Avis Budget Group, Inc.

Greetings and welcome to the Avis Budget Group first quarter 2022 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 today's conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn this conference over to Mr. David Calabria, Treasurer and Senior Vice President of Corporate Finance. Thank you, sir. You may begin.

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. Yesterday, we reported our best-ever first quarter results in our company's history. This now marks our fourth consecutive earnings report where we delivered record-high adjusted EBITDA for that given quarter. I'd like to start this call, as I usually do, by thanking all our employees for giving their best so that we as a team could achieve these results. In January, I stated that we as a company are getting better, that we're becoming better operators, a better management team, and a better organization. I think the proof of that improvement is reflected in how we manage the business thus far. You'll recall that during the first six weeks of 2022, the entire travel industry was still navigating through the effects of Omicron. Travel demand was challenged, and we saw the negative effects of this in rental days, rate, and utilization. However, instead of shutting down to ride out the variant, we got to work and mobilized our organization. We took this opportunity to dispose of our highest mileage vehicles at optimum prices to crystallize significant gains while refreshing the age of our fleet. We repositioned vehicles to locations where we believed the recovery would happen earliest and strongest. We went into overdrive on preventive maintenance to bring our out-of-service vehicles to some of the lowest levels we've ever seen. In short, we were getting ready for the outsized demand we believed could occur once Omicron subsided. And that turned out to be the right decision. By the time we reached President's Day, strong demand returned and continued to build sequentially throughout the quarter. By March, in the Americas, we had more cars on rent than the highest peak of summer of 2021. If you followed the reports of other sectors in the travel and leisure space, this will come as no surprise. Consumer demand for travel is the highest we've ever seen, After two years of quarantine, video conference calls, and home improvement projects, consumers have now decided enthusiastically to dedicate their share of wallet towards seeing the world and reconnecting with loved ones. We at Avis are ready to help our customers do just that. 2022 is off to a remarkable start. We generated $810 million of adjusted EBITDA in the first quarter, Now, as a frame of reference, that's higher than the full year adjusted EBITDA of 2019. And we delivered this in what is typically the seasonally lowest quarter of the year. We're ready to build on this momentum and achieve even greater heights. But before we do that, let me recap our historic first quarter results. And as usual, let's start with the Americas segment. In the Americas, it was a tale of two quarters. Omicron hit hard in January. and we saw the effects immediately. Leisure rental car demand softened significantly, and commercial demand was nonexistent. Just to illustrate how sharp and severe this was, America's utilization in January was lower than any month of 2021. This includes the pre-vaccine rollout of the first quarter of 2021, the peak of the Delta variant. However, on a positive side, January was also when the used car market was at its strongest. We capitalized on this dynamic and sold high mileage vehicles at attractive gains. I've always said that the fleet we exit makes up some of the best used inventory in the market. It has one owner. It's well maintained throughout its life and is attractively priced. That was validated through January and February as consumers aggressively purchased our vehicles and there was no shortage of demand. The careful pruning and harvesting of our rental fleet dominated our activities for the first six weeks, and gains on sale contributed significantly to adjusted EBITDA during this period. Because we were so quick to act on this, by the time the Omicron cases subsided in mid-February, we were large and complete with our targeted age fleet disposition schedule. This allowed us to focus 100% of our efforts into getting cars into the hands of consumers and back on rent. During the second half of the quarter, we saw tremendous rebound in utilization, RPD, and rental days, where we delivered over 10% more days versus the first quarter of 2019, despite the soft start to the quarter. What's reflected in our reported quarterly metrics is the blend of these two opposite market conditions and not reflective on how we're trending to the second quarter of 2021. RPD, for instance, was down sequentially in the first quarter of 2022 for the second quarter in a row. However, February RPD saw marked improvement from January, and March RPD saw improvement from February. So the average RPD of $72.76, which we printed in the quarter, doesn't indicate the strength of the exit trend. The same holds true for utilization. For the quarter, utilization was 69%, which is roughly in line where utilization was in the first quarter of 2019. However, utilization in the month of March of 2022 was near peak summer of 2021 levels. We're operating on all cylinders when it comes to positioning our fleet to squeeze out the most rental days, drive RPD, and maximize revenue improvement. Our demand fleet pricing system, combined with field experience, allows us to consistently execute on operations no matter the demand environment. Moving on to the income statement results of these metrics. In the Americas, revenue increased by over $900 million year over year. America's adjusted EBITDA during the same period increased by $702 million for an incremental margin of 76%. If you compare our most recent results to the first quarter of 2019, America's revenue increased by $673 million, while adjusted EBITDA increased by $775 million for an incremental margin of 115%. Obviously, gains on disposed vehicles contribute significant to these results, but so did our relentless focus on cost control and operational efficiency. It's the same story we told all throughout last year. By maintaining stringent discipline around costs, we're able to maximize the revenue and depreciation benefits that we bring to the bottom line. The results are eye-popping. $810 million of adjusted EBITDA generated from the Americas this quarter. The previous record was $115 million in 2015. As you can see, it's almost as if you're comparing two completely different businesses between now and then. And that's what we mean when we said we're on a transformational journey here. It's not about getting slightly better and calling it a win. We're focused on pressing every last macroeconomic advantage and running it through our battle-tested, lean, efficient operations to sustainably get to a structurally different profitability plan. I'll close the first quarter results of the Americas, but before I move on, let me provide a bit of color around April and what we're seeing in early May. The strength and demand that we saw materialize in March has continued into the early part of the second quarter. The Easter season was strong. and early indications for May are promising as well. While we're not getting specific guidance on this call, I will say that in the Americas, at this point, it appears that both rental days and RPD will be higher in the second quarter of 2022 than it was in the second quarter of 2021. With that, let's move over to our international segment, which posted a record and historic quarter as well. Consistent with our prior quarters, our EMEA and APAC business have yet to see the robust recovery we're experiencing in the U.S. in terms of travel demand. However, throughout the quarter, we saw moderate but noticeable improvement in rental car demand, which led to sequentially improving rental days and RPD throughout the months in the first quarter. This combined with the maniacal cost control our international team has exhibited throughout the pandemic resulted in $23 million of adjusted EBITDA in the quarter. On an absolute basis, that may seem modest compared to the adjusted EBITDA generated in the Americas. However, when you consider that this is the highest first quarter adjusted EBITDA that our international segment has ever achieved, you begin to appreciate the step function change made in the sustainable profitability of this business. To put it differently, on a total international basis, adjusted EBITDA has gone from a negative 50 million in the first quarter of 2021 to a positive 23 million in this most recent quarter. That's over $73 million of improvement in adjusted EBITDA on $140 million of revenue gains, representing a contribution margin of 52%. More impressively, if you compare the most recent quarter's results to the first quarter of 2019, You'll notice that despite having over $160 million in lower revenue, adjusted EBITDA in the first quarter of 2022 was actually $44 million higher than the first quarter of 2019 when they posted a negative $21 million in adjusted EBITDA. The dynamics that allow for such impressive adjusted EBITDA drop-downs in the Americas are not unique to this region. We believe that latent travel demand in Europe is just as strong as it was in the U.S. a few quarters ago. Like the Americans, the industry fleet situation internationally is severely constrained as well. I've said in previous calls that our international team will be ready when demand materializes, and that due to the structural cost improvements made to our operations, the drop-through to adjusted EBITDA will be sizable when we see top-line recovery in that region. I know it's still early. But from where I sit today, it appears that this is the year where our teams internationally will get to show you just that. Moving on to fleet, we're consistent with last quarter. We'll focus on the Americas segment. In the Americas, our average fleet size in the quarter was sequentially higher at 443,000 vehicles. Consistent with last quarter, this was a management decision taken to address the uncertainty around receiving new vehicles these days. We've been in daily contact with our OEM partners to ensure that deliveries of our vehicles' orders remain intact. However, due to labor shortages caused by Omicron earlier in the year, lack of semiconductor availability, and ongoing supply chain issues aggravated by the conflict in Ukraine, receiving new vehicles on schedule is far from a sure thing. The rental car industry will be faced with delays and cancellation throughout 2022. That's the reality of the rental car industry supply. However, as we made it clear earlier, consumer demand for rental cars is at all-time highs. We want to do everything we can to ensure our customers have a vehicle available to make that business trip or take that vacation. In order to service that demand in the coming peak, we're currently forced to carry a larger fleet than we normally would in a shoulder period. This is a temporary strategy in order to get us through the uncertainty around fleet availability. as our OEM supply chain normalizes to slow our fleet rotation. Related to fleet, let me address our unusual fleet depreciation for this quarter. You'll notice that our consolidated monthly depreciation cost per vehicle in the first quarter of 22 was $62, down from $185,000 in the fourth quarter of 2021. This was due to roughly $300 million in gains from dispositions in the quarter, If you adjust for those gains, you'll see that our straight-line depreciation is set at over $230 per month per vehicle. We've always taken a conservative approach on how we account for depreciation at Avis. But it's this measured approach and strong residual environments can result in significant gains in a quarter when dispositions are high. This quarter was an example of that. We're not changing how we account for fleet costs at this time, and our fleet refresh was largely completed by the end of February. Therefore, you will see a normalization of consolidated monthly per unit fleet costs starting next quarter. Lastly, with regards to fleet, let me touch briefly on our current buy. While certain OEMs have begun discussions around the model year 2023 buy, we're still working through how we receive our model year 2022 orders. It's a fluid situation, and it has been for the past two years now. Luckily, we have decades working together with our OEM partners to deal with this uncertainty. We believe this is one of the true advantages. There's a level of trust that can only be developed by fighting the same fight together for years. The understanding that comes from shared hardships is what allows you to ask for a favor when you need it and freely give one in return. That's the difference between a true partnership and a customer-supplier relationship. So yes, It's a challenging time right now with chip shortages, supply chain issues, and labor uncertainties. But we're here to invest and work with our OEM partners to get through this. And by the way, we've seen some of the product portfolio that's coming down the pike from our strategic OEM partners over the next few years. And we couldn't be more excited about what's coming, both with traditional and electric vehicles. Moving on to our continued improvements around technology and the customer experience, due to strong consumer feedback and efficiency we've seen in our workflow, we are dedicating additional resources to expand our Avis QuizPass offering. For those unfamiliar with this product, it enables our preferred customers, upon arrival, to select from a choice of vehicles on their phone, proceed directly to their car, and then utilize a unique QR code to exit via our automated express exit for a completely 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. Our goal is to have QuickPass deployed at the majority of our key airports by the summer travel season. Let me comment briefly on Avis commitment to safety and our latest views on the industry disruptions caused by COVID-19. Our Avis safety pledge and budget worry-free promise remain in full effect and provides both our customers and our employees industry-leading protocols to keep everyone safe. Thankfully, at this time, it appears the effects of COVID and the Omicron variant are subsiding. While there has been an increase in cases over the past few weeks, we have not seen any impact to our booking demands. Our belief is that as long as hospitalizations remain low, consumers will be comfortable traveling. Which provides a good segue to how I'd like to wrap up my prepared remarks. I love seeing our customers traveling again. There's a buzz around the airport. It feels great to be getting back to normal after so many starts and stops. From what I see out in the field and from the conversations I've had with our operators, It seems like we're already in the thick of summer. I have to keep reminding myself that we're just in May. There's a wave of demand headed our way in the coming months, and I'll tell you exactly what I tell our field ops on this front. That's exactly what we've been preparing for. All the hardship and sacrifice, the cost cutting, the retooling of operations, learning how to maximize throughput and minimize leakage, those lessons learned the hard way through the depths of this pandemic prepared us for this moment. If you're a true operator, being tested like this is what you live for. Thankfully at Avis, we pride ourselves on our operational ability, and I can tell you unequivocally that we're ready for the summer. If we're able to execute at the level I know we're capable of, I believe that 2022 will fully showcase how transformed a company we really are. With that, I'll turn it over to Brian to discuss our liquidity and our outlook.