Avis Budget Group, Inc.

Greetings. Welcome to the AVIS budget group first quarter 2023 conference call. At this time, all participants are on 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 cell phone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, David Calabria, treasurer and senior vice president of corporate finance. 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 provide 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 first quarter results, and it's clear that our company is off to a strong start in 2023. We've delivered the highest first quarter revenue in company history, at $2.6 billion and generated $535 million of adjusted EBITDA. I want to thank all our employees for their hard work and dedication this quarter. We wanted to get off to a great start, and our team did just that. I want to thank them for setting an ambitious pace right at the beginning of our fiscal year. On our last call, I spoke about a return to normal seasonality, and anyone who's followed the rental car industry knows that the first quarter is our seasonally lowest quarter of the year. We saw terrific growth in rental transactions. As a matter of fact, it was the largest amount of transactions in the first quarter history of our company. Demand was strong, with growth coming from commercial activity as well as international inbound travel. Both these segments started their growth in the middle of last year, and the momentum continued to build into 2023. In addition, there was great demand for our used cars and residual values improved throughout the quarter. Lastly, rate per day increased month to month as it would do normal in a pre-COVID period. To be able to generate over 500 million of adjusted EBITDA during this period is an achievement that we're all proud of. And I have the pleasure today of telling you how we accomplished that. As usual, let's start with our America segment. In 2022, The first quarter was categorized by a very soft first six weeks due to Omicron, followed by a robust period of demand post-President's Day weekend in mid-February. With the absence of new COVID variants in 2023, we expected the first quarter demand to be significantly stronger year over year, led by commercial and international inbound demand, and planned accordingly. Commercial transactions were up close to 20%, and international inbound transactions were up more than 25% from the first quarter of 2022. It is clear that these two segments will be the drivers of our continued success throughout the year. We have seen a rise in most of our commercial verticals, but especially in aerospace and defense contracting, technology, and professional and financial services. Cross-border inbound travel continued from EMEA, Latin America, Asia Pacific, and Canada. Unrestricted travel for many countries began mid-last year and we've certainly seen the ramp-up from travel due to this pent-up demand. We expect both of these segments, along with continued growth in our ride-held business, will re-provide drivers convenient access to our vehicles to fuel our growth in the upcoming quarters, and we're already seeing these trends continue into the second quarter. We've also seen demand for our used cars continue to be strong. As we mentioned on our last call, We began to see improvement in the residual values in the first quarter, and that has continued. Rotation of our fleet is always of paramount importance as getting out of older, more mileage vehicles and replacing them with new vehicles provides a better product to our customers, both commercial and leisure. It minimizes maintenance and in-life costs and ensures our fleet is commercially ideal. While we did not fully anticipate the significant turnaround in the strength of the used car market in the Americas, we ensured that we reacted appropriately given the opportunity. We obviously follow our vehicle dispositions closely on a market-by-market basis, but as a proxy, let me provide some data from the Mannheim Used Vehicle Value Index. The index saw seven consecutive months of decline beginning in June of 2022. That reversed in January of 2023, which showed a 1.5 sequential uptick from December of 2022. Now one month does not make a trend, but February of 2023 saw a 3.7 sequential increase, and March of 2023 saw another 3.5 sequential increase. This development altered how we approached the quarter, and we pivoted quickly towards disposing of vehicles while refreshing our fleet. The result of this was ensuring our rental days were in line with our fleet size, producing increased utilization as we continue to manage supply to be slightly inside of demand. These fleet actions provided a strong gain on sale. While we pulled forward some of these gains from future quarters, our actions acknowledged the strong demand from consumers for vehicles of our type. Due to strong travel demand and well-balanced industry vehicle supply, we saw healthy revenue per day in the low $70, only 2% below the record first quarter revenue per day we saw in 2022, despite the increase in commercial travel. As Brian and I have been stressing on our previous calls, we continue to maintain discipline as asset managers and centered our actions to maximize return on invested capital by selling agefully at attractive prices during the quarter. Additionally, I'd like to point out something that remains consistent with our initial business plan. Rigid cost discipline is the focus of managing our day-to-day expenses that enabled us to deliver adjusted EBITDA margins of over 25% in the Americas while making investments that will make us a leaner and more efficient company in the years to come. These strategies encompass investments in our people designed to ensure our ability to handle the peak summer period seamlessly and systems which create stability and better processing and ensuring the required digital customer applications to promote the best in customer service. Our touchless experience allows Ava's customers to choose their vehicle on their phone or exchange it upon arrival while being sent a digital rental agreement, which can be used to exit our facility through an automated Exigate process. We are currently rolling out facial recognition technology as well that will allow all our first time Ava preferred customers to quickly and conveniently bypass our current counter verification process. In addition, after a successful pilot, we are beginning to roll out an improvement to our budget choice application. Customers, upon arrival at a budget facility, will be able to choose their vehicle from their reserved zone, take a picture of the license plate, which is then uploaded to their digital rental agreement and allows the customer to exit from an unmanned exit gate by use of their phone. Technology enhancements have always been an important aspect of our strategic plan. We continuously improve our proprietary demand fleet pricing system to produce the most profitable outcome. Our mileage optimization technology allows us to minimize mileage accretion, and connected car technology facilitates automatic customer returns and accurate gas readings, producing both financial and customer benefits. Moving on to the income statement results of these metrics. In the Americas, revenue increased $16 million year over year. America's adjusted EBITDA during the same period decreased by approximately $300 million due mostly to the anticipated increase from vehicle depreciation and interest. Last quarter, we called out depreciation and vehicle interest as headwinds we would face in 2023. The gain on sale from vehicle dispositions mitigated this significantly in the first quarter, but we do not expect this benefit to continue throughout the year. We'll get into more detail on this during the fleet portion of our prepared remarks. So in summary, the Americas delivered a strong quarter with increased demand in key segments while improving our fleet rotation and taking advantage of a robust used car market while rate per day increased month to month in the quarter. With that, let's move over to our international segment, which had a record first quarter in adjusted EBITDA. Consistent with prior quarters, we've been seeing a steady recovery in days, combined with a robust rate per day of 14%, excluding exchange rate effects. The international countries started to open up mid-last year and react similarly to what we saw in the Americas in 2022. While rental days in the first quarter was 16% higher than the first quarter of 2022, they were still 20% below the first quarter of 2019, implying we're nowhere near optimal scale in this region. However, revenue per day has continued to remain robust, with the international region seeing an 8% year-over-year gain, and perhaps more encouragingly, a 2% sequential gain to the fourth quarter of 2022. Adjusted EBITDA in the first quarter of 2023 was a record 50 million on a reported basis, including a 7 million negative impact from currency exchange rate movements. This is over the double the adjusted EBITDA generated in the first quarter of 2022 and a structural departure from the region consistently reporting negative first quarter adjusted EBITDA pre-COVID. We continue to see strength in transatlantic inbound into EMEA, but also international travel between the European countries. While it's early to comment on the demand pattern for the summer, like the airlines, we see increased inbound travel throughout the international countries and are encouraged by these early trends. We have confidence that our international teams will continue to deliver strong results in the upcoming quarters. Moving on to fleet, where as usual, we'll focus more on the Americas segment. As I mentioned earlier, our fleet disposition teams were busier than expected this quarter as they exited high mileage vehicles to capitalize on a strong used car market and in fleeting newer models to improve our rotation. This means younger and lower mileage cars, as well as optimizing the overall vehicle mix of our fleet, which allows for a product portfolio that our renters demand. Our OEM partners continue to come out with exciting new vehicle designs for both traditional internal combustion and, of course, electric. While the selling price of our disposed vehicles remained well above net book value into the peak tax refund season, we do not expect gains at these levels for the balance of the year. The entry of additional model year 2023 vehicles in the quarter continued the upward trend of our straight line depreciation. Despite the gain on sales this quarter, we saw significant pressure on our net monthly depreciation per vehicle. We recorded $128 per unit fleet cost per month in the first quarter of 2023 versus $20 in the first quarter of 2022. We saw similar pressure in our vehicle interest per month per vehicle, which came in at $83 in the first quarter of 2023 versus $50 in the first quarter of 2022. As we guided to our last earnings call, we expect our full year 2023 monthly vehicle interest per vehicle to be roughly $100, so there are additional headwinds to overcome on the vehicle interest line. We also mentioned we'd rather run out of the incremental vehicle than have an unutilized vehicle on our lot. This quarter, our actions were consistent with that rhetoric. We continue to be consistent going forward. We run our business to be fleeted just under demand in order to optimize utilization and mitigate the headwinds of vehicle depreciation and interest. This stringent management allowed for an improvement in utilization, even with strong fleet rotation and unexpected recalls during the quarter. We expect our fleets to continue to be in line with demand, inclusive of our summer peak. Let me take a moment to talk about our ongoing electric vehicle strategy. As previously stated, we believe the road to electrification rests solidly on the foundation of a robust charging infrastructure. This is a necessary condition to support electrified fleet. We continue to advance this strategy throughout the quarter by adding additional charging units at our locations through our partnership with EverCharge, an SK Group company. We can continue to acquire a diverse electric fleet from our numerous OEM partners, which allows customers to reserve and select from varied product offerings to meet growing demand. These diverse offerings will help insulate us against residual value and potential recoil pressures. Before I conclude, I would like to make you aware of our new marketing initiative, which centers around a fresh new advertising campaign for RAVIS called Plan On Us. Simply said, for 75 years, we've only had one plan, to make sure you keep yours. You can look for our campaign on various platforms, as well as signage throughout airports and our facilities in the near future. This slogan is not only a message to our consumers, but a call to action for all of us here at Avis Budget Group. That concludes my prepared remarks, but before I turn it over to Brian, let me reiterate how proud I am of this start to 2023. It's important to get out of the gate early, and I believe we did just that. We're going to continue this momentum throughout the year and continue to show what a transformed company we are. While travel patterns are normalizing to more pre-COVID seasonal levels, we do anticipate a strong summer peak with continued growth in both our commercial and inbound business. With that, Brian will now discuss our liquidity and our outlook.