Operator: Welcome to the Hertz Global Holdings Third Quarter 2010 Earnings 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 third quarter results issued yesterday and in the risks factors and forward-looking statements section of the Company's 2009 Form 10-K and second quarter 2010 Form 10-Q. 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 pm Eastern Time and running through November 17, 2010.
I would now like to turn the call over to your host, Leslie Hunziker. Please go ahead.
Leslie Hunziker - IR: Good morning, and welcome to Hertz Global Holdings 2010 Third Quarter Conference Call. You should all have our press release and associated financial information, which we issued last night. This morning, we've provided slides to accompany our conference call that can be accessed on our website at www.hertz.com/investorrelations.
Let me give you a quick update on our IR calendar. We'll be attending Northcoast Fall Management Forum on November 9, and Barclays Global Automotive Conference on November 16, both in New York. Hertz's annual financial modeling workshop and Investor Day is scheduled for December 6 and 7, in Midtown Manhattan, and more detailed information on that will be sent out next week.
In a minute, I'll turn the call over to Mark Frissora, Hertz's Chairman and CEO. Also speaking today is Elyse Douglas, our Chief Financial Officer. In addition, 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 Gerry Plescia, Executive Vice President and President of Hertz equipment rental. They'll be on hand for the Q&A session.
Before we begin, I need to remind you that 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 our website. We believe that our profitability and performance is better demonstrating using these non-GAAP metrics.
Our call today focuses on Hertz Global Holdings, Inc., the publicly traded Company. Results for the Hertz Corporation differed only slightly as explained in our press release.
Now I'll turn the call over to Mark Frissora.
Mark P. Frissora - Chairman of the Board and CEO: Good morning, everyone, and thanks for joining us. Let's start if we can on slide five. As you saw in our pre-announcement a couple of weeks ago, we delivered a solid third quarter performance despite the slower pace of the economic recovery. Revenue from our U.S. Rental Car business grew faster than our public competitors for the fifth consecutive quarter, benefiting from a relatively healthy pricing environment this summer, as well as higher demand in the commercial market.
Our European rental car revenue growth neared double-digit levels when you exclude the effects of currency translation, and the equipment rental business turned the corner, generating 33.7% higher adjusted pre-tax income in the quarter and year-over-year revenue growth that was positive for the first time in nine quarters.
Turning to slide six; for the Company as a whole, our balanced strategy that focuses on diversified growth and continuously improving our cost structure paid dividends in the third quarter. We generated 29.9% higher adjusted pre-tax income on 7.1% more revenue compared with last year. The significant profit improvement was generated despite higher interest expense, $3.7 million of negative currency exchange rates and continued investments in our expanding Advantage leisure business and our off-airport operations.
Third quarter 2010 adjusted pre-tax margin for the entire Company increased by 200 basis points year-over-year to 11.6% as we continue to benefit from ongoing cost-saving initiatives. In particular, we're seeing strong flow-through of the savings in our U.S. rental car business, where on slide seven, you can see that the adjusted pre-tax margin was 160 basis points higher in the recent third quarter and adjusted pre-tax income was $14.5 million higher than in the third quarter of 2007, which was a historic peak period for Hertz. This stronger profit was achieved in the face of today's macroeconomic pressure that resulted in 2.4% less revenue than the similar 2007 period. This is a noteworthy achievement.
We continue to identify valuable cost-savings opportunities using Lean Six Sigma tools that further improve process efficiency and labor productivity while enhancing customer satisfaction. You'll see that as the economy progressively improves and internal growth initiatives mature, the annual margin benefit from cost savings for the entire Company will be more obvious and even more compelling.
On slide eight, our consolidated revenue grew 7.1% or 8.9% when you exclude currency translations as a result of improving volume trends across both of our business segments. In terms of pricing, there is also good news across the board. The equipment rental pricing pressure is abating with year-over-year pace of decline improving each month as we near neutral.
In Europe rent-a-car in the third quarter, we secured a 1.5% price increase from higher revenue per day in each of the commercial, replacement and leisure rental car markets. In U.S. car rental, revenue per day or RPD, increased 2.4% with our Hertz classic brand or 1.7% when you include Advantage, with the greatest contributions coming from our off-airport business, which was up 4.8%, and airport leisure business, where the revenue per day increased 3.6%.
Total Company-adjusted direct operating and SG&A expenses as a percent of sales declined by 160 basis points despite the fact that we have higher maintenance cost for our older equipment rental fleet, despite the fact that we have 18 more Advantage airport locations open versus last year, the fact that we have an additional 247 net new off-airport locations to our rental network over the last 12 months and that we've had further expansion in China and an 8% increase in employee training and development investments as a percent of payroll and benefits.
It's important to note that while we're recognizing the costs associated with the fairly rapid expansion of these businesses, we have not yet fully realized the revenue potential given the newness of the locations. However, same-store revenues for both rental car businesses are up double-digit year-over-year. Monthly rental car depreciation per unit is down 5.6% worldwide on lower vehicle acquisition costs and a larger portion of vehicles being sold through higher return non-option channels.
In the third quarter, corporate EBITDA was up 12.7% year-over-year, driven by a 20.5% improvement in worldwide rental car earnings, total Company corporate EBITDA margin expanded by 100 basis points to 20%.
Turning to slide nine; in total, we generated permanent cost savings of $89 million in the third quarter, bringing September year-to-date savings to $330 million. We recently increased our savings target for 2010 to $410 million, 7.9% higher than our earlier goal. The cost savings are split relatively evenly between direct operating and depreciation expenses, with about 10% of the cost savings coming from SG&A.
Our more efficient processes led to greater productivity at Hertz. Consolidated revenue per employee was up 8.5% in the recent quarter over the same period last year. From our inception of Lean Sigma back in 2006 to the last 12 months, ending September 30, revenue per employee has increased 27% despite $590 million less revenue.
Now, let's take a quick look at the third quarter performance by operation starting on slide 10 with U.S. rent-a-car.
In the most recent third quarter in the U.S., total rental car revenues were up 11.4% in the quarter compared with last year. Of the growth, on the right-hand side of the page, total Hertz airport operations contributed 49%. Of that, the contribution from commercial business was 37.1%, and leisure airport business was 11.9%. Advantage accounted for 15.8% of the total revenue increase, and off-airport represented 35.1% of the increase. Inbound revenue, which is included in each business unit's revenue and is a strategic advantage for us, was up 20% from last year on strong demand from Europe and Latin America.
Commercial rentals on airport, which are made up of large corporate customers, government and small business account programs delivered a 15.4% increase over last year. Airport leisure revenues were up 3%. Off-airport revenue growth was up 15.8%, driven by the leisure and insurance replacement markets. Off-airport same-store sales rose 14%. Increased investments in advertising also supported the top line expansion.
On slide 11, revenue per day or RPD, which encompasses both price and mix, was up 2.4% for our Hertz classic brand. Of course, as you know by now, pricing varies significantly across our mix of rental options. So you really need to break down the consolidated RPD to get a clear understanding of the trends across end markets. For example, airport leisure RPD was up 3.6% in the third quarter, but its volumes were 1.5% lower. At the same time, our off-airport operations' RPD was up 4.8% on 10.4% higher volume.
While off-airport rentals have about a 24% lower rental rate per day on average compared with airport rentals, labor and other operating costs are also significantly lower, and rental length is nearly 50% higher. So we're excited to be capturing more share in this attractive market.
Traditionally, we've reported revenue per day, excluding ancillary revenues, which is what you're looking at on slide 11. This time, in order to give you more transparency around the contribution from ancillary of sales and enable you to compare our revenue per day on a more apples-to-apples basis with our public competitors' RPD, we provided additional data on slide 12. You can see that the Hertz classic reported RPD for the quarter was up 2.4%, but when you include ancillary products and services, the fully-loaded daily rate was actually $52.13, up 2.9% in the third quarter. On slide 13, even with the higher RPD, our U.S. airport market share is increasing. According to the latest data available for July 2010, our market share for Hertz and Advantage brands combined increased 150 basis points over the July 2009 period. From what we've seen, this trend continued throughout the third quarter.
On the next slide, U.S. fleet efficiency was roughly flat at 82.2% in third quarter despite 9.4% more fleet than last year and the comeback of the midweek corporate traveler, which represents a larger portion of the revenue mix year-over-year, and therefore, negatively impacted airport fleet efficiency by 2.8 percentage points. Monthly depreciation per vehicle in the U.S. was 2.5% lower than the 2009 third quarter's level, driven by strategic fleet management actions, including developing more profitable remarketing channels, optimizing our portfolio mix and procuring better new car pricing from the OEMs due to stronger negotiating leverage as we diversify the supply base.
On the used car front, residual values remained stable at normal seasonal levels. Our net promoter scores in the U.S. is up 8.5% over the prior year, reflecting the appeal of our fleet mix and the higher service standards of more productive employees. In particular, in the areas of vehicle condition, speed of service and staff courtesy, our promoter scores went up by 33%, 13% and 10%, respectively.
Our U.S. rental car adjusted pre-tax margin increased 100 basis points in the third quarter versus last year. Corporate EBITDA also expanded in the quarter in U.S. rental car benefiting from the strong off-airport demand, recovering corporate volumes and disciplined cost management.
Turning to our European Rental Car operations on slide 15; the third quarter reflected the benefits of our cost-reduction programs, account gains and seasonal growth, our customer satisfaction scores improved by 17% in the third quarter supporting a 70 basis point increase in market share. When you exclude the impact of foreign currency translations, revenues was up 8.3%, driven by 5.8% higher volumes that benefited from 1.9% longer average rental length and a 1.5% increase in revenue per day. European commercial RPD has now increased year-over-year for the last 11 months consecutively as a result of a very successful account renegotiation activity. With the majority of our business accounts having annual contracted rates, we expect that trend to continue.
We also achieved a double-digit improvement in monthly fleet depreciation per unit, lowered our adjusted direct operating SG&A expenses 180 basis points as a percent of sales and increased our revenue per employee by 7.4%. As a result of these accomplishments, Europe delivered a 22.9% increase in adjusted pre-tax profit from last year and a 200 basis points improvement in adjusted pre-tax margin when you exclude currency effects.
Now, let's talk about the equipment rental business on slide 16. We saw continued improvement across all metrics from a sequential monthly perspective. During the third quarter, we benefited from a stabilizing environment, a favorable year-over-year comp and a continued growth of the industrial market driving higher utilization. Revenue turned positive in the third quarter, driven by a 3.2% increase in volume year-over-year. The trend is definitely moving in the right direction. In fact, 2010 third quarter revenue was up 5.8% over the second quarter, and in September, we saw volume jump 5.4% year-over-year. Since then, October's volumes nearly doubled to 10.5% as momentum in the industrial, government and petrochemical markets continue.
Pricing declined just 2.9% versus 5.9% in the 2010 second quarter, and 8.6% in the 2009 third quarter. The industry is becoming more rational as demand recovers. However, we're still seeing pockets of deep discounting in certain geographies and equipment types, as well as in segments where competitors are protecting share from newcomers. Time utilization improved 450 basis points to 59.9% over the 2009 third quarter and was 530 basis points better on a sequential quarterly basis.
In October, we saw another dramatic improvement with utilization nearing 65%. Comparatively, our peak utilization was 70.2% in the summer of 2006. So there's still opportunity to improve as demand recovers, our equipment mix expands further into industrial and new fleet management strategies to drive greater efficiency.
Adjusted pre-tax income increased 33.7% over last year, with a margin improvement of 300 basis points in the quarter. Now that the equipment rental business has begun its turnaround, we should continue to see double-digit adjusted pre-tax earnings growth going forward. Corporate EBITDA margin for equipment rental was 40% on improving top line trends and a lower cost structure due to Lean Sigma initiatives.
While SG&A was lower as a percent of sales, direct operating expenses were partially impacted by higher maintenance costs year-over-year as we reached a historically high average fleet age. In the third quarter, maintenance costs as a percent of sales were 7.5% compared with a normalized maintenance margin of 5.5% when our fleet age averaged 34 months in 2008. The maintenance costs will come down in the fourth quarter and overtime as we more aggressively refresh the fleet.
Last quarter, we purchased $125.3 million worth of new equipment, some was to replace our older earthmoving pieces, and the rest was to secure industrial equipment related to new business.
Now, let me give you an update on slide 17 on a few of our growth initiatives to further the diversification of our businesses, markets and products before I turn the call over to Elyse for a detailed financial review.
For the overseas traveler, we continue to expand our global offering with greenfield Hertz locations in China, the introduction of Advantage in Italy and Spain, and an hourly rental option through Connect by Hertz in Paris, London, Madrid and Berlin. Inbound rentals to the U.S., Europe, Latin America, Canada, Australia and New Zealand generate revenues of about $800 million annually for us. Year-to-date, September 2010, our U.S. inbound revenue was up 20.7% year-over-year with 7.2% higher revenues per transaction.
Despite volatile economic conditions around the world and unpredictable currency rates, global travel into the U.S. is forecasted to be up 6% over last year, with similar annual growth rates expected through 2014. Being the only true global provider in the industry is a significant competitive advantage for us. Global brand awareness builds a loyal base among leisure customers across the continents, and our large corporate accounts want to be able to rely on Hertz's speed service and vehicle selection everywhere they travel.
In a $10 billion U.S. off-airport market, we opened up 27 net new locations in the third quarter, primarily co-locating with body shops, hotels and repair facilities to serve the needs of the local market customers. This brings our net new store openings since September 30, 2009, to 247. Our off-airport volume continues to expand in the third quarter at a double-digit rate.
Off-airport rentals, which include leisure and local business rentals, replacement rentals and monthly or multi-month rentals are typically priced lower than airport rentals on a per-day basis, but have a longer average length of keep, which drives revenue per transaction. In the third quarter, U.S. off-airport revenue per transaction increased 5.5% year-over-year.
Since associate transaction costs are leveraged across a longer rental, the costs as a percentage of revenues are lower than the airports allowing for similar margins. Additionally, the overall costs structure has lowered fewer labor hours required on more economic fleet, shared facilities and no concessions fees, which are considerable at the airports. In the third quarter, adjusted pre-tax margin for off-airport increased more than 650 basis points over the prior year.
Total U.S. ancillary revenues, including up-selling car classes and marketing additional products like insurance coverage, roadside assistance, damaged waivers, NeverLost and refueling, increased 16.2% year-over-year in the third quarter as both airport and off-airport locations focus on this revitalized program.
Moving on to slide 18; our Advantage leisure offering, which we acquired in April 2009, has surpassed our expectations for market share, margin and volume. Today, our Advantage business is profitable with 41 airport locations covering 38 major U.S. leisure destinations, including those recently opened in Boston, Louisville, Milwaukee and Dallas and three leisure destinations in Europe. We have plans to open up six more airport locations by year end.
In the third quarter, same-store sales grew 39.6%, adjusted pre-tax profit tripled and fleet efficiency improved 695 basis points. Utilization for Advantage is exceeding our early expectation. At Hertz airport locations with mature Advantage facility, we're on track to increase utilization in 2010 by 1.1 percentage points through sharing fleet and capturing both the corporate midweek demand with Hertz and the weekend surge with Advantage. We believe worldwide rental cars utilization will continue to improve as the Advantage brand is rolled out in more locations and its network matures.
Finally, and most importantly, we are investing in our employees, innovating our product offerings and refreshing our fleet. As a result, our service scores are climbing. We're successful executing a growth plan that is positioning us to deliver even more for our customers.
With that, I'll turn it over to Elyse for a more detailed financial review.
Elyse Douglas - EVP and CFO: Thanks, Mark, and good morning, everyone. Let me begin on slide 19. We are very pleased with the third quarter financial performance. On a consolidated basis, we generated $2.2 billion of revenue, up 7.1% or $144.9 million increase over the same period last year. GAAP pre-tax income of $158.3 million reflects a 108.8% year-over-year improvement due to improved operating earnings and lower restructuring costs offset by higher interest expense and cost-related to the proposed Dollar Thrifty transaction.
GAAP diluted earnings per share of $0.36 for the 2010 third quarter represents a 140% improvement over the prior year period's $0.15 per share. Adjusted pre-tax income of $253.6 million, as Mark mentioned, was up 29.9% over last year's third quarter, reflecting a margin improvement of 200 basis points.
On an adjusted basis, EPS increased 29% in the quarter to $0.40 per share compared with $0.31 per share in the third quarter of 2009. The increase in earnings was driven primarily by higher revenue, cost savings, including improvements in monthly depreciation per vehicle and higher labor productivity as Mark showed you earlier.
Let me give you some more detail on the performance trends by business segment. On slide 20, our worldwide rental car revenue for the quarter of $1.9 billion was up 8.3% year-over-year, or 10.5% excluding the effects of foreign currency translation. U.S. rental car revenue increased 11.4%, while the European rental car operations experienced 8.3% growth in revenue, excluding the impact of currency translation.
As you know, revenue is a function of volume and revenue per day. Volume, as measured by transaction days, grew 8.9% in the U.S. and 5.8% in Europe. RPD, as Mark mentioned, was up in the U.S. and Europe with increases of 1.7% and 1.5%, respectively and excluding Advantage, U.S. RPD was up 2.4%. The total RPD increase in the U.S. was driven by a 4.8% improvement in off-airport and 3.6% higher year-over-year airport leisure pricing, partially offset by the impact of the expansion of Advantage, causing a shift in mix toward lower RPD businesses.
Worldwide rent-a-car generated corporate EBITDA of $339.6 million in the quarter, a 20.5% increase versus the prior year. The reported earnings represent a $57.8 million year-over-year improvement. This improvement was driven by the revenue growth, lower per-unit depreciation per month and the realization of cost efficiencies across all jurisdictions, all of which contributed to 150 basis point adjusted pre-tax margin improvement during the quarter.
Turning to worldwide rental car fleet efficiency on slide 21. As you know, the entire rental car industry was under fleeted last year when leisure volumes strengthened throughout the third quarter. The supply/demand imbalance enabled us to achieve very high fleet efficiency rates last year, which consequently made for a tough comparison this year.
With this in mind, we're pleased with 81.3% worldwide fleet efficiency. In both the U.S. and Europe, fleet efficiency was essentially flat against last year's strong levels. As Mark mentioned, this occurred in spite of the rebound in commercial travel, where demand peaks midweek and transaction length is typically only three to four days.
Given that the leisure and off-airport businesses generally averaged about five to six days in length, fleet efficiency is benefiting from the expansion of our off-airport and Advantage network nationally.
In addition, the use of direct-to-dealer and direct-to-consumer used car sales channels enables us to keep the cars on rent right up until the point of sale positively impacting utilization.
Now let's take a look at rental car's fleet cost on slide 22, measured as a monthly net fleet depreciation per unit. As Mark highlighted, our year-over-year worldwide fleet cost were 5.6% lower last quarter. In Europe, monthly depreciation per car also continued to improve, falling 11.8% in the quarter from third quarter 2009 levels on a constant dollar basis.
Just like U.S. rental car, our stronger procurement strategy and better mix management are helping to counter the stabilizing, but still low residual values across the continent. While residual values have fully recovered in the U.S. from recession levels, residual values in Europe are still 15% below 2007 pre-recession levels.
In the U.S., we reduced fleet cost on a per unit basis by 2.5% from a year earlier. Our domestic monthly depreciation costs have been decreasing since the end of the second quarter of 2009 when used car residual values were extremely low.
In the third quarter, our fleet cost were 4.6% below third quarter 2007 pre-recession levels in the U.S. The sequential quarterly increase in depreciation in the 2010 third quarter reflected a richer mix of fleet during the summer season. We expect the fleet to return to a more normal mix by year end as we de-fleet in the fourth quarter.
Year-to-date, U.S. rental car monthly fleet depreciation per unit is down more than 10%. The improvements are credited to strong residual values, our execution of disciplined fleet sourcing strategies, improved portfolio management and leveraging alternative sales channels in the domestic used car market.
On the next slide, you can see that only 54% of our U.S. car sales were executed through the auctions in the third quarter, which is down from 67% at year-end 2009, and 87% at year-end 2007. Our goal continues to be to further improve our remarketing returns by bringing auction sales down to just 50% of total car sales by the end of the year.
Utilizing direct-to-dealer and direct-to-consumer channels, like our Rent2Buy business, allows us to capture a higher sales price, reduce our cost of sale as we forego the auction fees and increase utilization as I just mentioned. For the full year, we now expect worldwide monthly depreciation per car to be down between 7% and 8% compared to 2009, excluding the effects of FX rates.
On slide 24, at quarter-end, risk cars in our U.S. fleet represented 63.6% of the total domestic fleets. In Europe, the risk cars in our European fleet represented 53.4% of the total European fleet. The risk percentage is below the U.S. risk level because many European OEMs offer only program cars. As we shift our supplier mix to our Asian and Korean OEMs, we'll be able to bring more risk cars into the mix.
Now let's turn to the results of our equipment rental segment on slide 25. In the third quarter, HERC reported revenue of $281.2 million and corporate EBITDA of $112.5 million. Mark has already walked you through the year-over-year revenue improvement that materialized with volume turning positive for the quarter. While pricing is still competitive, its decline is easing each month. HERC has always been disciplined and tactical in its pricing strategy.
In the third quarter, pricing was down just 2.9% year-over-year versus a decline of 8.6% last year. Comparatively, our two year decline of 11.4% is anywhere from 180 basis points to 240 basis points less than our peers. We expect to see a continued sequential monthly improvement in pricing in the fourth quarter with pricing nearly flat year-over-year by the end of the period.
As Mark mentioned, seasonal demand increased in the third quarter for industrial and especially earthmoving equipment, requiring additional maintenance spending of $5 million over last year in order to get underutilized fleet ready for rent. This had a 180 basis point negative impact on corporate EBITDA margins, which was still a robust 40% for the quarter.
Revenue from our industrial business was up 20.6% in the recent quarter. As you can see on slide 26, our strategy to shift more of our equipment mix to this category is benefiting us as facility maintenance, petrochem refining, energy services, and oil and natural gas exploration continue to add new products and restart deferred projects. In the third quarter, industrial represented 25.6% of our total North American revenue, up from 21.5% a year ago.
At September 30, our worldwide equipment fleet age was 49 months and increased less than one month from the second quarter and almost seven months higher than the year ago third quarter. We intend to stabilize our fleet age at the 49 to 50-month level over the next few quarters. As the business continues to rebound, we anticipate increasing fleet purchases to both meet demand and lower the overall fleet age.
On slide 27, you can see that our equipment rental fleet on a net book value basis was down 11.2% year-over-year. Third quarter equipment fleet purchases were $125.3 million versus disposals of $101.9 million on a first cost basis. This compares to third quarter '09, where additions were $18.6 million and disposals were $45.9 million on a first cost basis. Year-to-date, gross spend on fleet was $188.1 million and gross equipment sales were $263.5 million on a first cost basis.
Now let's move to slide 28 for an update on our recent financing. It's been a rewarding quarter for us in the capital markets. In July, as we discussed on our last call, we closed the refinancing of our European fleet debt and priced approximately $750 million of three, five, and for the first time ever, seven-year rental car asset-backed note.
Then in mid-September, we obtained amendments to the corporate credit agreements related to our asset-backed loan and term loan facilities that allow us flexibility to opportunistically refinance outstanding debt to lower our interest expense.
Immediately thereafter, we completed the issuance of $700 million of 7-1/2% senior notes due in 2018. Our plan is to use the proceeds to pay off our existing 10-1/2% subordinated notes due in 2016 when they become callable in January.
As a result of the high yield offering from October through December, we will incur incremental interest expense until the subordinated high yield debt is extinguished in January. This represents a negative impact of approximately $0.02 of adjusted earnings per share in the fourth quarter. As we move forward, however, the lower coupon debt will benefit ongoing interest expense by roughly $15 million each year through maturity.
Moving to the next slide, for the rest of the year, from a balance sheet perspective, we are focused on completing the international financings in Brazil and Australia, which are expected to close this month. We are also evaluating an early renewal of our U.S. 2009 $2 billion variable funding note facility, given the conduit market is in great shape. We are finalizing our strategy on the corporate credit facility financing, which we expect to renew in the first half of 2011, given they mature in 2012.
On slide 30, let's take a look at cash flow. Cash from operations of $904.7 million in the third quarter improved by $295.9 million versus the same period last year, driven by higher earnings and improved working capital. This year there are large variances in quarterly year-over-year comparisons of cash flow after fleet growth due to timing differences in the fleet rotation, the fleet debt refinancings over the last several months resulting in lower advance rates and the capital raising activity in 2009.
Therefore, let me focus on the year-to-date cash flow, which provides a more normal view of cash flow performance. Levered after tax cash flow before fleet growth was a positive $452.1 million through September, an improvement of $143.6 million in spite of $529 million of proceeds received from the 2009 equity offering, making it a tough comparison.
The improvements are driven by higher earnings and improvements in working capital. Levered cash flow after fleet growth was a negative $141.6 million, compared to the positive $178.1 million reported last year. This reflects the higher year-over-year investment in rental car fleet, which is up 13.4% to meet increased demand.
While cash flow after fleet growth is typically negative in the third quarter as we fleet up to meet peak season travel demands, the fourth quarter is consistently a strong cash flow quarter due to the high amount of de-fleeting activity. We expect to see strong fourth quarter cash flow in spite of a year-over-year increase in equipment rental fleet investments.
We expect full year 2010 advance rates to be 8 percentage points lower than the 72% 2009 level, reflecting the full impact of changes in credit enhancement levels on ABS fleet debt financings in the U.S. and international markets. We ended the quarter with total net corporate debt of $3.8 billion, total net fleet debt of $6 billion and $1.5 billion of unrestricted cash on our balance sheet.
At September 30, 2010, corporate debt increased $729.1 million from June 30, 2010. Nearly, all of the increase is related to our recent high yield offering, which as I said, will be offset by the paydown of high coupon existing debt in January. At the end of the quarter, we had $2.3 billion of corporate liquidity available to fund our growth initiatives and to take out the subordinated notes in January.
Turning to Slide 31. Interest expense, net of interest income, was $200.8 million in the quarter, up $32.6 million over last year, driven by the higher fleet levels required in the third quarter as well as higher European fleet financing costs. Our estimate for incremental interest expense for 2010 versus 2009 is now $90 million to $95 million, only $5 million to $10 million higher than our earlier estimate despite $13 million of incremental interest in the fourth quarter from the recent high yield offering.
Restructuring and restructuring-related charges in the latest quarter were $15.2 million, of which $10.7 million will be settled in cash compared with $47.1 million of restructuring and related charges in the same period last year. These charges mainly relates to HERC facility closing costs as we consolidated underperforming branches.
For the third quarter, the GAAP income tax benefit was $3 million compared with an expense of $6.9 million last year. Cash income taxes paid in the quarter were $10.8 million, $4.1 million more than the prior year. We estimate cash taxes to be $40 million to $50 million for the full year of 2010 versus $31.3 million in 2009. The increase is primarily due to higher earnings. As a reminder, in calculating adjusted net income and earnings per share, we used a tax rate of 34%, which we believe reflects our more normalized rate over the long term.
Now if you turn to slide 32, you'll see that we comfortably met both of our corporate financial covenant tests in the third quarter. In fact, our corporate consolidated leverage ratio was 4.2 times, well below the maximum 5.25 times allowed. Our corporate interest coverage ratio was 3.57 times, well above the minimum required of 2 times. These ratios exclude the convertible debt issued by Hertz Global Holdings in 2009 since the covenants only apply to the Hertz Corporation results.
With that, I'll turn it back to Mark.
Mark P. Frissora - Chairman of the Board and CEO: Thanks, Elyse. Let's move to slide 33 if we can. While the consumer sentiment rose slightly in October, it remains at historically low levels. Despite this, we're cautiously optimistic about the macro trends going forward in both of our businesses.
If you turn to slide 34, you'll see a 20-year industry trend represented by the yellow line that validates the expected continued growth in the rental car industry. A lot of people ask us how closely we correlate to airline travel. While certainly a driver of our growth, you can see our market has moved independent of the airline industry as a percent of the GDP.
Off-airport rental revenue, which is represented by the blue line on the chart, is the biggest driver of the rental car industry's overall growth. This supports our strategy of off-airport market penetration and gives us confidence that we're focusing on the right things as the industry shows positive macros going forward.
For the fourth quarter in particular, we are seeing a typically seasonally low quarter for leisure demand. However, on slide 35, the global environment for commercial travel remains strong. Moreover, our growing U.S. off-airport business will continue to make healthy contributions to both revenue and profitability, and our value leisure product Advantage continues to rapidly expand its presence nationally, at the same time, existing locations are adding to market share and margin growth.
In the U.S. and Europe, industry fleets are currently right-sized for demand and worldwide, we expect to deliver at least 200 basis points of year-over-year utilization improvement in the fourth quarter.
Pricing remains the only real wildcard. Right now, we've got strong leisure pricing in place for the holidays, which will help us as we face a tough year-over-year leisure pricing comparison. Competitive pricing pressure in the commercial accounts continues, and the negative mix of Advantage and off-airport's lower rental rates will be reflected in RPD as these businesses continue to grow rapidly.
Growth from new business opportunities and the additional cost-saving initiatives in the fourth quarter should counter any potential pricing headwinds. Our Lean Six Sigma project that we call Lighthouse would have been implemented in 15 North American and 8 European airport locations by year-end, and there are other opportunities to turn some cost ideas into savings and new account wins in incremental ancillary revenues into revenue.
For equipment rental, we expect the pattern of sequential monthly price improvement to expand as utilization improves. We're now expecting pricing to be positive, however, until the first quarter of 2011. As our fleet age nears 50 months, maintenance expense will remain higher than average through the end of the year, regardless our equipment rental business is on track to deliver corporate EBITDA margins of 42% or greater in the fourth quarter on double-digit volume growth and rising fleet and labor efficiencies.
We continue to invest in acquisitions to expand our presence in the equipment rental market. On October 1, we purchased Western Machinery, which gives us a position in the Hawaiian market, and a second acquisition has been executed to expand our presence in the entertainment service industry. This is our second acquisition in this market since developing the opportunity more than a year ago.
In equipment rental, Lighthouse would have been implemented at 13 equipment rental branches in North America by the end of the year, and 18 more are slated for 2011, of which three are launching in Europe.
For the third quarter, Lighthouse actions, HERC, U.S. Rent-A-Car and European rental car reduced direct operating expenses by 350 basis points more than non-Lighthouse locations. Adjusted pre-tax income at Lighthouse locations was 114 basis points higher year-over-year than non-Lighthouse locations. We're seeing tremendous progress in this initiative.
As we look forward, we expect to deliver a solid revenue growth in rental car that exceeds industry levels and growth equal to industry levels for equipment rental. On slide 36, you can see that our goal is to return to peak '07 revenue as quickly as possible.
We now have positive growth momentum for all Hertz's business units concurrently for the first time in three years. We believe our fundamentals are finally all in place, but nothing but positive earnings growth into the foreseeable future.
With that, operator, let's open up the call for questions.
Operator: Brian Johnson, Barclays Capital.
Brian Johnson - Barclays Capital: A couple of questions. I just want to get a sense of some of the market share momentum in the corporate travel market. A, what's driving it? And B, how do you think that's going to play forward into pricing as you go into the contract negotiations? Seems like there is a clear preference for the business traveler for your brand, the question is, can you translate that into contract price increases?
Mark P. Frissora - Chairman of the Board and CEO: Brian, first of all, the market share improvements both in leisure and commercial, probably in equal segment. So I want to make sure you're clear and that. In terms of contract negotiations, we have couple of hundred every single month. Where that goes is where the competitors go, right? So we protect our share with 99.3% retention rate. So we're not going to give that up, that will continue to be our retention rate. So, pricing pressure is less than it was a year ago. It continues to be in the neutral to down 1% or 2% range. When does that improve? I don't know. I really don't. For me to forecast that would be like crystal balling and I just don't know, but hopefully, as volume improves, you would think that the pricing in commercial will begin to improve with that. So, hopefully, we would expect sometime next year, we start getting some positive price growth, if you will, in commercial business.
Brian Johnson - Barclays Capital: On the one hand, are competitors going to get more desperate if they see share going to you and cut price further or on the other hand, at what ?point can you just take a firmer line with the procurement departments and travel departments and saying we should be rewarded for what your employees want to rent?
Mark P. Frissora - Chairman of the Board and CEO: First of all, there is nothing's changed. Our market share growth is built around those pieces that you saw. We showed you the growth in distinct segments. So I mean, it's clear that the share growth is coming from a broad base return-to-value proposition that we've established. We got higher customer satisfaction scores. We're not doing it with pricing. I'm not growing the business through pricing. We had positive RPD growth in the highest volume quarter of the year.
Brian Johnson - Barclays Capital: No, I was suggesting, do competitors cut price further to make up for their, perhaps, brand disadvantage with the corporate traveler?
Mark P. Frissora - Chairman of the Board and CEO: I mean, for me, anyways, I think the competitors have all settled on market share numbers that they're at right now. I don't think anyone in the industry is looking to cut price. I think the fleets right now are fairly tight. I mean, I wouldn't call them tight, but they're adequate, they're certainly where they should be right now. So, we feel pretty good about the fact that the industry is very rational. We haven't seen return to irrational times or anything at all because the market is not that great in terms of absolute demand. It's still not at '07 levels. We're doing better than most because of our growth programs. So, we're driving double-digit growth because we've got areas to grow double-digit, but in general, the general demand level is still below 2007 levels in most markets. So, you still got a pretty rational industry right now. We're not seeing what you're indicating as some irrational competitor is trying to gain share. We don't see it.
Brian Johnson - Barclays Capital: Well, speaking of that, since one of your growth initiatives is off-airport, we would assume that some of that off-airport share if not a large part of it is coming out of Enterprise. Are they at the point where you've gone from being a net to a mosquito or a bee, are they noticing what's going on with your success off-airport, and what does that mean, and could they potentially retaliate on-airport or at corporate against your growth in off-airport?
Mark P. Frissora - Chairman of the Board and CEO: I think there's always been healthy competition between Enterprise and Hertz. So there's nothing new going on there, and the competition is exactly as you've outlined. It's on-airport, is where they've always try to grow, and we've always tried to grow on off-airport. This has been going on for about 10 years. The reality is that we feel like we're growing faster than the industry in off-airport and it's because it's a huge market. It's $10 billion, just as big as on-airport. There's been 80%, 75% market share held by one person, and that one person can only – if a formidable competitor comes back and establishes a network and we become a second choice, we're just going to keep growing. I mean, I think it's obvious that there is going to be market share gain when there's been almost a monopoly in one particular market. So, I think we have a big opportunity there to continue to grow without creating a pricing situation. Frankly, it does no one any good to create pricing problems. You saw our off-airport grew on pricing. We were above 450, 480 basis points on pricing year-over-year in off-airport. So I think in terms of what's going to happen, I think it's more of the same. I don't see anything really changing. We both compete based on value and whoever provides the best value to the consumer ultimately wins in any market.
Brian Johnson - Barclays Capital: So, they are not saying, we're bothered by what you're doing off-airport and we're going to take it out against you in airport pricing?
Mark P. Frissora - Chairman of the Board and CEO: I don't know what they're saying. They don't talk to me. That's for sure.
Brian Johnson - Barclays Capital: But you're not seeing it in terms of how they're showing up at the corporate bids?
Mark P. Frissora - Chairman of the Board and CEO: I think I've answered the question.
Operator: Emily Shanks, Barclays Capital.
Mike Perez - Barclays Capital: This is (Mike Perez) on behalf of Emily. Mark, we're wondering if you could comment on your overall view of rent-a-car fleet levels in the industry? Related to that, what's your view on pricing power going into 2011?
Mark P. Frissora - Chairman of the Board and CEO: I just did in that last question. I'll repeat it. What I said was I think industry fleet levels are adequate. They're right where they should be. We don't see a lot of over-fleeting anywhere. We think they're right where they need to be. The pricing environment for us, I said in my call, it's a wildcard. It looks good in the peaks, and in the trough areas, it looks pretty stable. So that's the best way to describe it for fourth quarter, positive in the peaks, a little tougher but stable in the trough periods.
Mike Perez - Barclays Capital: Second question if I could is, what are HERC gross and net CapEx plans for 4Q 2010, and do you have a preliminary view for full year '11?
Mark P. Frissora - Chairman of the Board and CEO: I do. So I guess, in terms of net CapEx for Q4, we'll probably right in line with Q3, approximately $80 million. For 2011, our net CapEx will be in the range of $300 million to $400 million. I don't have a gross number. We look at everything on a net basis.
Operator: Rich Kwas, Wells Fargo Securities.
Richard Kwas - Wells Fargo Securities: Depreciation per unit, you continue to see nice declines there. You're getting to that mix level in terms of disposition mix that you're achieving of 50% or so. How much do you think depreciation per unit per month has (more to decline) as you look out the next several quarters?
Mark P. Frissora - Chairman of the Board and CEO: I mean, I can't really forecast that for you, I guess, the way you probably like me to, but in general, it's going down. Net depreciation per vehicle will continue to go down throughout the year next year. So, we're confident in saying that and it'll be significant. So, we're doing an awful lot, as you know, in the remarketing side, where we can take that, we think, down to like 20% at auction, longer term. I mean, that's kind of our goal. On top of that remarketing, some of the programs we've got in place for car manufacturers are very attractive. We bought a wide range of fleet and we've got an attractive range of prices. So our cap cost, we believe, will also have an impact to that net depreciation line. So we feel pretty confident that you will continue to see from Hertz net depreciation per vehicle improvement throughout 2011.
Richard Kwas - Wells Fargo Securities: On Advantage, RPD was down 7% to 8% year-over-year in the third quarter. Was there anything driving that? How should we be thinking about RPD as we move into next year? I don't know if that's inclusive of everything, is that a same-store number, but if you could provide some color on that, that would be great?
Mark P. Frissora - Chairman of the Board and CEO: Advantage is a brand-new brand, has very little volume. We were at a run rate of about $160 million roughly a year right now. What you've got is, last year, when we were looking at it, in very few locations, those locations we did have, we were yielding up, obviously, with Hertz. Sometimes, we had no cars in the industry, because the industry was tight fleeted, Advantage had cars and we were getting rates of $50, $60 a day. Now that Advantage is more mature and we don't have that same condition with tight fleets, I mean, everyone seems to be more right-fleeted this year. Advantage is returning to the RPD rate that it always has been. So there is no deterioration of RPD, per se, in Advantage. It's right about where it always has been. It's just the vagary of what happened last year versus this year of having a very tight fleet last year in the industry, and we were able to take advantage of that with the Advantage brand.
Operator: Chris Agnew, MKM Partners.
Christopher Agnew - MKM Partners: First question on equipment rental. The government and engineering services, which is about a third of your business, just maybe could you shed a little light on what the drivers are there and what activity you're seeing as you're heading into next year?
Mark P. Frissora - Chairman of the Board and CEO: Gerry, feel free to answer that question.
Gerald A. Plescia - EVP and President, HERC: It's actually about 8% of our business, Chris. One third of our business is what we call fragmented and that's about 20% of that pie, but we're seeing stimulus money start to have an impact on the road construction, on transportation terminals, municipal work and that's where we're seeing the money start to come into our industry. It appears that that level of spending, the increase we've seen lately, will continue into the first half of 2011. So, some of the impetus behind the earthmoving improvement that the industry is seeing, we expect to see into the first half of '11.
Christopher Agnew - MKM Partners: A quick follow-up on China. I know it's very small, but you're in there in equipment rental and car rental. What do you think the opportunity is there and is this something we'll be talking about more in one to two years or is it more three to five years?
Mark P. Frissora - Chairman of the Board and CEO: We just hired, actually, a General Manager to run operations there, very well, respected Chinese professional. We've put together a fairly aggressive strategy in China for both the equipment rental and rent-a-car. Now we've got four locations in each. I mean, what revenue growth we get, it will expand rapidly as we open up the stores. Everywhere we open up, we've been successful. We're making money in equipment rental already, and the growth is double-digit very rapidly once the store is opened and established in that area. So on the rent-a-car side, again, big opportunities more of a chauffeur-driven model and what we call fleet-leasing model. So it's a little different model than what you traditionally think about rent-a-car, but it's very rapidly growing as well. We've made good connections with the Chinese government, the mayors of different cities in order to expand that business model with licenses that we need in order to grow the business. Our strategy in China for rent-a-car is to open up the top 30 airports and have a corporate store opened at each major airport, all of those being larger than O'Hare. Then, actually expand in a hub-and-spoke concept, so that we end up having local Chinese franchise of those franchises and get trained at that corporate location that's at the major airport. So we can deploy that strategy, actually, fairly rapidly. But in terms of your actual question, I wouldn't look at significant revenues probably occurring for three to five years, although we'll get nice revenue growth in the next two, I think it's more of a three to five-year time horizon where you start seeing a much bigger piece of our revenues coming from Asia-Pac.
Operator: John Healy, Northcoast Research.
John Healy - Northcoast Research: Mark, kind of a longer term question, when you look at the performance of HERC and RAC on the pre-tax margin front this quarter, the highest we've seen in a number of years, I was wondering if you could give us some thoughts of where you think, longer term, the pre-tax margin potential of the Company is today, in light of a more disciplined pricing environment, the internal initiatives you've put to reduce costs in the strong used car market, where you think over the next couple of years, we can march to on the pre-tax margin side?
Mark P. Frissora - Chairman of the Board and CEO: We look at the '07 levels of pre-tax margins for the Company and the corporate EBITDA margins. Our expectation is to move, I would say, 300 basis points to 500 basis points higher than the '07 levels, which were historic for us. We think that that's very achievable over the next two to three years, that we'll be higher than '07 pre-tax and EBITDA margin levels by 300 basis points to 500 basis points. So that's kind of the longer term strategy. We're developing from the Investor Day an outline of revenue growth and margin expansion and cash flow generation for all the models for the Investor Day that we're hosting for investors. We'll be more clear on that and try to give you some framework around that. The good news is that, again, much higher margins, both on EBITDA and pre-tax side, based on our current trajectory and the cost takeout that we've had over the last three years.
Operator: Steve Kent, Goldman Sachs.
Neil Portus - Goldman Sachs: This is Neil Portus for Steve. I just want to follow-up somewhat on a prior question. Could you just talk about some of the ways that you've been able to drive sequential increase in commercial rental car pricing? I think in the second quarter, it was down about 2%, but this quarter it was up 0.5%?
Mark P. Frissora - Chairman of the Board and CEO: Yes, so on commercial pricing, it involves a wide range of accounts, right? There is like a Fortune 100 list, Fortune 200, a Fortune 1000 list. What we're finding is that in the very competitive top 50 accounts, pricing pressure continues to be high. However, it's getting more flattish, right, because we had to have some large reductions a couple of years ago. Midrange businesses, again, good pricing pressure, but if you provide more value-added, there is obviously more opportunity for pricing growth, so in the midrange, small range accounts, more opportunities on pricing growth. Top range customers continues to be competitive, but we believe we're getting, in some cases, value equations where we're increasing because we did lower our prices so much over the last two years in order to save market share. So we feel pretty good. Small accounts are BAP accounts. These are very small local businesses that we sign up in off-airport locations often times. That pricing, that RPD, was actually up 1.5%.
Operator: Michael Millman, Millman Research Associates.
Michael Millman - Millman Research Associates: Could you give us some idea of the cost, maybe frame it in operating expense plus SG&A for the different components, for example, airport, commercial, leisure, off-airport, Advantage?
Mark P. Frissora - Chairman of the Board and CEO: You mean like DOE, direct operating SG&A by segment or something? Is that what you're asking?
Michael Millman - Millman Research Associates: Yes, exactly.
Mark P. Frissora - Chairman of the Board and CEO: I don't have that off the top of my head.
Michael Millman - Millman Research Associates: Or at least give us some ranges if you could?
Mark P. Frissora - Chairman of the Board and CEO: I mean, Michael, I wish I could answer that question. I don't have it. I mean, typically, the way we look at our segments we have off-airport and airport. Certainly, in off-airport, our operating expenses are lower than on-airport, probably by a factor of, I would say, maybe 20% to 30% lower, in that range roughly, 20% to 30% lower on a DOE SG&A basis. Then you asked about off-airport and airport and what else did you ask about?
Michael Millman - Millman Research Associates: Well, I asked about airport, leisure and commercial.
Mark P. Frissora - Chairman of the Board and CEO: See, now that's blended. I've got a cost center at the airport, and the DOE and SG&A is one cost center, and I'm handling leisure and commercial together. In terms of which is more expensive, a lot of it depends on the customer, right? So leisure traveler, in general, we can get a higher, fast RPD growth than we can with a business traveler. Business travelers rent typically cars that are a little nicer, medium-sized, full-sized cars. So sometimes, we get a better rate there. Leisure travelers on an airport like Orlando, as you know, that's a very competitive market. So again, it's more price competitive. In the Midwest market, though, we can typically do better with leisure in some of those markets than we can in the highly competitive markets. So really it's kind of airport-specific in terms of the margins we make on the businesses. But, in general, a business traveler with a two or three-day rental, it's more difficult to make a higher (rental) on that to turn that asset than it is on a seven-day at leisure or a five-day, or 13-day rental in off-airport. That's just because it takes more labor, as you know. Every time I do a two-day rental, that's all I'm doing is two-day rentals with a business traveler. I've got to turn that car 15 times a month. I have to relocate that car. I have to clean that car. I've got a lot more labor associated with it. So that's why the off-airport growth strategy makes a lot of sense for us, and it's very helpful. We think longer term, even a margin enhancement standpoint for us.
Michael Millman - Millman Research Associates: That's exactly what I was looking for. If you could give a little bit of quantification for what that two-day extra cost? Also, Advantage was the other name.
Mark P. Frissora - Chairman of the Board and CEO: Yes, Advantage, again, for Advantage, our operating expenses typically, are probably, I would say, somewhere, roughly, 40% lower on operating expenses. Then in terms of fleet costs, the fleet cost there are, let's see, if I do the math on this, we're around, I'd say, $300, $240. So I mean, $300 per day versus on Hertz Classic versus $240 per day net depreciation per month on Advantage. So that's about 20% to 25% lower. So that's what we're seeing in terms of Advantage in terms of cost comparisons.
Operator: Chris Doherty, Oppenheimer.
Christopher Doherty - Oppenheimer: Elyse, you guys have been very successful at tapping the debt markets, recently and you said that you're going to use the proceeds from the 7.5% to take out the 10.5%. I mean you've sort of leapfrog one on the maturities which are the 8.875% and those stepped down in January on call price basis. What's the thought that coming to the market again?
Elyse Douglas - EVP and CFO: Well, we're definitely looking at it. So we're keeping tabs on where the market is. When we think the timing is right, we could potentially tap the markets again and refinance those early as well.
Christopher Doherty - Oppenheimer: Mark, in terms of the net CapEx for HERC, where are you right now in terms of a time utilization standpoint? Or can you absorb more demand without growing the fleet at this point?
Mark P. Frissora - Chairman of the Board and CEO: Yes, I mean, we certainly can. I mean, Gerry, you want to expand on that a little bit?
Gerald A. Plescia - EVP and President, HERC: Sure. Where we have room is in aerial and material handling. We still have room in that segment of our fleet. Earthmoving and industrial power pump, some of those areas were more highly utilized than we're purchasing fleet into. So it's really by type of fleet. We can absorb more demand in aerial and material handling. We have to buy some more in the other specialty categories to grow utilization.
Christopher Doherty - Oppenheimer: Gerry, the 300 or 400 that Mark mentioned of net CapEx in '11, does that assume any growth or is it that just pure maintenance?
Gerald A. Plescia - EVP and President, HERC: There is some growth as well. We're expecting closer to double-digit growth overall in volume next year. About half of that would be for growth.
Operator: Fred Lowrance, Avondale Partners.
Fred Lowrance - Avondale Partners: Just a brief one on the off-airport business. You've obviously growing that pretty quickly and gaining a lot of traction, just interested to know just how quickly those off-airport locations mature and maybe if you could compare that to the timing that you're seeing with your Advantage expansion?
Mark P. Frissora - Chairman of the Board and CEO: I'll have Scott answer that. Scott Sider who is President of our North American and South American operations for rent-a-car.
Scott Sider - EVP and President, Vehicle Rental and Leasing, The Americas: So the locations are profitable within the first year, and I would say they get to full maturity, in terms of margin, takes about three years. Within the first 12 months, they are turning a profit for the locations.
Operator: That was the final question.
Mark P. Frissora - Chairman of the Board and CEO: Well, listen, thanks, everyone, for attending the call. We look forward to talking about more good news from Hertz. Thank you, everyone.
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