ve had a slide in the past that walks through the 2009/2010 financing needs and that slide will be updated to reflect the comments I made during the additional remarks on this call.

Emily Shanks – Barclays Capital

Around the conduits, have you already begun discussions with your lender group on that?

David B. Wyshner

No formal discussions. We talk to our bank relationships on a very regular basis but no, given that the maturity of that facility is in December, we wanted to get through the second quarter, file our Q and have a really good sense of where the summer is shaping up before we do that. But, as I mentioned, we do expect to be having more formal discussions with the banks in the fall.


Your final question comes from [Yoma Abebe].

[Yoma Abebe]

One quick one for me, can you remind us of your seasonality for free cash flow quarter-to-quarter historically and how do you think that will play out this year?

David B. Wyshner

As I mentioned, our cash flow generally follows our pretax income. There can be a lag of a few weeks or so but generally speaking it follows income and as a result you should see free cash flow seasonality that is generally in line with our earnings seasonality which means the third quarter tends to be our strongest from a number perspective.

David Crowther

For those of you who should have additional questions that we didn’t answer please feel free to call any of us, we’d be happy to answer them. We know you have to get on another call and really don’t want to jam you one up against the other. Thank you for listening in today and we look forward to reporting the results in the third quarter to you sometime in late October.


This concludes today’s conference. You may disconnect.

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