Hertz Global Holdings' CEO Discusses Q1 2012 Results - Earnings Call Transcript

| About: Hertz Global (HTZ)
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Hertz Global Holdings (NYSE:HTZ) Q1 2012 Earnings Call May 3, 2012 10:00 AM ET


Leslie Hunziker - Staff Vice President of Investor Relations

Mark P. Frissora - Executive Chairman, Chief Executive Officer, Member of Executive Committee, Chairman of Hertz Corp and Chief Executive Officer of Hertz Corp

Elyse Douglas - Chief Financial Officer, Executive Vice President and Treasurer of Hertz Corp

Unknown Executive -


Christopher Agnew - MKM Partners LLC, Research Division

Michael Millman - Millman Research Associates

Richard M. Kwas - Wells Fargo Securities, LLC, Research Division

John M. Healy - Northcoast Research

Bobby Jones


Ladies and gentlemen, thank you for standing by. Welcome to the Hertz Global Holdings 2012 First Quarter Conference Call.

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 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 first quarter results issued yesterday and in the risk factors and forward-looking statements section of the company's 2011 Form 10-K and quarterly reports. Copies of these filings are available from the SEC, the Hertz website or the company's Investor Relations department.

I would like to remind you that today's call is being recorded by the company and is also being made available for replay starting today at 12:30 p.m. Eastern Time and running through May 17, 2012.

I would now like to turn the call over to our host, Ms. Leslie Hunziker. Please go ahead.

Leslie Hunziker

Thank you. Good morning. You should all have our press release and associated financial information. We've also provided slides to accompany our conference call that can be accessed through our website at www.hertz.com on the Investor Relations page.

Today, we'll use certain non-GAAP financial measures, all of which are reconciled with GAAP numbers in our press release and at the back of the slide presentation, both of which are posted on the website. We believe that our profitability and performance is better demonstrated using these non-GAAP metrics.

Our call today focuses on Hertz Global Holdings, Inc., a publicly traded company. Results for the Hertz Corporation differ only slightly, as explained in our press release. With regard to our IR calendar, this month, we'll be presenting at the Wells Fargo Industrial Conference on May 8 in New York City.

This morning, in addition to Mark Frissora, Hertz's Chairman and CEO; and Elyse Douglas, our Chief Financial Officer, on the call, we have Scott Sider, Executive Vice President and President of Vehicle Rental and Leasing, The Americas; Michel Taride, Executive Vice President and President, Hertz International; and Lois Boyd, Executive Vice President and President of Hertz Equipment Rental Corporation. They'll be on hand for the Q&A session.

Now I'll turn the call over to Mark.

Mark P. Frissora

Good morning, everyone, and thanks for joining us.

Let's start on Slide 6. You can see that 2012 is off to a strong start. Consolidated revenue was up 10.2% worldwide in the first quarter. This growth, together with incremental cost savings of nearly $100 million, led to a 25% increase in corporate EBITDA year-over-year, which translated into a 130 basis point margin improvement. Adjusted pretax income was $29 million, reversing last year's loss. And we reported adjusted earnings of $0.05 per share, a record first quarter result.

As always, there were lots of puts and takes in the quarter, but in the end, our more efficient cost structure, the ongoing macro recovery in the U.S. and the benefits from our strategic growth initiatives prevailed. Strong contributions in North America from both rental car and equipment rental, more than offset the challenges resulting from the weak European economy.

In particular, in the U.S., on Slide 7, rental car revenue was up 5.3%, supported in part by another strong increase in inbound revenue to the U.S. Adjusted pretax margin was 10.7% in the latest period, which marks a new first quarter record and reflects a 240 basis point increase over last year. This earnings performance had multiple catalysts, as you can see on Slide 8.

Let me add some color. U.S. rental car volume increased nearly 10%, with airport transaction days for Hertz Classic and Advantage brands up 9% and off-airport transaction days up about 11% higher. U.S. fleet expanded by only 8.4% on the higher demand as we ramped up fleet-sharing initiatives between brands and businesses. And average rental length increased 1.5%, driven by more leisure and insurance replacement transactions.

On Slide 9, revenue per day in total was down 3.9% in the U.S., but our airport leisure RPD, excluding Advantage, declined only 2.4%. Advantage experienced the most pricing pressure in the first quarter as the number of competitors in the deep-value segment of the market is growing. Right now, these regional competitors are able to sacrifice price per share as long as high residual values continue to provide a profit cushion for them. However, as we've seen historically, as used car residual values normalize, prices rise so that profit stability is maintained. If we adjust total revenue per day for growth in lower-RPD businesses like Advantage and insurance replacement, pricing was down 3%.

Pressure is also coming from U.S. airport corporate pricing, which fell 3.6% year-over-year. It's important to note, our largest commercial account's revenue grew twice the rate of all of our commercial accounts, thus putting downward pressure on revenue per day. Greater operating efficiency allowed for 55% of U.S. rental car incremental revenue to flow through to adjusted pretax income.

On Slide 11, of the total cost savings secured by U.S. rental car in the quarter, about 2/3 came from depreciation, which improved by 11.4% or $32 on a monthly per-unit basis. And as Slide 12 illustrates, of the depreciation improvement, only 35% was attributable to a generally stronger used car market driven by tighter OEM production levels, low off-lease supply for late-model vehicles and improving macroeconomic conditions.

36% of the savings was achieved by Hertz through strategic and opportunistic fleet buying and vehicle rotation, which benefited from an 84% risk fleet. Finally, 29% of the monthly depreciation per unit savings resulted from concerted efforts to increase sales to higher-return channels like direct to dealer and direct to consumer. In the first quarter, consumer direct channels represented 14% of our total used cars sold, a 190 basis point increase over last year or a 92% increase in the number of units sold at retail. As you know, consumer direct sales generate about $1,100 net more per vehicle than wholesale auction sales.

In addition to depreciation savings, we reduced U.S. rental car direct operating and SG&A expenses as a percent of sales by 60 bps in the quarter through a continuation of Lean and Six Sigma initiatives. The culmination of all of this was a 35% improvement in adjusted pretax profit in U.S. rental car. And this was achieved despite higher fuel expense and milder weather, which softened demand in ski destinations and lowered the number of insurance claims in the industry.

Moving to Slide 13. Overseas, operating conditions in Europe remained challenging and we had a tough year-over-year comp in the first quarter. Last year, European revenue was up 8% on 6% more transaction days. Keep in mind, the strength in Europe in 2011 continued into April before beginning to deteriorate last May.

So far this year, we've seen rental car revenue decline year-over-year across our major regions. In total, our European revenue fell 8.7% in the first quarter. Excluding currency, revenue decreased 5.3% year-over-year, with a similar level of decline in each of the first 3 months. For the quarter, volume was down 3.2% and pricing declined 5.6%. However, if you exclude the negative mix impact of our growing Advantage discount brand, the pricing decline was only 3.7%. Higher rates on commercial accounts are being more than offset by declining leisure rates, reflecting weak discretionary travel trends.

However, we believe European revenue has stabilized recently and advanced reservations are positive now for the summer. We're taking this opportunity to streamline administration and support functions across the continent. Against a difficult economic background, this restructuring will strengthen the business and create a leaner cost base.

Europe represented about 67% of non-North American rental car revenue in the first quarter. The balance comes from Australia, Brazil, New Zealand, Puerto Rico and China. Because our other global competitor reports international results, I thought it might be helpful if I quickly run through ours.

Non-North American revenue declined 3.4% in the first quarter, or 1.8%, excluding currency. Transaction days were relatively flat year-over-year. Revenue per day was down 3.5%, but only 1.9% when you exclude negative currency translations.

Now let's talk about equipment rental on Slide 14. The industry recovery and our penetration into new markets, geographies and accounts through acquisitions, led to an increase of roughly 14% in rental rate revenue worldwide. In North America, rental rate revenue grew about 17%, driven by strong markets in the U.S. and Western Canada. In the U.S., rental rate revenue increased 20% year-over-year.

The positive pricing environment continues, with increases in both national account contract rates and local non-contract rates in North America. Our national accounts generate much higher volume, rent larger pieces of equipment and are more resilient than local business over the cycle. However, it's faster to increase prices on non-contracted rentals, given the fact that they have no rate commitment terms. In the first quarter, national accounts represented 55% of domestic equipment rental rate revenue.

In the 2012 first quarter, worldwide volume grew -- growth of 9.3% was led by oil and gas and power generation projects, as well as greater overall rental penetration as more companies turn to renting versus buying equipment. North American volumes increased 10.5%.

As you know, in the first quarter, we completed 2 acquisitions: Cinelease, an entertainment services lighting company; and Arpielle, a rental provider of construction equipment for the New York market. Both acquisitions provide access to customers in regions and markets where previously we had little exposure and are tracking well ahead of our initial expectations. Our strategy to balance the core non-res construction business with industrial, entertainment and pump and power has provided continued profitable performance while we await the return of the non-res construction market where lending remains tight and projects have been delayed.

In spite of non-res construction spending being down 25% in the first quarter, according to McGraw-Hill, our non-ren -- our non-res construction revenue increased double digits in North America. We are well positioned to take advantage of the upturn we expect to see later this year. In the meantime, further penetration of the less-cyclical Industrial and Entertainment Services segments is paying off through revenue growth, with better utilization and operating cost controls driving profits.

Five more equipment rental locations completed our Project Lighthouse program last quarter, bringing the total to 28 since inception. Direct operating and SG&A expenses as a percent of sales improved by 180 basis points in the quarter due to Lighthouse process standardization and efficiency improvements. And even with the incremental investments in sales, marketing, fleet and staff, equipment rental employee productivity was up 12.8% in the quarter. All of this drove a corporate EBITDA increase of 17.4%, reflecting 150 basis point margin expansion for equipment rental in the first quarter.

I'll take a minute here to state the obvious. The equipment rental industry has been disconnected in the way it reports financial metrics. With the help of ARA Rental Market Metrics, which provides equipment rental companies a consistent way of calculating and reporting performance measures, we hope to be able to better benchmark our operating effectiveness against the industry, recognizing that equipment mix will still be a driver of differentiation. As Elyse takes you through the details of our first quarter results, she'll reference both our historical and the new ARA calculations. But before I turn it over to Elyse, I want to touch on guidance on Slide 15.

2012 is clearly trending ahead of plan. As a result, we've updated our guidance, reflecting an increase in equipment rental volumes, greater cost savings opportunities, a lower interest expense projection, stronger-than-expected residual values in the U.S. for both car and equipment rental and incrementally higher Donlen revenue. Keep in mind that most of our original conservatism was built into the back half of the year, reflecting uncertainty about the impact of the political election on consumer confidence in the U.S., the weak economic environment in Europe, China's slowing economy and its effect on Australia and the political instability in the Middle East on world oil prices. These are still very real concerns and one of the reasons we're accelerating our efficiency programs. We now expect cost savings for 2012 to be $300 million, 20% higher than our original guidance. Our strategy is always to be proactive in volatile environments rather than reactive.

Now let me turn it over to Elyse for a more detailed financial review of the last 3 months, and then I'll come back and give you some color on the second quarter.

Elyse Douglas

Thanks, Mark. Good morning, everyone. Let me begin on Slide 17 by reviewing our financial results on both a GAAP and an adjusted basis.

Consolidated revenue for the quarter was up 10.2% to $2 billion, with the global rental car division growing 9.8% and worldwide equipment rental revenue reporting a 12.6% revenue improvement. As Mark mentioned, in the first quarter, we generated cost savings of $100 million. Approximately 1/2 of those savings came from direct operating expenses. In particular, fleet-related costs, primarily lower vehicle damage, improved collections, favorable vendor negotiations and milder weather drove the improvements. Reduced employee cost also contributed, as labor efficiency for the company improved 2% in the quarter from the prior year. Slightly offsetting this was a 40 basis point increase in SG&A expense as a percent of revenue, mainly due to higher advertising spending which was up 25% year-over-year.

We achieved record first quarter adjusted pretax income of $29.4 million, a 284% increase year-over-year. GAAP pretax income improved 76.8% or $122.1 million. This translated into adjusted earnings per share improvement of $0.08 per share over the prior year loss of $0.03 and a 59.4% improvement on a GAAP basis.

Now let me give you some more detail on the financial performance trends by business unit.

Starting with U.S. rental car on Slide 20. Total revenue improved 5.3% in the first quarter, including ancillary revenue growth of 8%. Offsetting the lower RPDs that Mark already discussed, was strong transaction days growth of 9.6% primarily due to a 12% increase in leisure demand and a 9.3% increase in commercial volume.

Slide 21 outlines our progress in expanding the off-airport and Advantage businesses during the quarter. Starting with off-airport, we continue to expand our footprint, opening 69 net new locations in the first quarter. Off-airport revenue increased 8.2% year-over-year, driven by 17.2% higher leisure volume and 9.7% higher insurance replacement volume. On average, our revenue, with the top 5 national insurance agencies, grew 24%.

Our worldwide Advantage brand expanded in the first quarter, with revenue up 40% due to the seasoning and expansion of locations and greater consumer visibility. Over the past 12 months, we opened 40 locations globally, with 7 opening in the first quarter of 2012. Other location expansion plans include additional affiliates and franchise partners around the globe.

In the U.S., fleet efficiency increased 570 basis points to a record 91% in the quarter. All of this led to an 85% improvement in worldwide adjusted pretax and a margin increase of 180 basis points over the prior-year period.

Now I'd like to return -- like to turn to our equipment rental business, as outlined on Slides 23 through 27.

Worldwide Hertz total revenue was up 12.6% in the first quarter of 2012. Our specialty categories like Entertainment Services and Energy Services, along with our penetration in the oil and gas market and acquisitions, are helping to offset continued macro pressure in Europe.

As Mark mentioned, we've adopted the American Rental Association's standardized methodology for some key metrics, including pricing, utilization and fleet age. We are benefiting a couple of ways from these new standards. First, today's new methodology on calculating price changes the basket of fleet used to index price year-over-year. Our pricing results improved using the new method, as historically, we were using more conservative calculations. Secondly, while our reported fleet age and utilization did not change materially, the new methodology has improved our results relative to competition.

As you can see on Slide 24, using the ARA methodology in Q1 improved our pricing by 80 basis points, and pricing has been positive every quarter since 2010. In the first quarter, worldwide pricing improved 3.7%, with pricing up 5.5% in the U.S. and up 4% in North America. The improvements were mainly driven by a 9.4% increase in non-contract pricing in the U.S.

I'd like to point out that Cinelease data is excluded from these metrics due to the nature of the business, where volume and pricing are tracked by project versus specific piece of fleet. We are currently working toward integrating the system so the Cinelease assets can be tracked using the Hertz methodology.

Slide 25 outlines our strong earnings performance in the first quarter for worldwide equipment rental. Adjusted pretax income of $25.9 million improved 153.9% over the prior-year period. The adjusted pretax margin of 8.6% was a 480 basis point improvement over last year and a direct result of our focused effort on productivity, process improvement and tightly managing other operating costs.

In addition to the direct operating and SG&A margin improvement Mark mentioned, we increased time utilization by 470 basis points in North America as a result of operating efficiency and improved demand.

Revenue flow-through to corporate EBITDA was 47% compared with 37% last year. We estimate that the recent acquisitions have a 4% to 5% drag on the flow-through during the first 12 months. We're still anticipating a 60% flow-through for the full year, excluding acquisitions. You just have to keep in mind that the first quarter is historically our lowest revenue-generating quarter of the year.

On top of that, this is an investment period for Hertz. During the quarter, we spent $165 million to refresh and enlarge our fleet to address the accelerating demand, as shown on Slide 26. The average equipment age, fleet age, is now down 1 month from the fourth quarter of 2011 to under 47 months, which is more than 3 months younger than last year. We continue to see improvement in sales of used equipment as retail residual values approach pre-recession levels. Worldwide, sales proceeds were 51% of original equipment cost in the first quarter, 920 basis points higher than last year's results.

Moving to Slide 28. Interest expense for the first quarter was $162.3 million, a decrease from 2011 of $34.6 million. The decline is primarily due to noncash financing charge write-offs associated with the $4.4 billion in refinancing activity last year.

Cash interest expense was flat year-over-year as lower rates related to our refinancing offset higher interest due to higher fleet levels and the inclusion of $835 million of ABS debt for Donlen.

During the quarter, we issued $250 million in high-yield notes at a yield to maturity of 6.05%. The proceeds, along with corporate liquidity, were used to redeem our highest-rate U.S. and euro notes that were due in 2014. This refinancing lowers our interest expense this year, so our full year interest expense outlook is now flat to up $10 million over 2011.

Restructuring and restructuring-related charges are shown on Slide 29. In the first quarter, these charges were $10 million compared with the prior year's $5.4 million. This is a continuation of our 2011 initiative to streamline the Hertz business, rationalize our global workforce and address the difficult economic environment in Europe. During the first quarter, we closed several European car and equipment rental locations and reduced our workforce by 65 people.

Cash flow from operations for the quarter was $492 million, an improvement of $326 million over the prior year, primarily due to the timing of interest and other corporate payments, as well as an increase in net income before depreciation and amortization.

Corporate cash flow was a net use of $280 million compared with the use of $350 million last year. Despite higher growth in fleet year-over-year, corporate cash flow before acquisitions improved by $249 million, reflecting higher earnings, better fleet working capital performance and improved average advance rates.

Turning to Slide 31. At the end of the first quarter, we had approximately $1.5 billion of corporate liquidity available. And our corporate leverage ratio continued to improve, declining to 2.8x, down from 3.3x since 2011. While we no longer have financial covenants in our credit facility, reduced leverage illustrates the progress we're making toward achieving investment grade status.

Finally, we have no major debt maturities this year. This year, our financing activity will focus on establishing the term ABS platform for Donlen and refinancing select fleet debt in Europe.

With that, I'll turn it back to Mark.

Mark P. Frissora

Thanks, Elyse. I'll start on Slide 33.

Despite the risks in the global macro environment, we're comfortable increasing our annual guidance as a result of the acceleration of cost efficiencies and the better delivery of U.S. growth initiatives. In the U.S., in the second quarter, volumes continue to accelerate. In fact, in April, airport demand remained strong, while Advantage and off-airport reported double-digit increases. Higher demand is coming from general improvements in the economy, incremental investments in advertising and new locations and the continued rollout of new products and services.

Today, we have 122 virtual kiosks in operations worldwide: 91 at the airports and 31 off-airport. We expect to have 500 video kiosks in operation worldwide by year end.

In addition, we're offering Gold Choice at 52 locations currently and expect to have it available at the final 7 locations later this year. Gold Choice is a new program that gives customers the security of reserving a car in advance or the freedom to choose another from Gold -- the Gold Choice aisle upon arrival. As always, with either choice, you save time by bypassing the counter. And Gold membership is now free to anyone. We believe our fleet plan is sized appropriately to capitalize on all of these opportunities.

In terms of pricing, total RPD should improve sequentially in the second quarter, with the biggest upside coming from leisure rentals on airport. Advanced reservations for the summer peak are already robust. We're especially pleased to see indications that Advantage pricing is trending positive year-over-year from May forward, with the pace of volume growth accelerating.

Our growth outlook supports American Express data showing U.S. consumers are planning to spend 11% more on vacations in 2012 than last year. And the national average price for gasoline, at around $3.83, has fallen for 3 weeks in a row for the first time since December. An early March Gallup survey concluded that a price of roughly $5.30 a gallon would be the tipping point for consumer sentiment.

Finally, residual values are actually stronger than we anticipated and our efforts to diversify our sales channels are progressing faster than planned. As a result, we now project full year monthly depreciation per vehicle in the U.S. will be down 2% to 5% from a 2011 level, rather than up 2% to 3.5%, as originally guided. For the second quarter, we expect depreciation per unit to increase slightly over last year as the cars being sold today have incurred less depreciation than the cars we sold in 2011 and are more reflective of the current residual values.

In terms of Donlen, revenues were up 17.4% in the first quarter on a pro forma basis. During the quarter, we focused heavily on sales assimilation, which was very productive, with leads being passed both ways between Hertz and Donlen. There are currently 315 qualified leads in the pipeline, and 12 new accounts have been signed by Hertz and Donlen since January. In March, Donlen realized its largest win since the acquisition, by leveraging new Hertz products created specifically for the fleet industry.

For equipment rental, we're taking delivery of incremental new fleet this quarter and continuing to sell older, used equipment. By the end of the first half, we expect to have about 60% of our $700 million fleet buy completed by -- for 2012.

New fleet is one way we're delivering revenue growth, further penetrating new markets is another. We're continuing to pursue acquisition opportunities, targeting companies with higher-than-average ROI potential in the fastest-growing areas of the market. Including acquisitions, we expect equipment rental revenues to be up 15% over 2011 or up 16% when you exclude negative currency adjustments.

Finally, our franchising initiatives are progressing nicely. We're currently in discussion with multiple prospects in both the U.S. and Europe, and expect to close some of these transactions in the second half of the year.

For 2012, in terms of guidance, we've weighed the incremental upside with the potential risk we're seeing.

Turning to Slide 34. We've improved our full year earnings per share forecast 9.5% over our previous guidance and 42% over 2011. These improvements are specifically driven by our expectations for higher cost savings and reduced cash interest and U.S. depreciation expense, partially offset by higher depreciation in Europe and incremental investments in new products and emerging markets. Continued cost management discipline while leveraging the investments we've made in growth should enable us to achieve our now more aggressive performance targets.

Before we open it up for questions, I would like to provide an update on where we stand in our efforts before the FTC with respect to a possible acquisition of Dollar Thrifty. We believe we have made substantial progress towards our goal to obtaining antitrust clearance that would allow us to consider the terms on which we might move forward with that acquisition. We've agreed on the material terms of the divestiture of our Advantage business with a potential buyer and have provided those terms to the FTC staff. We are optimistic this divestiture will satisfy the FTC staff. In addition, Hertz has made significant progress in negotiating a draft consent order with the FTC staff. We are working with the FTC staff on the next steps toward obtaining a final consent order from the FTC.

Having said this, we want to focus this call on the first quarter results and guidance. Accordingly, we will not be taking any questions regarding the potential divestiture, transaction or Dollar Thrifty.

Let's open it up for questions now. Operator?[Operator Instructions] And first on the line of Chris Agnew with MKM Partners.

Question-and-Answer Session

Christopher Agnew - MKM Partners LLC, Research Division

I was just wondering if you could give an update on your franchising initiatives.

Mark P. Frissora

Well, I kind of did that, I guess. If you want more detail, we have several large projects we're working on in the United States. We have a large one in Canada, and we have 2 countries in Europe. All of these deals are in the contract stage where we're negotiating the finer points of the contract, so -- but these things, as you know, take time and so that's why we're forecasting we'll have some announcements in the second half of the year. But on both continents, we have deals that are significant enough to talk about. There will be a press release out on each one when we complete them. But again, several large ones in the U.S. and several large ones, whole countries. I'd say we're working on 3 countries and we feel pretty confident on 2 of those in Europe. That's about the most color I can give you at this point.


Our next question is from Michael Millman with Millman Research Associates.

Michael Millman - Millman Research Associates

Could -- did you talk about any concern that you have that -- now with Avis realizing its residual reality, I guess, that they will reenter the competition for Dollar Thrifty?

Unknown Executive


Mark P. Frissora

Yes, unfortunately, I can't comment on that, Michael. As I discussed in my opening remarks, there's no comment on this -- on the potential Dollar Thrifty transaction.


And next we'll go to Rich Kwas with Wells Fargo Securities.

Richard M. Kwas - Wells Fargo Securities, LLC, Research Division

On -- Mark, on HERC, with pricing, so you're up 4% in the first quarter, guidance maintained for 2% to 3%, what are the kind of the puts and takes for the rest of the year in terms of, or thoughts on pricing for HERC?

Mark P. Frissora

I think our forecast we've handed out there maintains itself. I don't know if I want to say there's upside. There may be a little upside on that on what we've guided to in the past. So a lot of it will depend on mix of business that we gain over the next 8 months. So we feel pretty good that there's some upside, but I don't want to forecast too much at this point.


And we'll go to John Healy with Northcoast Research.

John M. Healy - Northcoast Research

Mark, I thought you made a very interesting comment earlier in the call, when you mentioned that, in the low end of the rental car market -- or the spartan brands in the rental car market, these players are using price just because of how strong the used car market is today. I wanted to get your thoughts in terms of how you guys think about the relationship between the used car market and the rental rates per day, because I think a lot of the investment community feel like the industry is over-earning to some degree because of how strong the used car market is. I wanted to get your thoughts on how confident you are, if and when the used car market comes off the level we are, that you'll be able to get higher revenue per day at the counter and that the margins in the business should be able to be maintained.

Mark P. Frissora

Yes. I'm very confident. I mean, we've seen it historically in the business model. It's not a trend that's different today than what it has been in the last 40 years. Again, we've got, as you know, John, we've got a lot of histograms to support this, that show that when you have strong residuals, oftentimes, pricing does suffer, but then once the residuals normalize, that pricing improves. And this is just typically the way it goes. And that's the reason why we even have some of the low-priced competitors right now. It's not just because they decided to enter into the market, it's because the market allows them to be -- to enter itself because of the stronger residuals, which allows them to play price without losing. Now those people, obviously, if they can get an anchor or enough share, they may be able to maintain momentum going forward, but if they're not, then they won't have staying power. But we see this every time. We see this historically, that in periods of strong residuals, low-priced competitors usually start up and pop up all over the place. So this is not a one-time phenomenon, and it's pretty cyclical, actually. So we feel the long-term profitability prospects of the whole rental market are strong and will continue to be strong because OEMs have rationalized their capacity, and we have a much better OEM universe. People are better at, from a systems standpoint, on logistics. People are better on a cost basis due to Lean and Six Sigma programs for the industry. And the industry is enjoying the fact that we're all more sophisticated than we have been historically on pricing, understanding how to optimize price more readily and in a quicker way using technology than we have in the past. All those bode well for the overall rental industry.


And we have a follow-up from Rich Kwas.

Richard M. Kwas - Wells Fargo Securities, LLC, Research Division

Just a follow-up on the guidance. When we think about -- I know you don't give quarterly guidance, but when we think about the rest of the year, last year's second quarter is pretty good because of the depreciation benefit. Do you view that as a tougher comp when you look at the balance of the year? Just some color on that would be helpful.

Mark P. Frissora

Yes, Rich, absolutely. We'll have a tougher comp in the second quarter given what happened with the tsunami last year. And I think that's probably true for the industry, not just Hertz. Having said that, we still think that we expect to show improvement, but it is a tougher comp and it's really driven, for the most part, by the strong residuals we had for about an 8-week period during the second quarter last year.


Our next question is from Bobby Jones with Highland Capital Management.

Bobby Jones

I was wondering if you could comment on the evolution of the rental car RPD, the U.S. market specifically, through the quarter.

Mark P. Frissora

I'm sorry. You want to repeat the question again?

Bobby Jones

Just how rental rates changed kind of through the quarter. I mean, was it basically consistently down kind of 3% through the quarter? Was it down more in January versus March? There's comments from some competitors, perhaps putting through price increases in late February and March, and just wanted to know if you guys saw any flow-through from that.

Mark P. Frissora

Well, I think things improved sequentially. I think, as the quarter evolved, the pricing got better and better. And we're seeing that. As I mentioned in my script, we're seeing that right now, that pricing has turned much more positive than it has been in the first quarter. I think fleets have tightened overall. We were tight-fleeted to begin with. I mean, we were pretty right-fleeted, I would say, for the quarter, but some of our competitors were over-fleeted. And so bottom line is, we think the dynamics in the quarter improved, and from at least where we sit today, it looks good right now.


We have no additional questions at this time.

Mark P. Frissora

All right. Well, thank you, operator. And thanks for everyone for attending this conference call. We appreciate your interest. And we'll talk to you next time.


Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.

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