Avis Budget Group, Inc.

Greetings and welcome to the AVIS Budget Group Third Quarter 2022 Conference Call. At this time, all participants are in lesson-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press stars and zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, 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 quarterly results in our company's history, making this our sixth consecutive earnings report where we delivered record high adjusted EBITDA for that given quarter. For over a year and a half now, our team has shown incredible dedication and drive by continuously setting new benchmarks quarter after quarter. I want to start off this call, as I usually do, by thanking the 25,000 employees of Avis Budget Group who helped make this possible. Last quarter, I said we were in the busiest summer travel season I've ever seen, with demand materializing in both robust bookings and a healthy rate. But we didn't just rely on strong demand to generate earnings. We acted decisively by selling age fleet for solid gains and maintaining our stringent cost discipline. When you combine a favorable travel environment with operational excellence, this is the result, $1.5 billion in adjusted EBITDA for the third quarter. That's over a 20% sequential growth from our second quarter of 2022 adjusted EBITDA, which is the previous record high adjusted EBITDA in any quarter in our company's history. This puts us at 3.5 billion of adjusted EBITDA thus far for 2022, which is already over a billion more than our record full-year adjusted EBITDA of 2.4 billion in 2021. And we still have the fourth quarter to go. But before we talk about the fourth, let's go through the highlights of the third quarter results, and as usual, let's begin with the Americas segment. The Americas continue to build off a strong second quarter, and the results across all business metrics reflect an operation that is humming. Travel demand was strong for both commercial and leisure segments, with volume well over 2019 levels. This is the second time that our Americas segment alone was able to generate over $1 billion in adjusted EBITDA in a given quarter. We're able to meet the strong demand of our customers by servicing over 33 million rental days in the quarter, a record for our company. This wouldn't have been possible without the work of our supply chain team who overcame part shortages and OEM recalls to find a way to get our cars safely back on the road. This resulted in a sequential increase in utilization back to the low 70s where we've been operating historically in the third quarter. RPD of 8106 was down year over year and slightly up from the second quarter. But I don't believe this tells the whole story. While we don't typically get into the month-to-month results of RPD, I do feel it's important to provide some color on this quarter. On our last call, I mentioned that we started to see a return to normal seasonality month-to-month in RPD trends. That continued this quarter, with August RPD coming in sequentially lower than July and September RPD coming in sequentially lower than August. That's what happens in a normal summer and implies stabilization in industry supply and demand dynamics. This new normal allows us to compete on operational efficiency, which is welcomed by us. Commercial business was strong in the quarter, well above the 2019 levels, and especially post-Labor Day, with new signings of accounts and partnerships powering robust midweek demand. However, even with more corporate travel in September versus the rest of the summer, pricing in the month was up compared to September of last year, allowing for good exit trends. Moving on to fleet, we're executing on the strategy we laid out on our last call, Back in August, I said that given macroeconomic uncertainties and with the arrival of newer fleet, we would rotate out of our older fleet and trim our vehicle size in order to ensure a proper return on invested capital while continuing to align our fleet with customer demand. And that's exactly what we did throughout the summer. We were able to exit high mileage vehicles at healthy gains relative to the net book value. Excluding the early part of COVID, This is the most number of vehicles we sold in a normal quarter. I'll get into more detail around this topic during the fleet section, but I wanted to quickly acknowledge our America's fleet team for mobilizing quickly and working tirelessly throughout the summer to take advantage of favorable window in the used car market while allowing the business to have enough fleet to handle peak period volume. Moving on to the income statement results of these metrics. In the Americas, revenue increased by $300 million year-over-year. Americas adjusted EBITDA during this same period increased by roughly $233 million for an incremental margin of 78%. If you compare our most recent results to the third quarter of 2019, Americas revenue increased by roughly $835 million, while adjusted EBITDA increased by $864 million for an incremental margin of 103%. Gains on disposed vehicles contributed approximately $360 million to our results reflecting our proactive decision to take advantage of a robust used car market while we saw demand. However, even excluding fleet gains, it's evident that the earnings power in our America segment is still objectively impressive. Consistent with recent prior quarters, our focus around costs allowed all the benefits of a strong revenue and used car environment to fall to the bottom line. This was a historic quarter for the Americas segment, and I believe the results showcase a business that's nimble, lean, and focused. Since exiting the COVID era, we've been saying we're a transformed company, and this quarter reflects what the Americas team is capable of. With that, let's move over to our international segment, which had a historic quarter as well. I've been consistent in our message that the stringent cost control our international segment sets up for an outside EBITDA recovery as revenue returns. The international team built on a strong second quarter and took full advantage of a robust summer travel season in the third quarter. While we believe rental days were hampered due to airport constraints and flight cancellations, our international team was able to service 22% more rental days versus the third quarter of 2021, with significantly higher RPDs. The return of inbound travelers, our most profitable segment, contributed to higher RPDs, and with the strength of the U.S. dollar, we believe that the segment will continue to grow. The strong demand combined with tight cost control resulted in over $290 million of international adjusted EBITDA. This means that despite $39 million of headwinds from foreign currency exchange, the international team was almost able to generate as much adjusted EBITDA in one quarter than any prior full year in company's history. Let me illustrate the magnitude of this transformation in another way. In the first three quarters of 2022, our international segment generated roughly $500 million of adjusted EBITDA. In the first three quarters of 2019, we generated roughly $500 million of adjusted EBITDA from our Americas segment. We acquired Avis Europe in 2011 because we believed that true global reach would be a sustainable competitive advantage. No other car rental company in the world matches our footprint, and the infrastructure investments we've made in our global network ensures that our customers can rely on consistent quality and convenience no matter where they travel. The results of this quarter demonstrate how valuable an asset we've built over the past 10 years. Moving on to fleet, very consistent with last quarter, we'll focus more on the Americas segment. In the Americas, our average fleet size in the quarter was basically flat, moving from 500,000 vehicles in the second quarter to 507,000 vehicles in the third. As mentioned earlier in the call, we aggressively disposed of high mileage vehicles throughout the summer as we took on delivery of new vehicles. I've always said that fleet management is at the heart of what we do. This quarter demonstrates how agile we can be, quickly taking advantage of the strong used car market while demand was at its highest. In the first quarter of 2022, and others. In the first quarter, our average fleet size was 50% higher than the first quarter of 2021. The second quarter, our average fleet size was 32% higher than the second quarter of 2021. In the third quarter, our average fleet size was 17% higher than the third quarter of 2021. So the growth has slowed from 50% to 32% to 17% during the first three quarters this year. is to optimize return on invested capital when we match our fleet size to demand in order to achieve that objective. For the past five quarters, we've sequentially grown our fleet in the Americas to take advantage of pent-up travel demand. However, given the return of normal seasonality, stabilizing industry supply, and mounting macroeconomic uncertainties, we believe in order to optimize return on invested capital, we will need to manage a sequential decline and America's Fleet, consistent with what we've historically done in pre-pandemic years from the third to the fourth quarter. We had roughly $360 million in gains from dispositions in the quarter by pulling forward sales that we typically would have spread across the third and the fourth quarter. If you adjust for Fleet gains, you'll see that our straight-line depreciation has increased from $210 in the second quarter of 2022 and more. As we deplete older model year vehicles and inflate current model year vehicles, you'll see this straight line depreciation continue to increase. Also, given that we've already harvested the fleet gains we initially expected for the fourth quarter, gains will decrease significantly next quarter. The used car market is currently in flux. But given our remarketing strategy, along with our conservative nature of how we account for our fleet assets, we believe the ceiling for monthly per unit fleet costs in the fourth quarter will be similar to where we straight line monthly depreciation in the third quarter. Let me wrap up the fleet section with a few comments on our 2023 fleet buy. While we have many contracts in place at this time, a portion of our fleet buy is still pending. and more. Conversations have been productive with our OEM partners. And while we do have more visibility in terms of availability and allocations of supply, chip and part shortages, along with vehicle delays, are still very evident. And we believe the 2023 industry fleet buy will be tight. Fleet purchases are the largest use of our capital in our business, and we realize that optimizing for return on that capital is our responsibility as stewards of this business. We are taking a measured approach to our 2023 fleet buy, both in terms of number of vehicles and purchase price of those vehicles. We are taking on a broader mix of makes and models with our OEM partners in order to showcase an exciting new lineup of vehicles to our rental customers around the world. And while we won't get into specific figures, new electric vehicles will make up a growing portion of our 2023 fleet buy. Next, I want to discuss our progress on our electric vehicle implementation strategies. When I talked about this last year, I said it was very important to make sure we follow consumer demand, maintain targeted utilization, and ensure the stability of the economics throughout the lifecycle of a vehicle, from purchase to vehicle use and maintenance to end-of-life residual values. We've been working hard with our partners to build out the infrastructure required in many of our locations, and I am pleased with our progress to date and our plans going forward. We have done extensive modeling of anticipated fleet size and rental demand by location by day of the week to determine the exact number of charging units and laid out an execution plan to get to the levels needed from both airports and city municipalities along with public utilities. We are confident in our ability to operate, service and maintain the EVs and we've been working hard with our OEM partners and are pleased with our ability to purchase a diversified portfolio of vehicles this year and the years to follow. It's an exciting time and we will be ready to take on this change in consumer preference. Moving on to technology, we increased our Avis QuickPass offering at a majority of our airports. For those unfamiliar with this product, it enables our customers to select from a choice of vehicles on their phone received directly to their car or even exchange their car if they like and drive to the exit gate utilizing a QR code for an automated exit. Upon return, customers can close out their rental on their own utilizing our connected car technologies. Our customers are responding favorably to this contactless and stress-free experience. Those that utilize Avis QuickPass score us 10 points higher on a net promoter scores. As I mentioned last time, We were early adopters of vehicle telematics into our core operating systems. Gas readings in our vehicles are registered before and after each rental and calculated down to the tenth of a gallon, allowing us to neutralize the rising cost of gas. VFP, our demand fleet pricing system, now several years in use, is continually getting more intuitive are forecasting supply and demand down to the lowest location levels, allowing for both demand and price optimization. Productivity notification systems are being used to reduce labor and wage pressures, and we've seen good results driving significant improvements in our operating performance. We will continue to integrate both customer and operational systems with our existing processes to further enhance our ability to drive results and exceed our customer expectations. So I'll pause here and wrap up my prepared remarks by once again saying how proud I am of our team and the results we have been able to achieve. We had a terrific summer season. September was the strongest September on record with demand at double-digit increases over last year. Fall is off to a great start with both our commercial and leisure bookings trending to be greater than last year in 2019, and we remain optimistic around the holiday season. In conclusion, we reported $3.5 billion of adjusted EBITDA over nine months in 2022, and our entire organization is operating with intensity to make sure we run through the tape in the fourth quarter. With that, I'll turn it over to Brian to discuss our liquidity and our outlook.