Avis Budget Group, Inc.

Good day, everyone, and welcome to today's Avis Budget Group third quarter 2023 conference call. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question and answer session. Please note this call is being recorded, and you may register to ask a question at any time by pressing star 1 on your telephone keypad. It is now my pleasure to turn today's call over to David Calabria, Treasurer and Senior Vice President 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 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 third quarter results, which delivered a record quarterly revenue of $3.6 billion and adjusted EBITDA of over $900 million. We all went into this quarter understanding that certain market dynamics of the third quarter of 2022 would not be tailwinds this year. However, our team was able to remain focused on cost discipline while delivering on record customer demand, which produced earning results that are incredibly proud of. I'd like to thank all our employees across the world for contributing to this achievement and demonstrating operational excellence throughout the year. For the past few quarters, we pointed out normal demand seasonality has returned to our industry. As I stated on our last call, the second quarter is traditionally a transitional period into the summer peak, and that showed this quarter in the Americas with the summer being the busiest on record with strong leisure activity and July having the most cars on rent in company history while representing the largest demand in the quarter. then sequentially declining into September as it normally does as summer travel diminishes and schools reopen. Our ability to accurately forecast summer demand allowed us to yield appropriately to sequentially increase RPD and diminish the year-over-year declines versus the previous quarter. However, on the international side, we were forced to navigate a more unpredictable market environment this quarter that saw higher-than-expected inbound demand, but rate pressures on the intra-Europe business. We'll get more into the details on that later in the poll. But before I do, let me review the key takeaways of the quarter for America's segment. On our last call, I said the summer of 2023 would be one for the record books, and the America's segment did not disappoint. We saw record rental days, record transactions, and record revenue in the quarter, highlighting robust travel demands. Rental days this quarter were 7% higher year-over-year, and more impressively, that was on top of the rental day record being up 16% last third quarter. As long as I'm talking about year-over-year stats, I want to include we were up 14% over 2019, which was our last full year of pre-pandemic activity. If you look quarter-to-quarter, our volume increase year-over-year was more than twice as large as the first two quarters, which were 3% and 3% respectively. This does not reflect the shift in strategy in our part, but is rather an outcome of the long corporate and partnership business we've signed over the past years bearing fruit. We saw a sizable change in demand as we started the summer season, as customers put closer in with a velocity never before seen as travel has peaked and extremely robust. We saw demand in both traditional outdoor environments like beaches and mountains, with tremendous growth of inbound customers, and different than prior year, more travel to the traditional cities, which was similar to what we saw pre-COVID, just at a much higher level. And demand does not stop through October, which looks to be the busiest October on record, with solid midweek commercial demand, coupled with leisure activity that supports the weekends. October traditionally has the best mix of commercial as companies start traveling after summer, and leisure influence as fall getaways become prominent. The weather conditions are great for rentals related to foliage, football, and outdoor activities, all support increased leisure activity. Moving on to RPD, there are several ways to analyze the results of this quarter. Crisis in the Americas was down 5% in the third quarter of 2023 versus the third quarter of 2022, and up 3% sequentially, which was in line with our expectations. If you recall last year, pricing from the second to third quarter was largely relatively flat due to coming out of Omicron and supply chain challenges surrounding semiconductor and vehicle product shortages. When it comes to pricing, it's worth noting three things. One, we all knew that the supply and demand imbalance the industry saw the last two summers would not be repeated in 2023. Two, the ROV had declined in RPD one from 8% in the second quarter to 5%. Three, we were able to achieve a greater level of sequential RPD growth from the second quarter to the third quarter than in 2022. All three of these notes depict a pricing environment that is more favorable than the absolute year-over-year growth to suggest. However, perhaps the most encouraging thing we're seeing around pricing environment is best reflected in another metric we follow, which is quarterly RPD versus comparable RPD in 2019. For example, the RPD in the fourth quarter of 2022 was 31% higher than the RPD in the fourth quarter of 2019. In the first quarter of 2023, it was 33% higher than the first quarter of 2019. In the second quarter of 2023, it was again 33% higher than the second quarter of 2019. And lastly, in this quarter, RPD was 29% higher than the third quarter of 2019, which we believe would have been more than 30% if not for the travel disruption in our highest RPD region of Hawaii due to the tragic effects of the Maui fires. We interpret this as a sign that the industry supply and demand dynamics are well matched and resulting in RPD that's roughly 30% higher at pre-pandemic levels. Is this the new normal? Maybe so, but it's apparent that we're back to more normalized seasonal trends, just at a much higher level. With regards to operating costs, the team was met with significant challenges across several market dynamics. Vehicle depreciation, which was a huge factor in the third quarter of 2022, started to normalize, and we were faced with a $350 million headwind this quarter. The interest rate environment continued to climb this quarter on a larger fleet base with higher cap costs resulting in another 80 million vehicle interest costs versus the third quarter of 2022. Utilization, while strong, was also negatively impacted due to higher than expected recalls in those Maui wildfires. However, despite these challenges, our teams continued to demonstrate stringent discipline while servicing a record number of customers and investing in our brand. Although rental days grew by 7% and we continued our nationwide Plan On Us marketing campaigns, Direct OPEX and SG&A in the Americas grew by only 4%. This operating leverage we created by reducing the costs in our control helped us to overcome those costs out of our control. We were able to deliver a fourth consecutive quarter with America's adjusted EBITDA margins over 25%. On that note, let me provide a few additional income statement results in the quarter. In the Americas, revenue increased over $30 million year-over-year, comprised of record rental to growth of 7%, offset by RPD declines of 5%. America's adjusted EBITDA during the same period decreased by roughly $445 million due to the aforementioned headwinds from vehicle depreciation, vehicle interest, and rate. These factors will continue to be a headwind throughout the balance tier, but as we did this quarter, we will continue to mitigate those costs within our control and demonstrate operating leverage that translates into adjusted EBITDA and larger attainment. From what we currently see, as I mentioned earlier, travel demand remains healthy as we experience the busiest October on record, Bookings for the outer months are robust as we look at reservation bills for the Thanksgiving and Christmas leisure periods. In summary, demand continues to be strong and price will adjust seasonally as it normally does from the third to the fourth quarter. And as always, we will continue to manage with operational excellence and are confident that our teams will show what it means in the fourth quarter and beyond. Now let's shift gears to international, which is more of a complicated story to unpack this quarter. On our last call, I detailed the different business segments we addressed in the international, which is made up of domestic, cross-border, and international inbound. Typically, demand patterns for all three of these segments are correlated, adjusting for predictable mix shifts due to normal seasonality. This quarter, however, we saw significant strength in the international inbound segment, primarily from U.S. customers traveling to Europe, but less apparent with domestic and cross-border business. The combinations Of these two factors resulting in a blended rental day growth of 1% for the region, significantly lower than the guidance of high single-digit rental day growth we gave on our last earnings call. I'd like to provide a bit of color on what we saw in our latest thoughts going forward. Prior to the third quarter of 2023, our international segment saw nine consecutive quarters of year-over-year revenue growth. Despite that growth, in the second quarter of 2023, our international rental days were still down 23% versus the second quarter of 2019. Our view is that while the post-recovery in Europe started later than the Americas, it would eventually follow a similar trajectory with continued recovery in the days billing throughout 2023 and into 2024. While we still believe this is the overall macro cost the industry will pay, this order shows that it won't be a straight line. Europe is more threatened than the rental car industry. We saw smaller domestic operators build fleet inventory in what we all assumed would be a record summer. However, what we saw in the third quarter was unprecedented travel disruptions with labor strikes and flight cancellations, civil disruptions and protests in key markets, and perhaps more importantly, a dour economic environment with high energy prices, surging borrowing costs, and waning export demand, all negatively impacting European consumer confidence and spending. Given that Avis Budget is a globally recognized brand with a home market being the U.S., we benefited from the boost in international inbound travelers. However, the domestic and cross-border segments saw significantly weaker demand. Instead of chasing volume to meet previously communicated rental day targets, we quickly pivoted and made the conscious business decision to forego low RPD business this season and concentrate on those transactions that met our return on invested capital hurdles. In an environment where monthly per unit costs are up 27% and monthly interest costs are up a multiple of that, we felt the only prudent decision was to remain disciplined and voluntary pass on low margin business. And this is reflected in our results. Yes, rental days were only up 1% year over year, but we protected our PD, which was up 4% sequentially, focused on cost mitigation, and delivered nearly $200 million of adjusted EBITDA at a 24% margin. the second highest quarterly adjusted EBITDA in our international segment's history. Our goal is to continue to optimize margin through strategic pricing, stringent cost mitigation, and fleets in line with demand. We continue to believe that substantial opportunity for recovery in this region exists, and we'll focus on capturing our share of it going forward. Moving on to fleet, where as usual, we'll focus more on the America segment. On our last call, I said that while we saw a strong and unexpected used car market in the beginning of the year, we did not expect gains at those levels to continue for the balance of the year. Residual values for used cars moderated from the second quarter and throughout the third quarter. They are still elevated over pre-pandemic levels, and there continues to be strong demand for used cars of our type. Used car inventory is still down at the price point of these cars to be more at $20,000 lower than a new car, which presents significant value for our consumers. We have said that we expected our gains to continue to normalize and our monthly depreciation costs to continue towards our gross depreciation of roughly $300 per vehicle. This will happen by next quarter, and we're seeing it reflected in the October results. The lower gains on sale this quarter versus the second quarter of 2023 combined with the additional new vehicles we inflated, increased depreciation costs in the Americas from $168 per vehicle per month in the second quarter of 2023, $219 per vehicle per month in the third quarter of 2023. We expect this trend to continue throughout the fourth quarter, where a monthly net depreciation per vehicle continues to converge with a monthly straight-line depreciation of roughly $300 per vehicle. Let's shift gears now to monthly vehicle interest. In the Americas, monthly per unit interest costs grew from $62 per vehicle in the third quarter of 2022 to $105 per vehicle in the third quarter of 2023, an increase of 70%. On a fleet base of roughly 550,000 vehicles, that equates to over $70 million of cash outflow from interest expense. I've said it before, and I'll say it again. In an environment where our core input costs are rising, both the cost of vehicles and the cost of finance, we must be hypervigilant in matching our vehicle supply just on the demand. We'd rather run out of the incremental vehicle than have an unutilized vehicle on our lot. You'll see us put this rhetoric into practice as we deplete the fourth quarter, the sequential declines consistent with what we've historically done in pre-pandemic years from the third to the fourth quarter. Lastly, with regards to vehicle availability and previous labor disruptions, deliveries are still on track, parts are still available, and we're progressing with our talks about future buys. Currently, our model year 2024 buys are largely complete. We have a great relationship with our OEM partners, and I want to thank them for their continued support. Before I leave fleet, let me comment on EVs. As you know, our strategy is centered around ensuring that our infrastructure is developed to service vehicles of this type in a manner that's consistent with our operational logistics. We've been investing in those capabilities, and while we currently have all necessary resources to appropriately service our electricity today, we will continue to build our EV infrastructure resources across our footprint, commensurate with our anticipated growth. This provides us the ability to react given changes in the demand curve. we have ensured we have EVs of different makes and models from our majority of our manufacturers, which helps with customer demand and further insulates us from cost pressures associated with recalls and other maintenance-related activities. We manage our EVs similar to how we manage our regular gas cars, focusing on our airport activity, which gives us our best margin outcome while we continue to have supply slightly under our demand. This ensures our per-unit economics stay in line, While our demand for EVs has improved considerably, we will continue to monitor our supply and ensure that it keeps up with this ever-changing environment. Let's turn towards technology and how it's an integral part of everything we do. Our proprietary demand fleet pricing system continues to allow us to optimize price and volume by forecasting volume down to the store level, both close in and months out, and pricing our vehicles at an individual vehicle level while optimizing utilization and contribution margin. This technology, along with our revenue management team and operational field experience, continues to generate a significant advantage at maintaining our supply, demand, and pricing process. We have made technological enhancements in our maintenance and repair processes, generating efficiencies in operating expenses. These enhancements provide our technicians with faster visibility of data analytics that determine body damage or salvage decisions, as well as ensuring we optimize our spend with outside service providers. We continue to see improvements in our field level productivity due to strengthening our workforce planning tool. We've been able to realize this improvement in our field direct operating expenses. The continuation of technology enhancements allow us to keep our costs inside of increasing demand and help margin profitability. As you know, we have implemented vehicle telematics in our fleet, which provides actual fuel readings and helps insulate us from rising gas prices, as well as provide improved asset control. On the customer experience side, we continue to promote a seamless experience from our customers. Our Avis QuickPass offering, now at a majority of our airports, enables our customers to select from a choice of vehicles on their phone, proceed directly to that car, or even exchange that car if they like, and drive to the exit gate utilizing a QR code for an automated exit. On return, customers can close out their rental on their own utilizing our connected car technologies. Similarly, a budget fast-break choice is an expedited pickup process that allows you to select your vehicle right from your mobile device by taking a picture of the vehicle's license plate and proceed through an automated exit gate, thus expediting your rental checkout. On return, a connected car technology allows you to check in automatically and receive your receipt within minutes. These technologies have improved our customer experience and enhanced our overall UPS service. Before I conclude, I'd like to make mention of our press release last night announcing changes to our management structure and board dynamics. Brian Schweit, our CFO, will be transitioning to a newly developed role in our company, EVP, Chief Transformation Officer. I asked Brian to step out of his current CFO role and take on this new challenge designed to help create sustainable adjusted EBITDA in the years to come. Brian has experience looking at our company both from the outside during his days as an investor and over the past three years, helping us managing from the inside his current role as CFO. He has a unique ability to analyze and digest data and turn it into a practical format like no other, and this will benefit our business as we look to grow our profitable revenue while creating efficiency in our cross-lines by working with stakeholders both in our headquarters and our field operations, all designed to improve our overall performance. Izzy Martins will move from a current role of EVP and head of the Americas to fill Brian's role as CFO. Izzy's prior experience as the VP of Tax, Chief Accounting Officer, and CFO of the Americas, now combined with the operational experience she gained over the past four years, positioned her extremely well in her new role as Global CFO. Izzy has been instrumental in delivering the record-setting performance in the Americas over the last three years. We will get to know Izzy more formally in the coming months. Adding in David Calabria with his experience in accounting, investor relations, and the terrific work he's done in treasury make this a formidable team. In addition, we announced some changes on the board level as well. Bernardo Heese, the executive chairman since 2020, will transition from his current role and remain a member of our board starting in May of next year. Bernardo has been instrumental in the company's performance helping us navigate through the pandemic and transform into the company we are today. His insights and partnerships were very much needed and helped guide our future, and I look forward to continuing to work with him as a member of our board. Jagdeep Palwa will move from the vice chairman role to the chairman role starting in May as well. Jagdeep, the president of SRS, has been with our board since 2018, and like Bernardo, has been a large part of our success, and I look forward to working with him and a greater capacity in the months to come. We are extremely fortunate to have terrific talent on our team and a gifted board to help align our strategies. So let me conclude. We are now in the great quarter, with record-setting revenue in the Americas and the strongest summer ever recorded, with price improving from the second quarter to the third quarter, as we noted on our last call. International continues to drive towards margin attainment with profitable revenue and cost efficiencies. The fourth quarter started off strong with good commercial and leisure demand and record-setting volume in the U.S. and advanced reservations surrounding Thanksgiving and the holiday seasons are strong. Price will moderate and adjust seasonally as it's done historically. As we come up our peak, we will continue to deplete our vehicles to keep them in line with demand. Our team is focused and driven to once again deliver another strong quarter to finish out the year. With that, let me turn it over to Brian to go through our liquidity and our outlook.