Avis Budget Group, Inc.

Greetings, and welcome to the AVIS Budget Group Third Quarter 2021 Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, David Calabria, Treasurer and SVP of Corporate Finance.

Good morning, everyone, and thank you for joining us. On the call with me are Joe Ferraro, our Chief Executive Officer, and Brian Choi, our Chief Financial Officer. Before we begin, I would like to remind everyone that we will be discussing forward-looking information, including potential future financial performance, which is subject to risks, uncertainties, and assumptions that could cause actual results to differ materially from such forward-looking statements and information. Such risks and assumptions, uncertainties, and other factors are identified in our earnings release and other periodic filings with the SEC, as well as the investor relations section of our website. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results, and any or all of our forward-looking statements may prove to be inaccurate, and we can make no guarantees about our future performance. We undertake no obligation to update or revise our forward-looking statements. On this call, we will discuss certain non-GAAP financial measures. please refer to our earnings press release, which is available on our website, for how we define these measures and reconciliations to the closest comparable gap measures. With that, I'd like to turn the call over to Joe.

Thank you, David. Good morning, everyone, and thank you for joining us today. On our last call, I had the pleasure of reporting that in the second quarter of 2021, we delivered the best revenue, adjusted EBITDA, and margin in our company's 75-year history. Today, I get to say that in our third quarter of 2021, surpassed those historic results by achieving over $1 billion in adjusted EBITDA and set a new bar for how we define success at Avis Budget Group. We've been working towards the $1 billion adjusted EBITDA milestone since 2014 when it was presented for the first time at our investor day. Now, while I acknowledge certain tailwinds have been in our favor to finally deliver on that promise in a single quarter, after the worst crisis our company has ever faced is honestly a bit cathartic. So I just want to take a moment to thank all of our employees for doing their part to collectively get us here. They handled peak period activity and were determined not to let throughput or supply chain challenges get in their way. We've been through a journey here at Avis. When the pandemic began, we realized that we had transformed as a company if we wanted to survive. During the pandemic, we laid the groundwork for cost discipline and operational efficiencies that will enable us to emerge as a structurally improved business. Now as we approach a more normalized demand environment, we're just beginning to show what we're capable of. But while we should celebrate our achievements, I also want to make it clear that this journey is far from over. We've only just begun to implement the systems and processes necessary to operate at full efficiency. And while there's still work to do, Seeing the early results of our efforts has energized this team in a way that I had not seen in my 40 years here at Avis. We clearly realize that one stellar quarter does not a transformed company make. We take it upon ourselves to continuously improve and demonstrate, quarter after quarter, that we are indeed a different Avis than before, but one quarter at a time. Today I'll go over the third quarter results, and as usual, let's start with the America segment. As you recall, last quarter we said that demand for travel in the U.S. showed positive momentum throughout the second quarter. That strengthened demand continued into the third quarter, so that for the first time since this pandemic, we are down single digits in rental days versus 2019, with September being the best month yet. As with the case in the second quarter, industry fleets were tight and demand outpaced supply again in the third quarter, resulting in strong revenue per day. However, two things to note in this front. One, the sequential growth in RPD in the third quarter of 2021 was 5% versus the second quarter of 2021. Now, this is down significantly from the 32% sequential growth we saw in RPD from the second quarter of 21 versus the first quarter of 21. rate in the marketplace appears to be stabilizing. And two, while the absolute rates are elevated from historic levels, we're now starting to see a return to normal seasonality on a relative basis month to month. Rate is clearly one of those tailwinds that I mentioned in our introduction, but allow me to highlight a headwind that's not clearly evident in our numbers. Utilization for the quarter in the Americas was 72%, roughly flat with both the prior quarter and the third quarter of 2019. But the fact that our teams were able to maintain this level of utilization is truly impressive when you consider both labor and parts were challenging to come by, and commercial business, while improving, is not yet back to pre-pandemic levels. It's a testament to how we can operate through tough environments, keep our available fleet high, and keep it balanced as business segments change. In the Americas, revenue increased by $1.3 billion year-over-year. America's adjusted EBITDA during this same period increased by nearly $750 million, for an incremental margin of 58%. On a two-year basis, if you compare our most recent results to the third quarter of 2019, America's revenue increased by $535 million, while adjusted EBITDA increased by $631 million. Favorable residual values appertains to used cars in a strong rate environment clearly assisted by a proprietary demand fleet pricing system help to cheese these remarkable incremental margins, but a focus on cost discipline enabled these benefits to fall to the bottom line. It's the same story as previous quarter, and it will be the same story in quarters to come. We're focused around investing in and implementing the resources necessary to continuously lower our cost base so that we maximize our contribution margin as rental days rebound. And speaking of a rebound in rental days, while not getting into specific guides on this call, I will tell you that the America's booking patterns for the fourth quarter and holiday seasons appear robust and are currently outpacing 2019 levels. It's a narrow window, and we saw last year how quickly the winds can change depending on the state of COVID transmissions. But as of today, demand for Thanksgiving and Christmas appear as strong as in 2019. Throughout the course of the year, America's quarterly rental days compared to 2019 has gone from being down 27% in quarter one to down 15% in quarter two, now down 8% in quarter three, with September being in low single digits, representing the best volume performance versus 2019 to date. We believe America's rental days will continue this trend of improvement and finish down low single digits in quarter four compared to 2019. However, the fact that the holiday season appears strong allows us to be cautiously optimistic about how we enter 2022. With that, let's move over to our international segment. It was a tale of two regions this quarter for international. While we do not break out specific figures for EMEA versus APAC, I wanted to provide some color given the disparity in the macroeconomic environments between the two regions. APAC, which saw improving demand trends in the first half of the year, was hit with very strict lockdowns in the third quarter due to rising virus transmissions in Australia and New Zealand. As a result, rental days in that region have gone back to levels similar to what we saw in the height of the pandemic in 2020. Yet despite this headwind, the region was able to deliver positive adjusted EBITDA in the quarter due to stringent cost control and nimble fleet management. They're still in for a fight, but our APAC team is already gearing up to take full advantage of the loosening of restrictions. EMEA, on the other hand, started to see the green shoots in demand this quarter. I don't want to get carried away here. Europe has not come close to reaching the inflection point that we've seen in the Americas. For context, Rental days in EMEA on a percentage basis were down in the high 40s compared to 2019 in the second quarter. In the third quarter, this improved to being down in the very high 30s, not a big change. But just that trickle of demand resulted in dramatically improved results due to the cost discipline ingrained in the international team. On a total international basis, adjusted EBITDA has gone from a $6 million in quarter three 2020 to $128 million in the most recent quarter. That is over $120 million of improvement in adjusted EBITDA on $170 million of revenue gain, representing a contribution margin of 70%. When compared to the third quarter of 2019, the international segment was able to mitigate nearly $290 million in lower revenue to just $41 million of negative adjusted EBITDA impact. We believe that as restrictions ease, international will see latent consumer travel demand materialize in strengthening rental days. When that happens, the international team will execute the same strategy we deployed in the Americas by holding firm on costs to capture the full adjusted EBITDA benefit of strengthening revenue. Moving on to fleet, we're consistent with last quarter. We'll focus more on the Americas segment. Let's again look at the sequential growth in average fleet size for the Americas. During the second quarter of 2021, we had an average fleet size of 378,000 vehicles. In the third quarter, we had an average fleet size of over 434,000 vehicles. That reflects a 56,000 increase in vehicles on an absolute basis and a 15% increase on a percentage basis from the second quarter of 2021 average fleet size. By comparison, in the sequential period of second quarter 19 to third quarter 19, we had a 15,000 increase in vehicles on an absolute basis and a 3% increase on a percentage basis. We knew there was strengthening travel demands, so we employed the same game plan that we did in the second quarter. We worked through supply chain issues with our OEM partners and kept the fleet at the most optimal levels to help service peak period consumer demand. As I mentioned during our America section, we also worked to keep utilization high by investing in reconditioning of our vehicles and being proactive with preventive maintenance. In short, we did everything in our power to maximize the use of our fleet. It was not easy, but through the efforts of our supply chain teams and service agents, we were able to actually post a higher customer satisfaction score this quarter than the second quarter of 2021. I would like to take a minute and address the model year 2022 buys. Last quarter, I stated that negotiations with our OEM partners will continue late into the third quarter. Unfortunately, given chip shortages and choke points throughout the global supply chain, many OEMs are still working through their 2022 planning, and we are working with them on solutions. The relationships we've developed with our OEM partners over decades allow us to iterate quickly with the glow of mutually optimizing 2022 fleet delivery. We are continuing our strategy of growing our relationship with key OEM partners while maintaining a disciplined fleet buy relative to consumer demand. Next, I would like to discuss the continued improvements with our technology and customer experience. We continue to expand our use of technology, including connected cars, to deliver superior mobility experiences, and we have been a pioneer for years across our brands. enabled by our one winning Avis app and through our Avis QuickPass offering, our Avis preferred customers upon arrival can select from a choice of vehicles on their phone, even while sitting on the plane when they land, proceed directly to their car, and then utilize a unique QR code to exit via our automated Avis Express exit for a complete contactless experience. Additionally, Upon vehicle return, customers can close out their rental themselves, enabled by our connected car technology, for an expedited and automated completion of their rental. These industry-leading capabilities completely puts our customers in control of their rental. And while we've seen cost efficiencies from these added technologies, more importantly, customer feedback has been overwhelmingly positive with customers using Avis QuickPass. This ability will allow you at all major airports by the end of the year. All our Avis and Budget customers can also take advantage of our digital check-in on our websites, reducing their transaction time at our counters to quickly and safely get on the road. Given the differentiated experience we provide, we are not surprised that many of those currently traveling are choosing our vehicles over other mobility options. Finally, I'd like to close with Avis' commitment to safety on our latest views around the industry disruptions caused by COVID-19. Avis has been focused around the safety of our customers and our employees since the beginning of this pandemic. The Avis safety pledge and budget worry-free promise we established then are still in full effect today. While the travel industry is still recovering from the effects of this pandemic, we are encouraged by recent trends. As I said before, we are seeing normal seasonality in the start of the fourth quarter, with forward-looking demand looking strong towards the end of November and into December. We're also particularly encouraged by the recent decisions to allow vaccinated travelers from Europe to enter the U.S. beginning November 8th. Although COVID clearly still remains a headwind, we are cautiously optimistic that the worst is behind us. Let me wrap up this by taking a step back. It's taken Avis 75 years to cross the $1 billion annual adjusted EBITDA threshold, and in 2021, we generated over $1.7 billion in adjusted EBITDA in just the first nine months. Clearly, certain macroeconomic factors have gone our way to help facilitate this. But on the flip side of things, there were also many unforeseen challenges that we had to overcome. We had to adapt quickly, find new solutions to old problems, and most importantly, come together as one global team in order to get here. I want to verbalize something that's not guidance, but more of a mindset that's shared by every member of our organization, which is now that we've broken the $1 billion annual adjusted EBITDA barrier, we're never going back. We will continue to challenge ourselves to be a leaner and more efficient organization. We will work with purpose and urgency that was required over the past 18 months, even when this pandemic is behind us. We will manage every factor within our control to mitigate challenging macroeconomic environments and capitalize on favorable ones. We're setting a new foundation to target higher goals and taking full advantage of this positive momentum to create a transformed Avis Budget Group. It's an exciting time to be here, and I look forward to demonstrating, as quarters progress, what this team, energized and unified by this mindset, will be able to achieve. With that, I'll turn the corner over to Brian to discuss our liquidity and outlook.