Welcome to the Hertz Global Holdings 2012 Second Quarter Conference Call. The company has asked me to remind you that certain statements made on this call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of performance and, by their nature, are subject to inherent uncertainties. Actual results may differ materially. Any forward-looking information relayed on this call speaks only as of this date, and the company undertakes no obligation to update that information to reflect changed circumstances. Additional information concerning these statements is contained in the company's press release regarding its first quarter results issued yesterday and the risk factors and forward-looking statements section of the company's 2011 Form 10-K and 2012 quarterly reports. Copies of these filings are available from the SEC, the Hertz website or the company's Investor Relations department. I would like to remind you that today's call is being recorded by the company and is also being available for replay starting today at 12:30 p.m. Eastern Time and running through August 14, 2012. I would now like to turn the call over to your host, Leslie Hunziker. Please go ahead.

Good morning. You should all have our press release and associated financial information. We've also provided slides to accompany our conference call, that can be accessed on our website at www.hertz.com on the Investor Relations page. Today, we have 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 of the Hertz Corporation differ only slightly as explained in our press release. With regard to our IR calendar, next month, we'll be hosting our Financial Modeling Workshop and Investor Day in New York City on September 12. The next day, we'll be presenting at the Morgan Stanley Autos & Industrials Conference, also in New York City, and we'll be at the Citibank Industrials Conference on September 19 in Boston. This morning, in addition to Mark Frissora, Hertz's Chairman and CEO; and Elyse Douglas, our Chief Financial Officer, on the call, we have Scott Sider, Executive Vice President and President of Vehicle Rental and Leasing, The Americas; Michel Taride, Executive Vice President and President, Hertz International; and Lois Boyd, Executive Vice President and President of Hertz Equipment Rental Corporation. They'll be on hand for the Q&A session, and now I'll turn the call over to Mark.

Good morning, everyone, and thanks for joining us. Hertz once again delivered record quarterly results despite softening economic trends in both the U.S. and Europe. As you can see on Slide 6, those records were achieved on many fronts. Consolidated adjusted pretax income and margin were the highest of any second quarter in our history and increased 26.8% and 160 basis points year-over-year, respectively, on a 7.4% revenue gain. However, on a constant currency basis, our revenue and adjusted pretax income growth of 10.3% and 29.8% are even more significant when you consider that global GDP is only forecasted to grow modestly in 2012. On Slide 7, as you know, we've put in place multiple strategies over the last several years to balance and strengthen our top line and significantly improve the efficiency of our operations and the productivity of our people. Things like fleet leasing contracts, entry into emerging markets, recession-resistant insurance replacement rentals, a growing value brand to complement the Hertz premium brand, technology and innovation and Lean Six Sigma processes improvements all helped insulate our revenue and profitability from macro fluctuations globally. Let's run through the highlights for the business units, starting with U.S. Rental Car on Slide 8. Total revenues grew 6.7% year-over-year, driven by 10.1% higher volume with transaction days up across all businesses. The strong volume was driven primarily by a 17.4% increase in off-airport rental demand, supported by 103 net new store locations, and a 47.7% increase in advantaged volume. The significant expansion in these markets also helped increase our total average length of rental in the second quarter by 3%, generating greater cost efficiency. In terms of pricing on Slide 9, you'll see that while rental revenue per day was down 3.1% year-over-year, it was a 130-basis point sequential improvement over the…

Thanks, Mark. Good morning, everyone. Let me begin on Slide 16 by reviewing our financial results on both a GAAP and on adjusted basis. As Mark mentioned, we achieved record earnings for the quarter with adjusted pretax income of $233.9 million, up $49.5 million year-over-year. Adjusted earnings per share improved 34.6% to $0.35 a share over the prior year earnings of $0.26 a share. The diluted share count for the quarter was 447.4 million shares. On a GAAP basis, pretax income improved 67.8% to $158.7 million. GAAP net income improved 68.9%, resulting in GAAP diluted earnings per share of $0.21. The record earnings performance was driven by strong top line growth, lower U.S. fleet costs and $107 million of incremental cost savings. Moving to Slide 17, approximately 48% of the savings came from direct operating expenses, which as a percent of revenue, declined 390 basis points from the prior-year period, benefiting from favorable trends in vehicle damage collection in Europe, reductions in vehicle licensing expense and Donlen's low operating cost structure relative to its revenue. Our Lighthouse efficiency program on Slide 18 was implemented at another 10 locations worldwide in the second quarter. We now have 108 of our global Rental Car and Equipment Rental locations, representing 43% of total revenue having gone through the Lean Six Sigma program. This program drives improved customer service and employee productivity, as well as increased revenue. In the quarter, average Net Promoter Score for the Rental Car division improved by 40 basis points, and consolidated employee productivity was up about 2%. SG&A margin was flat year-over-year as streamlined operations and reduced staff levels in Europe were offset by higher legal expenses and the expansion of our equipment rental sales force to address that market's favorable demand trend. We're now on track to deliver…

Thanks, Elyse. Let's move to Slide 33. As you know, downside risk to the weakening global environment continue. You've got the usual pull between the lack of resolution on the Eurozone crisis and doubts about the strength of the U.S. economy. With the macro so volatile, it's tough to predict what's ahead, but as of right now, things are still pretty good for us. Even in these uncertain times, we're continuing to execute and deliver on our robust strategies. With that being said, we are comfortable with our current 2012 guidance. And our 3-year plan on Slide 34 is on track, which we feel good about considering the weaker European assumptions. Barring a free fall in the global economy, we remain confident on our ability to achieve our long-term goals. Near term on Slide 35, in Europe Rent-A-Car, we expected to see signs of recovery in the back half of the year on easier comps and the stabilization we saw in early May. So far, that hasn't occurred. As said, there's now uncertainty around exchange rate fluctuations to add to the challenging condition overseas. However, as I mentioned earlier, we're aggressively pursuing revenue and cost-saving initiatives to stem the tide, and those are helping. In U.S. Rental Car, a tight fleet in the third quarter, consistently strong utilization improvements and incremental growth initiatives are helping fortify our resiliency. We're more focused than ever on delivering speed and value at all customer levels. For Equipment Rental, we are continuing to perform at or even a bit above plan and we don't expect that to change. Overall market demand is stable. We expect our utilization to continue to increase as fleet logistic processes improve through the Lighthouse program as we service incremental demand in new markets and new geographies. Recent equipment rental…

. [Operator Instructions] And we'll go to Adam Jonas with Morgan Stanley.

I want to ask a question about Advantage profitability, and thanks for the extra color on the slide deck where you show the incremental profit. First, can you tell us what total pretax EBITDA margin for Advantage is right now?

No.

Okay. Then, just using the information you provided of the 920-basis point margin improvement year-on-year, understanding was that, based on your guidance in part, that business was either profitable or breakeven maybe. But if we assumed it was breakeven last year and we're doing a 900 -- high single-digit margin pretax, would that imply -- are we wrong to kind of assume that, that might imply an EBITDA margin that's not a million miles away from the group average?

Yes, you're correct. I mean, our profitability on Advantage is very close to U.S. Rent-A-Car's profitability, pretax margin-wise.

. And we'll go to Afua Ahwoi with Goldman Sachs.

It's Afua Ahwoi, actually. Just a quick question. I wanted to -- can you elaborate on the trajectory of price and volumes in the U.S. and maybe North America as the quarter progressed, I mean, especially because we saw a sequential improvement over last quarter, which is a little atypical to what we saw some of our other companies reports? So I was hoping you could give us some more color in May versus June versus, if possible, July.

Yes. Well, we can't comment on any forward-looking pricing. There's antitrust issues around that and so we won't. But I will tell you that we did have pricing improve sequentially from the first quarter to the second quarter, and we saw actual price realization. On-airport Leisure pricing went up 1.4 points for us, so we think that was a very encouraging sign, but for a part of our business model.

. And next, we'll go to Michael Millman with Millman Research.

On Hertz, the same-store sales was up 7.3%, which is showing a decelerating growth. Can you talk about why that's occurring and maybe whether we'll see that change around in the short term?

We don't have those numbers. I don't know -- is that on a sheet somewhere or did you calculate that?

Well, if you put the current number down and was able to calculate the last.

We have stores growing and closing stores all the time. We do that every quarter or so, I know FX probably had some impact in both -- in Europe, it had a more dramatic impact than you might think. But in general, we were pretty much right on our growth plan. We didn't have a surprise on growth in our core stores, Michael. So I don't -- the comment is one that says we're decelerating and I don't think that's accurate. I think it would be driven by international, if anything, given the fact that we had the foreign exchange issue. But we could try to back into the number for you and adjust it for foreign exchange and see if you'd see that -- I think you would see it's growing, it's actually not decelerating.

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

Within the outlook -- or Mark, are you assuming that residual values decline year-over-year for the rest of the year? And then, could you just comment on commercial pricing because you said that was a point of weakness this quarter, it was down 3.6% last quarter. Was it worse than last quarter?

Yes. I guess in terms of our assumptions going into the back half of the year, Elyse, do you want to talk about those?

Yes, I mean, we are -- I guess our assumption with residuals is that they're going to remain relatively strong, so we don't see a huge change in residuals for the back half of the year. But obviously, as you know, the second quarter is the peak selling season, so they do come down seasonably throughout the year. In terms of the debt rate versus our original forecast, we do see that up versus our original forecast, and obviously, that's being offset by things like pricing and foreign exchange. Did that answer your question, Rich?

Yes. Then commercial pricing, Rich, in terms of the weakness that we're seeing there, it's just the continued competitive environment on commercial pricing. We didn't see it slackening, although down in Q2. I mean, for us, when we look at it, we assume it will be constant, but start to improve at some point, hopefully in the fourth quarter when we cycle through contracts. We think the year-over-year comp in the fourth quarter will become a little easier, and so that would be our prediction. But you just don't know. We don't know where competitors are going, and there's been pressure there, as you know, longer than we would have anticipated. But right now, we're feeling that maybe the fourth quarter will be a little bit better on the commercial front.

. And we'll go to Christopher Agnew with MKM Partners.

Couple of questions around free cash flow. How should we think about free cash flow over the next couple of years? Is pretax earnings still a good proxy as it's been in the past? And maybe can you outline growth CapEx expectations for HERC? And then just one more on cash flow. Avis Budget have been buying back their convertible bond, I think, over the last couple of quarters. Is that something you would consider or even can consider? And how would that impact your goal to become investment grade in the next couple of years?

Okay, so let me address the cash flow. So on average, we earn about $1 a share in terms of cash flow before acquisitions and fleet growth -- or significant fleet growth. So we do expect to be positive cash flow this year. We have made some acquisitions and we have increased our investment in the HERC fleet, but we do expect to be positive in cash flow for 2012. The investment in HERC, as you know, we did up the investment from our original guidance, so there's about $140 million of incremental cash flow we'll be spending this year that we had in the original plan. With respect to the goal to be investment grade, obviously, that continues to be our goal. We do, however, constantly look at alternative investments for cash, and buying back the converts is actually something that we do look at and consider. So we continue to look at that. We just have not felt that it's the right time given some other strategic issues that we're considering at this point in time.

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

Mark, I was hoping you could give us a little bit of color on the European market. I know you mentioned 2% transaction growth there. What would transaction growth -- transactions grown without the Advantage brand being launched in some of the markets there? And do you feel like you outperformed the market or was the performance by the Hertz Classic brand more in line with the market there?

Well, in terms of outperformance of the market, yes, we're pretty confident, year-to-date. Our share, and this is on the -- this is looking at share reported into a central group there in Europe, we were up year-to-date, I think, about 0.4%, so almost 1/2 share point up. I think that was through May, if I remember right, but Michel is on the phone. so we don't feel like we have a share issue at all. If anything, we've gained a little share. In terms of the volume issues, they primarily are continuing to be in Spain, and Germany is probably a little bit weaker than we would have anticipated as France is. Those are the 2 of the bigger countries, Italy is doing fairly well, and Benelux has weakened a little bit as well. So that's kind of color, if you will, by country. But in general, we expect the comps to get easier as we move forward in the year, and we're hopeful that we start cycling out of a continued degradation, if you will, of going down, but it's just taking longer for the bottom to kind of start moving up, if you will, and that's been the bulk of the issue there. It's just that it's been a slower return than we would have thought at this point, much more -- the consumer confidence issue has played out in Europe just like it has in the U.S. a little bit.

And Mark, this is Michel speaking. I think the question was also how much is the weight of Advantage. Advantage accounts for about 1.5% fixed point of the growth.

. And we'll go to Jordon Hymowitz with Philadelphia Financial.

On your Slide 42, this is very helpful. I guess my question is, if you had your druthers, would you put 100% of your cars on auction if it's possible to execute in that regard?

You mean 100% on risk? At auction? I mean...

I'm sorry, let me ask the question more specifically. If you had the retail ability, would you put 100% of your risk cars that have come to term through retail and none through auction?

It's probably not 100%, but we would certainly increase this percent of cars that we have at retail. I mean, if we could get it up to 50%, 60%, we think that makes sense. Some of what we do with the dealers is oftentimes trade cars and they're both a source of cars for us as well as a partner where we give them cars, obviously, for their sale. We also have service relationships in place and do off-airport business. So we're never going to get to 100% at retail, but I think a goal of 50% makes a lot of sense.

. And we'll go to Adam Jonas with Morgan Stanley.

I got a second question. Can I ask, does the uncertain there possibly deteriorating macroeconomic environment, any way, change your thinking or alter your stance on pursuing M&A?

We look at all kinds of factors that determine our thinking about M&A all the time, so that's one factor we always would consider.

. And we'll go to Fred Lowrance with Avondale Partners.

Quick question on franchising. I don't think we got an update from you with this quarterly call as far as -- if you could update us on where you are there with franchising, if we're going to see any sort of movement on that front this year? And then just secondly, as we look to your 2014 targets, that you obviously reaffirmed here today, how much of the franchising opportunity that you've outlined, you know the 415 locations, $600 million in associated revenue. How much of that is actually included in that 2014 plan?

I think in the 3-year plan, we didn't put a whole lot of franchising in it. Do you guys know how much?

$450 million.

About $150 million -- I'm sorry, $450 million over that time period. In terms of what we're doing this year, we're -- I think it's safe to say we're sure that we will announce a few deals this year on franchising and they'll be of significance, and we feel confident we'll hit our goals internally on franchising revenues that we think make better sense to have with the local providers than us. So I feel pretty comfortable there.

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

Just a couple of follow-ups. On the nonrecurring stuff, is there any residual impact in the third and fourth quarter? It doesn't seem that way, but just want to clarify that. And then on utilization for HERC, with the added investment, is there going to be any pause in the expansion on time utilization that you've seen recently?

On the unusual items, no, they're just specific to the second quarter.

And then on time u, we do expect time u to continue to improve in the second half of the year.

. And we'll go to Michael Millman with Millman Research.

Just 2 things. Can you talk about U.S. RAC in July? And secondly, generally, it's acknowledged the fleets have tightened, why do you think that prices revenue per day has not done better?

First of all, we can't comment on pricing, and really both questions kind of deal with that. So I mean, I can only tell you is that we saw our fleets tightened and we did get rate, if you will, at the airport on Leisure, so that was helpful, and I think it was due to the fleets' tightening. So again, pricing environment is a mixed bag of tricks, obviously, and commercial pricing was really the driver of our issue. So as that improves, and hopefully it will improve, it will improve our overall rate. That's about the best I can tell you because we don't talk prospectively on pricing issues.

. And speakers, I'll turn the call back to you for closing comments.

Okay. Well, thank you, everyone, for joining us this morning. Look forward to telling you more about the Hertz story at upcoming events. Over and out.

. Thank you. And as a reminder, this conference will be available for replay. And that does conclude your conference for today. Thank you for your participation and for using AT&T Executive TeleConference. You may now disconnect.