Avis Budget Group, Inc.

Good morning ladies and gentlemen and welcome to the AVIS budget group second quarter 2023 conference call. At this time all participants are in listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference please press star then zero on your telephone keypad. As a reminder this conference is being recorded. It is now my pleasure to introduce your host David Calabria, Treasury and Senior Vice President of Corporate Finance. Thank you, sir. Please go ahead.

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 risk uncertainties, and assumptions that could cause actual results 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 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 GAAP 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 second quarter results, which delivered over $3 billion in revenue. and $737 million of adjusted EBITDA. I want to thank all our employees for their efforts over the past quarter, which built on the strength of our first quarter and sets us up in a strong position to capitalize on the peak summer season. On our last call, I mentioned that in the first quarter, it appeared the industry has returned to normal seasonal trends. That was true this quarter as well. where demand strengthened with each consecutive month, with June being the strongest, showing terrific exit trends and positive momentum going into the summer. In general, trends for the quarter was what we had seen pre-COVID and shows that we are no longer in a COVID environment as it pertains to the business dynamics and seasonality. Overall, demand for travel is robust, and we believe the summer of 2023 will be one for the record books. But before we get into that, let me tell you about the second quarter, and as usual, let's start with the America segment. The second quarter of 2022 marked the height of the supply-demand imbalance in the rental car industry, which led to historically high revenue per day. If you recall, we were just exiting Omicron. Fleece were challenged and at their lowest levels, and travel increased as virus transmissions reduced. The second quarter of last year represented the highest RPD we saw in all of 2022. And there was no doubt that RPDs in the second quarter of 2023 would come down from the second quarter of 2022. The question was around where would rates normalize? Given the stable industry dynamics we observed in the first quarter of 2023 and the normalized demand pattern we saw building into the second quarter, we believe that if we manage the fleet appropriately, an RPD in the mid-70s would be achievable. That would represent the ninth consecutive quarter where RPD is roughly 30 percent higher than the RPDs in the pre-pandemic era. The shapes of the graph today are looking more similar to what we saw in 2017, 2018, and 2019. It's just that they're transposed 30 percent higher. And while it might be early to anchor to this new normal, it is clear that the marketplace is back to more seasonally affected trends and stability, which has allowed us to better forecast and plan fleet movements and volume growth. We were able to grow rental days by roughly 3% year over year, with June growing 6%. Last year, we saw demand materialize in those locations that supported beach, mountains, or areas of high outdoor activities. And while this was still true this year as well, We did see more robust return to cities, evening out demand, and this continues into the summer, allowing our utilization to be even more evenly distributed. Our utilization increased over a point, finishing at 71% with a larger fleet. As we have done in the past, we took advantage of our growth in new cars to exit or rotate out older and higher mileage vehicles at the highest residual values where we saw the opportunity. As in prior quarters, there was high demand for our used vehicles, and we met that demand as required. Additionally, in advance of the summer season, our Avis brand kicked off their Plan On Us marketing campaign, our first real media spend in years. In a world of change and uncertainty, we want our customers to know that they can plan on us, because for 75 years, Avis had had only one plan to make sure you keep yours. It's a natural extension of our iconic We Try Harder campaign and a commitment we make as an organization to deliver. In every call since the pandemic began, we've read with our rigid cost discipline, but cost control and cost cutting are two different things. This marketing campaign is just one example of the deliberate investments we continue to make in areas that we believe will generate outsized adjusted EBITDA benefits. which is why we are again able to generate adjusted EBITDA margins in the mid-20s on a revenue base of nearly $2.5 billion. On that note, let me provide a few additional income statement results of this quarter. In the Americas, revenue decreased roughly $140 million year-over-year, comprised of RPD declines of 8 percent offset by rental day growth of 3 percent. America's adjusted EBITDA during the same period decreased by roughly $410 million, primarily due to headwinds from rate, vehicle depreciation, and vehicle interest. While we believe that these factors will continue to be headwinds throughout 2023, as I mentioned earlier, we are seeing things reach an equilibrium. As you recall, the second quarter historically is a transitional gateway to the summer season, with both volume and price increasing month to month, with June being the strongest on both. This is exactly what we saw this year. commercial business supporting the early parts of the quarter with holidays such as Easter and Memorial Day over-indexing on leisure, and the later few weeks of June driven by a start to summer travel and dynamic increases in volume, rate, and close-in bookings. As a matter of fact, we saw the highest amount of cars on rent at the end of June than we had ever seen before in any month in the history of our U.S. business. In summary, the America segment delivered solid second quarter results in every aspect of our business, from fleet positioning to demand pricing to marketing and normalization of historical trends in both volume and price, just at a higher pre-pandemic levels, all geared towards taking full advantage of the 2023 summer season. And as long as I'm speaking about the summer, the exit trends we saw in June materialized early on this summer, with the July 4th holiday being the busiest on record and reservations demand increasing with a velocity compared to previous months. I've been around to many of our locations in the Americas, talking to our team members, and I have to say they are ready with staff in place and vehicles to support this increased level of activity. With that, let's move over to our international segment. Similar to the Americas, our businesses operate at a higher level, generating an 18 percent margin. almost 13 percent more than a normalized environment of 2019. Volume increased 7 percent, with inbound travel generating a large part of that activity. Year-over-year rental day growth slowed from 16 percent in the first quarter to 7 percent in the second quarter of 2023, which, similar to the Americas, saw an elevated level of travel post-Omicron in the second quarter of 2022. RPD declined 4 percent year-over-year, The first decline after eight quarters of growth, but it's still more than 25% greater than 2019, excluding exchange rate effects. Just like in the Americas, we saw an increase in RPD as we exited the quarter from the levels we saw when we entered. However, there's more to unpack here. First, let's talk about the business mix. When we think of rentals in our international segment, there are three broad categories. Domestic travel, which is travel within a country. Then there's cross-border travel, which is travel between countries in EMEA, a German renter renting in France. And lastly, there's inbound travel, which is travel from renters originating out of EMEA and American renting in France. International inbound is a segment where we're seeing strength, similar to what other travel companies are reporting, but it's not large enough segment to overcome the headwinds we're seeing in the core European travel. Domestic and cross-border travel, which make up over 80% of the rental days, is still down over 30% versus 2019. For this reason, we still believe that there's continued opportunity for operating leverage in this region. The return of days is just taking longer than we've seen in the Americas. When it comes to RPD, there is significant year-over-year comp noise to contend with. If you recall, in the first quarter of 2022, international RPD was $50.42, which sequentially grew to $62.69 in the second quarter of 2022. That 24% sequential jump was due in large part to COVID restrictions being lifted in the APAC region in 2022. We realized that that wouldn't be replicated in 2023. This year, we saw RPG grow over 11% sequentially from the 54, 28 in the first quarter to the 60, in the second quarter of 2023. We view that as a healthy underlying trend and expect sequential growth to continue in the third quarter of 2023. In summary, international's margin performance is strong, showcasing terrific cost discipline. Our international segment was able to generate over 175 million of adjusted EBITDA in the first half of 2023. That's nearly 10 times what the region generated in the first half of 2019. despite days being down some 20%. That step function change in profitability is a testament to the re-architecting of costs we undertook during the pandemic. We believe that this will continue to drive sustainable adjusted EBITDA in the region as business recovers in the second half of 2023 and beyond. Moving on to fleet, where as usual, we'll focus more on the Americas segment. On our last call, I said that while we saw a stronger than expected used car market during the first quarter tax refund season, we did not expect gains at those levels for the balance of the year. That provided to be accurate, with used car strength moderating throughout the second quarter as it normally trends. However, the used car market is still significantly elevated over pre-pandemic levels, and there is an increased demand for our vehicles of our type. We are preparing for an environment where our gains will continue to normalize. The lower gains on sale this quarter versus the first quarter of 2023 combined with the additional new vehicles we inflated meant that depreciation costs in the Americas grew from $128 per vehicle per month in the first quarter of 2023 to $168 per vehicle per month in the second quarter of 2023. We expect this trend to continue throughout the third and fourth quarters where our monthly net depreciation per vehicle converges with our monthly straight-line depreciation of roughly $300. Similarly, monthly vehicle interest per vehicle grew sequentially from $83 in the first quarter of 2023 to $96 in the second quarter of 2023, and we expect this trend to continue as well. This is a true cash cost to our business, and we manage it obsessively. We've been consistent in saying that on the margin, we'd rather run out of an incremental vehicle than have an unutilized vehicle on our lot. I believe our fleet growth this quarter reflects that position and will continue to fleet just under demand to optimize utilization and mitigate the headwinds of vehicle depreciation and interest. As with previous quarters, we continue to look for opportunities to rotate our fleet exiting older, higher mileage vehicles with newer deliveries as this helps to improve maintenance related costs and increase service levels which enhances our customer experience. We are pleased with the support we get from our OEM partners to deliver new vehicles, differentiated makes and models, all aligned to increase our diversified offerings and insulate us from any large-scale recalls. This quarter, our actions were consistent with that rhetoric. We will continue to be consistent going forward. Currently, we believe we are fleeted just under demand for the upcoming quarter in order to optimize utilization and mitigate the headwinds of vehicle depreciation and interest. Additionally, we continue to roll out our electric vehicle strategy, which centers on an integrated infrastructure at our locations with vehicle offerings from a varied group of manufacturers. Demand is increasing, and our key focus is on on-airport locations, which additionally deliver the highest RPD and contribution margin. We are still in the early stages of performance in this category, but it's important to our team to set the groundwork for customer demand, vehicle maintenance, and revenue-generating activities as we know this segment will continue to grow over time. Technology is a key aspect of our day-to-day performance, creating efficiency in the business and allowing for improved customer experience. Over the past seven plus years, we've continued to iterate our proprietary demand fleet pricing system, which gives us tremendous insight on demand down to vehicle location and prices our cars accordingly. We believe this technology, combined with our pricing team and field experience, generates a significant advantage in managing supply and demand. Data analytics, combined with our on-the-ground productivity systems, has created efficiencies in our location-level throughput, increasing our performance all above levels we experienced in 2019. Modernization of our IT systems have provided benefits, allowing our partners to seamlessly create reservations, generating real-time demand and increased revenue, while creating stability in our operating environment. On the customer experience side, a touchless process allows customers to choose their vehicles on their phone or exchange it upon arrival, creating a digital rental agreement which can be used to exit our facilities through an automated execute process. Facial technology rolled out at a majority of our airport locations quickly transferred first-time Avis preferred customers to their vehicles, thus bypassing our current counter-verification process. In this quarter, we have rolled out an improved budget choice application. Customers upon arrival at a budget facility choose their vehicle from a reserve zone, take a picture of the license plate, allowing a rental agreement to be sent to them digitally for a quick exit and an unmanned exit gate. This concludes my prepared remarks. But as we're in the middle of the summer season, let me provide a bit of color around just what we're seeing. In a word, things are looking positive. The demand for travel is strong, and the exit trends we saw leaving June continued with the July 4th holiday being the best on record in the U.S. The summer season has always been a time of the year when activities are at this highest level. This year the peak seems to be larger and more elevated. Bookings are happening closer in, which is what we've seen traditionally as customers are confident in both longer-term and closer-in travel opportunities. Pricing in the third quarter will improve sequentially from the second quarter and more aligned with traditional seasonality and we saw last year when it was approximately flat from quarter to quarter. We have enough visibility to project that despite some reallocation of demand towards international travel, our America segment will deliver the most rental days in the company's history this coming quarter. The industry is appropriately fleeted and we expect this normalized rate environment to continue throughout the summer. All I can say is that our team is ready and everyone is laser focused on taking full advantage of this favorable environment and I look forward to showing you what that means on our next call. With that, let me turn it over to Brian to go through our liquidity and our outlook.