Ladies and gentlemen, welcome to the Hertz Global Holdings Third Quarter 2013 Earnings Conference Call. The company has asked me to remind you that certain statements made in 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 Risk Factors and Forward-Looking Statements section of the company's 2012 Form 10-K and 2013 Form 10-Q quarterly results. 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 and running through November 18, 2013. I would now like to turn the conference over to our host, Leslie Hunziker. Please go ahead.

Good morning. You should have all received our press release and associated financial information. We've also provided slides to accompany our conference call that can be accessed on 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 our website. We believe that our profitability and performance is better demonstrated using these non-GAAP metrics. Our call today focuses on Hertz Global Holdings Inc., the publicly traded company. Results for the Hertz Corporation differed only slightly, as explained in our press release. You've probably already noticed our new segment reporting, which is included in our press release tables. We changed our segment reporting primarily to increase the transparency of our U.S. rental car business, which has grown faster than any other unit, especially in light of the recent Dollar Thrifty acquisition. The new segments are U.S. rental car, which includes U.S. airport and off-airport businesses and Dollar Thrifty; international rental car, which includes Canada, Europe, Latin and South America, Caribbean, Australia and New Zealand; worldwide equipment rental; and then other operations, which includes Donlen Leasing and other business activities like our third-party claims management services. With regard to the Investor Relations calendar, we'll close out the year presenting at the Barclays Auto Conference on November 12 in New York and the Bank of America Merrill Lynch Leveraged Finance Conference in Florida on December 3. This morning, in addition to Mark Frissora, Hertz's Chairman and CEO; and David Rosenberg, our interim Chief Financial Officer; on the call, we have Scott Sider, Group President of Rent-A-Car, The Americas; Michel Taride, Group President of Rent-A-Car International; and Lois Boyd, Group 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.

Good morning, everyone, and thanks for joining us. I'm going to start on Slide 6. During the third quarter, we continued to see good progress from the strategic initiatives that will ultimately drive the long-term success of the company. Our U.S. off-airport operations generated 11% revenue growth, driven in part by 92 net new locations and a 14% top line increase in the insurance replacement business. The rollout of our 24/7 technology is underway. We installed our proprietary Telematics package in 11,500 more cars in the third quarter. Donlen Leasing delivered another quarter of double-digit growth, increasing revenue roughly 10% in the latest period to $133 million. This was driven by a combination of new account wins and continued strong order activity from our core customers. The equipment rental tuck-in acquisitions are allowing us to incrementally capitalize on the industrial recovery. HERC North American rental revenue grew 12.3% in the third quarter year-over-year, excluding currency. And the integration of Dollar Thrifty is on track, which I'll talk about in just a minute. Finally, on Slide 7, from a structural cost perspective, our Lean/Six Sigma programs generated an incremental $89 million of efficiencies in the third quarter, bringing the year-to-date savings to $237 million. Let me walk you through the business segment performance. If you turn to Slide 8, for the third quarter, U.S. rental car total revenue grew 33% year-over-year, driven by 28% higher volume and a 2% increase in pricing. Total rental car transaction days benefited from acquired and incremental Dollar Thrifty volume, as well as a 10.6% increase in overall off-airport rental demand. Longer rental transactions in our fastest-growing leisure and insurance replacement businesses resulted in more than a 3% expansion in average rental length. Despite this strong overall performance, as you know, we ran into some unexpected…

Thanks, Mark, and good morning, everyone. Let's start on Slide 17. For the third quarter of 2013, GAAP earnings of $0.47 per share were lower year-over-year, impacted by a $39 million charge associated with exchanging 82% of the convertible senior notes to shares; expenses associated with the Dollar Thrifty integration, including the corporate relocation to Florida; and a charge of $44 million primarily associated with the expected losses on the sale of vehicles subleased as part of our divestiture of the Advantage brand. As I'm sure you are aware by now, over the weekend, we terminated our sublease with Advantage. Under the terms of the agreement, we leased a fleet of cars to Advantage in connection with the divestiture required by the FTC when we bought Dollar Thrifty. Advantage called us in early October to inform us that it was having liquidity issues. Among other things, Advantage was unable to make payments owed under the sublease. We have been working with Advantage since then to try and restructure our commercial arrangement. Our goal during the last 3 weeks was to find a mutually acceptable solution to the liquidity issues that Advantage has been encountering. To that end, after we and our advisors discussed this matter extensively with them, we were unable to agree on a suitable alternative and determined that it was not in Hertz's best interest to make the requested changes. Details of the charges are outlined in today's press release. This morning, Advantage issued a press release stating that it is planning on filing for U.S. bankruptcy protection maybe as early as today. Advantage also made some allegation about Hertz's involvement in their liquidity issues, and all I can say about those is that Hertz believes they are without merit. We will vigorously defend them and look forward…

Thanks, David. Let's move to Slide 25. Overall, our businesses have a lot of moving pieces going into the fourth quarter, some positive, some less positive. For equipment rental, we expect continued year-over-year price and volume improvement. However, we do face a tough volume comparison this quarter due to share gains last year as we brought in new fleet and the slower recovery in non-res construction. For the full year, we expect revenue stats to be in line with our guidance for worldwide equipment rental revenue. In Europe, in the fourth quarter, volume and pricing trends remain positive. We continue to expand our brand network, opening Thrifty corporate and franchise locations in multiple countries and growing Firefly corporate locations. Our European team continues to focus on cost control, driving expenses lower as a percent of revenue. As the fourth quarter develops in U.S. rental car, we're encouraged by improving airport volumes for our Hertz brand, which are now running at more normalized mid-single-digit growth since the government shutdown ended in mid-October. Additionally, we saw positive airport pricing last month. However, as we move into November and December, we will experience more difficult comps due to the spike in rental demand during the recovery efforts related to Hurricane Sandy last year. But right now, it's too early to estimate where total RPD for the current quarter will be. In terms of fleet in the fourth quarter, efficiency will be impacted by an additional 26,000 recalled vehicles, which we expect to have repaired by the middle of November, as well as the excess fleet we've been dealing with. We still believe we can have the right -- the fleet rightsized by the end of March 2014. Moving to Slide 26. We're trying to be opportunistic when we sell cars due to the…

[Operator Instructions] Our first question comes from the line of Chris Agnew with MKM Partners.

I was wondering if on the fleet cost guidance for 2014, I think you mentioned some seasonality. I wonder if you could give us any more details. I think you talked about first quarter being higher.

No. I mean, I pretty much gave you all the details we have at this point. We're going to be working on -- as we announce fourth quarter and as we get into the year, into 2014, we'll have more information as to what the depreciation rates firm up as and what -- where we are on the status of de-fleeting. Right now, we're being opportunistic in the market. So we think that in January and February, the 2 months -- actually, January is a little, I would call it a flat month. February and March end up being better months, and we're hopeful that we can accelerate the whole schedule of being over-fleeted. What we've built into this number was the fact that we would assume to take some losses in order to accelerate that de-fleeting. So that's kind of built into the numbers, as well as, obviously, a residual decline overall in the total market. So I wanted to make sure that we got ahead of investors on this, so we didn't surprise them and -- but in terms of giving you more information, it's hard to do so right now until we kind of finish out the next 3 months and see where -- see the world -- where the world is in January and February.

And can I have one more follow-up on, Mark, the Hertz brand and market share in the quarter? With volumes down 3% on airport, was there some share shift to DTG? Did you lose market share? And I'm just wondering, is that a process you manage, and how should we think about that trending into 2014?

Yes, in terms of share shift, if there's a share shift in a given month or a quarter, we usually try to regain it, obviously, if we lose some. Any given month, you never know what's going to happen. I know that we talked to investors, we looked at July, we were pretty much flat to up a little bit. Year-to-date, if we look at where we stand year-to-date kind of through August, I think our share overall year-to-date is about flat on all brands. So we're trying to manage that share to kind of a flat number for all 3 brands. If that happens, then we know we don't have cannibalization of one brand over the other one, Hertz shifting to Dollar Thrifty. But on a year-to-date basis, we feel pretty good that we've been able to achieve a goal of flat share growth. And as the rest of that continues to come in, we'll know more. But yes, we adjust that every single month and adjust our strategies, so we keep that share flat between all 3 brands.

Our next question comes from the line of Michael Millman with Millman Research.

Can you talk a bit about what you're seeing out in the marketplaces as you check availability, but kind of broken down between premier and value and discount?

I think that when you look in the overall market, there are probably, I don't know, let's just say 15, kind of 20 top leisure markets where there is a deep-value discount brand. In those markets, we see the deep-value brands growing more rapidly than a premium or midsize brand. But as you know, Michael, the overall share of the deep-value segments is around 4%. But in those markets, it could be anywhere from 8% to 12% or 13%. So in those markets, they're obviously growing a little bit more rapidly than in -- than the other brands. In other markets that are outside of what we call the really highly sought-after leisure markets, the ones that -- where you have a lot of tour business, as well as a lot of travel by vacationers, everything is pretty much stable. We don't see a whole lot of change there. The only real change we see is maybe the deep-value segment and those core leisure markets where rates end up being a little bit more competitive due to the number of competitors in those markets.

I think I was more aiming towards when you do surveys and looking at fleeting in these different categories in the coming months.

I'm not sure I understand your question.

Put another way, it seems like we've had some industry over-fleeting. I was wondering if you're seeing that continue or if you're seeing that improving?

I think that -- I mean, obviously, we've had an over-fleeting situation because we planned for more volume growth. I think that was -- in Florida, I would say we started the summer in an over-fleeted situation, but we ended the summer and into October under-fleeted. So there seemed to be a significant change in Florida that we saw in terms of the way the demand built. So again, very quick change in the Florida market. We see the Florida market pretty strong right now, and we've fleeted up accordingly. So that's the biggest change, I would say, that I've seen. Northeast has been generally weaker in terms of volume growth we've seen versus the fleet we have there. So we were a little bit over-fleeted in the Northeast. In terms of the rest of the country, pretty much right where it needed to be. So I'd say Northeast and Florida were the biggest fleet challenges that we saw in terms of demand shifts and then being right-fleeted in those markets.

Our next question comes from the line of Afua Ahwoi with Goldman Sachs.

Two questions for me. First, can you help us reconcile the difference in your Hertz brand volume growth versus your public peers? Because they're down sort of 3% versus -- I think they look for up -- about 3.5% would seem more in line with what you are planning for, so maybe help us bridge that gap. And then on the fleet costs, I was just wondering, the decision to accelerate sort of the sales in -- excess fleet sales in 4Q, is that different from when you sort of gave the updated guidance in September? Because at that point, you obviously did not update the fleet cost guidance, so just curious. And if it is an updated view, what factors drove that?

In terms of competitors, I'm not sure what you're talking about. I guess Avis -- I don't know if we reported the Avis brand only. I don't remember that exactly. But to try to reconcile between Avis and Hertz is like apples to oranges, right? We have a lot different other pieces. Our off-airport piece is growing really rapidly. So overall, on the Hertz brand, I think our actual volume growth was the same overall in the Hertz brand. When you look at Avis brand only at airport, I don't know what their number is. I'm giving you Hertz brand on-airport only, so you can't really compare apples and oranges here. And our volume, remember, is to our expectation. Our volume is to our expectation, and our expectation was to have more growth. And again, I've told the share numbers year-to-date. Year-to-date through August, we're pretty much flat on share. We have, on a volume basis, seen a big recovery, which the good news is we're seeing mid-single-digits kind of growth. But we seem to have taken a hit in the government sequester more than our competitors, maybe because we have a very high share in commercial business that's associated with government businesses. There are a lot of businesses that serve the government, and we have that corporate business. And it's fairly -- we have fairly high share in it, and so there was some impact on that, that might have been greater than our competitors. But other than that, it's just hard to speculate given that I don't have an understanding of Avis's numbers only on-airport. I just don't have that understanding, so I hate to comment on it. Your other question had to do with fleet, and I'm not sure if I understood the question. Could you repeat it for me?

Sure. I was saying the -- you indicated that you decided to accelerate some of the sales of excess fleet in the fourth quarter, which obviously drove up your fleet costs number. But in your update in September -- is that different from the update you provided in September? Because obviously, you didn't change the fleet cost guidance then. So I'm just wondering what changed, if anything at all.

The only thing that has changed is as we move into each coming month, we have more visibility. I mean, I get experience and so as I get more experience, I feel more confident in giving you numbers on where I think they're going to end up, right? So we moved up the early sale of some of these vehicles in order to make an economic decision. So we look at does it make sense to hold the fleet for a longer period of time and try to drive for volume growth, or does it make sense to sell it. And we make those trade-off decisions every week. So it's a very fluid model that we use to make fleet decisions. So nothing's really changed since September, I mean, other than the fact I've got more granularity. I'm able to predict fleet costs better into the quarter than I could in September.

Our next question comes from the line of Adam Jonas with Morgan Stanley.

Mark, could you describe any changes to your assumptions for the market of used prices or whether it's the Manheim or whether it's the Moody's outlook that you sometimes reference into 2014 that you could say contributed to the revised or the, say, the weaker depreciation outlook for next year?

We assume that there's going to be a reduction, obviously, in residual values next year. And we use Black Book as our biggest guidepost, I guess. That's what we use as kind of our anchor for setting those depreciation rates. So again, you've got Black Book just like I do, so we're kind of looking at that and looking at where that's going. And I think there's 2% roughly kind of a deterioration planned in Black Book. And then we look at our vehicles and the way we sell our vehicles by make and model. We're going to lay that against an overall number because there's certain, as you know, make and models that sell at higher prices and others at lower prices. So my -- it's hard for me to generalize because -- I went through those slides with you. On Slide 11, for example, you could see all the moving pieces. Those moving pieces allow us to outperform the market or in some cases, to make the wrong decision and underperform the market, depending on what your fleet rotation is. And it's about the best thing I can tell you.

That's clear. So it doesn't sound like you -- the market assumption didn't change underlying. If I can ask a follow-up, Mark, given that you're partially attributing the weakness in the fleet costs outlook to the selling of excess fleet as a big driver short term, does that mean that this impact is kind of onetime in nature and that we could see a return to the $220 or $230 depreciation per month level once we get past this hump of $250, $260? Or is $250, $260 kind of the new normal that we launch on when we think about our models beyond 2014?

Yes, I think it's really difficult for me to answer that question based on what happens to residuals in 2015, also based on the ramp up of our car sales network. Our goal is that -- and I'm just going to give you at a broad level, we sell, let's say, on average, 16,000 cars a month, and that's kind of an average month for us. We'd like to get half of those car sales into the retail channel. That's a long-term goal. That may take us a couple of years to execute. When we can get half of our car sales into retail channel, we typically always make money at retail, $1,100 a car to $1,500 a car depending on the market. The other half of those cars that we have to sell at wholesale, if the wholesale market is, in fact, under pressure, normally, you don't take much more than $1,000 to $1,500 car loss. So if I can get the pipe at retail to be as large as the pipe I need to sell at wholesale, I've really mitigated the risk of the residual market. So what we're trying to do, our clear strategy is to build that retail model so that we can get 6,000 to 8,000 cars, I'll put it in that kind of a range, that we could sell every single month at retail. And we think based on our own modeling and stuff, we can get that accomplished. We're already at 3,000 today, maybe 3,200. So we think we can get to 6,000 to 8,000 over the next, I'll say, 18 months to 2 years. And that would allow us to mitigate the risk of residuals and be more stable, if you will, in our prediction of what car costs are going to be.

Our next question comes from the line of Fred Lowrance with Avondale Partners.

I was wondering if you could explain the accounting thought process, the methodology used when you decided to count the Advantage fleet as a onetime impairment rather than flowing that through to your P&L sort of over the next couple of quarters as you sell those cars. And kind of along those lines, if I do the math, impairment divided by the number of cars that you're stuck with, the unit losses on those cars are very similar to the level of losses that Advantage is alleging they're taking on each of their cars that they're selling. So does that not lend support to some of those allegations that maybe the book values you had on your cars were too high to begin with? I just wonder if you could address those couple of things.

This is Jeff Zimmerman. As we said in David's scripted remarks, this is a matter that we've been working very carefully with Advantage on for now going on close to a month. And in their public announcement this morning regarding their bankruptcy, they signaled that they intend to commence litigation. And given that, I have instructed our team to take no questions today on the Advantage proposed bankruptcy or along the lines that you're asking. So unfortunately, we can't go there on this call.

But on the first part of your question, which doesn't have anything to do with the dispute, the way we took the actual charge just estimated the number of vehicles that they had and what we thought the mark-to-market fair value would be on some of those cars. And the longer the time is before we get the cars, the greater the loss. So if we got the cars in 2 weeks, the loss would be less than it would be if we got it in 2 months. And so it's just a straight math calculation. There's nothing disingenuous about it. It is what it is. And so we put in the investor presentation, as well as in our earnings announcement, the fact that it could be between -- in the neighborhood of $50 million to $70 million. And that's just based on what we know the fleet was valued at when they initially got it and where we think the market is today, and that's about it. So there wasn't -- the way you were presenting it, we don't have possession of those cars. And we don't know when we'll get those. It will be based on the bankruptcy court judge's decision on how we have access to it.

Our next question comes from the line of Rich Kwas with Wells Fargo Securities.

Two questions. Mark, on the $250 to $260 next year, you said about 2/3 came from lower residuals and then the disposition of the excess fleet. How's the breakup? If you look at that 2/3 is it -- what's the split between the residual impact and then the excess disposition?

I haven't -- honestly, Rich, I haven't broken it down that way, but if I were to hazard a guess, I don't know if it would be half and half. I'm not positive, maybe 2/3 of it from the losses and the other 1/3 of it from the weaker residuals. But that's just a wild guess for me. I'd have to get back to you on it, but we didn't break it down in that level of detail yet.

But it's fair to say there's a piece of that that's not sustainable, correct, in terms of an increase?

Right, right, yes. We are, again, doing everything we can to offset that forecast, and we'll continue to do everything we can. And it's based on market assumptions and a rotation schedule that, we think, on car sales, we can achieve. And if we can beat our car sales assumptions on retail, that helps it. If we can get better car deals next year, that helps it. A lot of things can help it, but the reality is those are all, on the common, we need to be able to demonstrate improvement to the numbers we're rolling up to right now.

Okay. And then just a quick follow-up on commercial pricing that was flat. Are you seeing any signs that, that could be a positive in '14? I know those negotiations are kind of annual or they're not -- they're kind of piecemeal, but what are you seeing in that market right now?

I guess it's hard to predict the future. 75% right now of our corporate contracts negotiated have been flat to up so far this year. So that's kind of good news versus where we've been historically. And we're not going after share in terms of trying to drive, if you will, commercial volume. We're trying to just maintain the existing share that we have. It's heading in the right direction the way we look at it.

Our next question comes from the line of John Healy with Northcoast Research.

Mark, I wanted to try to get a little bit more clarification on the guidance for fiscal '13. When I look at the Slide 29, it looks like the guidance is the same as on the 26th of September, when you updated things. So with car costs going higher than you originally thought at that time frame, as well as the impact of the government in October, is it likely that we're tracking at the low end of guidance? Is there something that maybe we haven't talked about on the call that's maybe upside to where you thought? And I'm just trying to understand how all the numbers fit together given those 2 moving parts.

Yes. I mean, we gave you a balanced message, and every comment was weighted. So best thing I can tell you is it is what it is. What I gave you is -- there's no conservative. There's no aggression. It's kind of where we see the lay of the land right now.

All right. And I wanted to ask about, from a disposition standpoint, you've got these cars that are coming back to you from recall. You may or may not have the Advantage cars coming to you. What is the absolute number of units you think you need to move by the end of March of next year that kind of need to flush itself out in terms of the market? And how does that compare to what you normally sell seasonally?

Yes. So I just wanted to make sure -- on the Advantage units were not -- those aren't coming into our fleet for the most part. We'll just sell those mark-to-market, and that's what we have. So that's not a fleeting issue for us in the future. I don't want you to think it is, all right? And then the second piece of your question, Scott, you want to answer it?

Yes. So I wouldn't worry about that. If you look at -- when we've done our rotation in order to rightsize the fleet, we'll be selling less cars in the first quarter than we did last year. So we feel confident that we can rightsize the fleet, and that will be putting less pressure on the market because we'll be selling less vehicles on a year-over-year basis.

Is there any -- and that $250 to $260 guide, is there any material change in your program risk car assumptions for next year?

We will have more non-risk cars next year in our fleet, and that will help us with flexibility in the fleet, which puts less pressure on car sales.

And any thoughts what that will represent?

No. We won't -- we have an idea, yes, but we're not prepared to talk about that until we finalize our fleet plans moving into the next year.

Our last question comes from the line of Brian Johnson with Barclays.

Just a couple of questions around depreciation and impact on 2015. First, can you maybe clarify a bit about the 1/3 of the year-over-year headwind, I could call it, normalizing depreciation from the benefit of the DTG fleet and why that's rolling off? And then second, what does this all mean for your Investor Day 2015 guidance range that you had put out?

Yes, so I don't know what to clarify. I mean, I said it about as clearly as I could say it. We have a fair value benefit by combining the Dollar Thrifty fleet with the Hertz fleet, and that's a onetime benefit that doesn't repeat itself in 2014. So that just becomes a hurdle, if you will, for depreciation and we built that in. And then in terms of 2015 and what this all does, again, we have not done our -- we're not ready for Investor Day. I'll just put it that way. Investor Day, when it comes, we'll be ready and we'll be able to discuss that. So I don't want to give you information that were not fully baked on yet. And when we get there, we'll be clear about the impact of this and other macros on our business model going forward.

And is the fair value benefit that you essentially bought used cars when you bought DTG, and hence, the monthly run rate depreciation on them would have been lower?

Correct.

That was our final question. Speakers, please continue.

All right. Well, listen. Thank you, everyone, for attending our call. We look forward to talking about the Hertz story as it positively unfolds over the next 4 months. Thank you.

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