Avis Budget Group, Inc.

Greetings. Welcome to the AVIS budget group fourth quarter 2023 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 the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to David Calabria, Treasurer and Senior Vice President of Corporate Finance. Thank you. You may begin.

Good morning, everyone. and thank you for joining us. On the call with me are Joe Ferraro, our Chief Executive Officer, Izzy Martins, our Chief Financial Officer, and Brian Choi, our Chief Transformation 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. I want to welcome Izzy Martins, who has recently moved from a prior role as head of the Americas and is now our new chief financial officer. Izzy has been instrumental in delivering the record setting performance in the Americas over these last three years, and her prior experience as the VP of Tax, Chief Accounting Officer, and CFO of the Americas sets us up well for a new role. She and I have worked together for nearly 20 years, and I'm excited to leverage her experience and depth of knowledge as we grow this business profitably for the years to come. Before I get into our results, I'm happy to be talking to everyone on this conference call from our new world headquarters. Although just a few miles from our previous building, our new state-of-the-art facility features advanced technologies as well as great opportunities for increased collaboration and thought development between the teams. And we believe this allows for increased productivity and performance benefits. We have been located in New Jersey for over 20 years, and we purposely stayed close to retain what I consider to be world-class talent while giving us a place we can be proud of and call home. I would like to thank our team that worked on finding this new home, as it is an impressive headquarters. Yesterday, we reported our fourth quarter and full year results. For the quarter, we delivered approximately $2.8 billion of revenue and $311 million of adjusted EBITDA. And for the full year, we achieved an all-time annual revenue record for our company of over $12 billion and our second highest adjusted EBITDA ever of approximately 2.5 billion. Looking at our fourth quarter results, our expectations were to continue to see seasonality return to the industry and our business. As I've been stating on previous calls, it is apparent that the pre-pandemic seasonality as it relates to each of the quarters are now the norm again, but just at a much higher level of volume and price than previously. The transition from the third quarter to the fourth quarter is in line with this thinking and very much in line with last year. We believe this continues into this year as well, with the months and quarters trending with historic seasonality. Volume was extremely strong, with October having the most vehicles rented in any month in the history of our company in the Americas, which led to increased activity and a strong holiday season, with Thanksgiving and Christmas being the largest we've experienced. And in Europe, we saw volume increase year over year And more importantly, an improvement in the decline as compared to 2019, more so than we did in the third quarter. All in all, our team performed extremely well in 2023, despite the challenges of inflationary and interest rate pressures, producing the most revenue generated in the history of our company and the second highest adjusted EBITDA. I want to thank the entire team for their hard work in getting us to this level of achievement. They took care of our customers, producing record service-level results, maintained terrific cost discipline, and ultimately produced earning results that we are all incredibly proud of. Now, moving on to the Americas results, as I mentioned earlier, the demand in the Americas was strong, with October being the strongest month for vehicles rented in any month in the history of our company in the United States. With a combination of improved commercial and leisure, as travelers went on both business trips, ball getaways, and at times, a combination of both as business trips to see a client turned into a weekend getaway. We kicked off the winter season with increased activity and the strongest holiday season of Thanksgiving and Christmas we've ever experienced with terrific growth in leisure demand as people traveled to see family or enjoy vacations away from home. Volume for the quarter was up 6% year over year and up over 17% versus 2019. We saw growth from our partnerships in both airline and associations, as well as on our own dot coms. Our strategic marketing initiative and plan on us campaign announced early in the year of 2023 was again deployed and drove record reservations. You may recall our tagline, at Avis for 75 years, we've only had one plan to make sure you keep yours. This is more than a slogan, but a call to action for all of us, and it seems to resonate well with our customers as this performed well again this quarter. My last point on demand. As I stated on our last call, we had our summer season for the record books, and when you have a significant peak, you can sometimes see a drop that follows. But this has not been the case, as October and Christmas were the busiest on record as well. It is apparent to us that consumers are traveling and choosing our brands and there is no reason to expect this to change. As expected, pricing adjusted seasonally as we transitioned out of the summer peak. Pricing in the fourth quarter was down 7 percent year-over-year, but still up more than 20 percent from 2019. If you recall, there were significant number of flight cancellations due to weather and system issues last year in December. This helped volume this year, but hurt RPD, as we did not have the higher-priced one-ways that typically come from flight disruptions like we did last year. Pricing from a sequential change from the third quarter to the fourth quarter is in line with 2021, 2022, with 2023 being down 9% quarter to quarter. America's pricing for the full year was nearly 30% up over 2019. On our last call, I mentioned how headwinds from vehicle depreciation and vehicle interest would factor into the fourth quarter results. But as usual, our teams did not abdicate responsibilities due to these factors. Instead, we continued to focus on cost discipline and delivered results that showcased the streamlined and lean operating structure we built during the pandemic. As we said before, we're keenly aware of the inflationary pressures we are seeing and will continue to combat rising costs with sustainable productivity gains driven by technology and data. Despite the headwinds, we achieved record rental days with revenues of $2.2 billion, adjusted EBITDA of $309 million, and adjusted EBITDA margins over 14% while navigating through the seasonal transition from the summer peak. Looking at our operating costs, the team was met once again with significant challenges across several market dynamics. Vehicle depreciation, which was still benefited by the supply chain shortages in the fourth quarter of 2022, showed more normalization in 2023, and we are faced with nearly 180 million of headwind this quarter. Interests continue to climb as well, with another 80 million of vehicle interest costs versus the fourth quarter of 2022. Utilization was negatively impacted due to the timing of vehicle deliveries slated for earlier in the year that came later and into the fourth quarter. We have set this timing difference by selling more cars this quarter than in our fourth quarter history but it was not quite enough to completely offset the new vehicle increases which were delayed from prior periods. And while the utilization was challenged, the full-year utilization is still in line with prior year demonstrating our approach to supply and demand, and you should expect to see this stringent discipline continue in the new year. Overall, the Americas had a great quarter, generating $309 million in adjusted EBITDA, with record-setting fall and holiday periods resulting in demand up 6%, above last year and 17% over 2019 with seasonally adjusted pricing from quarter to quarter and up over 20% versus 2019. The team ended with another great year with close to $2.2 billion in adjusted EBITDA. Going forward, as I mentioned, travel in general is strong and we are expecting demand to grow as well with the course of this year. As we move from January to the remaining months in the quarter, will take advantage of both business and leisure activity, warm vacation destinations, and early Easter with improved inbound activity continuing into the spring and summer with elevated travel. Pricing for the first quarter, while expected to be down versus prior year, will still be up a similar amount versus 2019 as we were in the fourth quarter and well above 2019 throughout the year while peaking in the third quarter and close to prior year. Let's shift gears to international. As we mentioned on our last call, our view was that while post-recovery in Europe started later than the Americas, it would eventually follow a similar trajectory with continued recovery in days building through 2023 and into 2024. While we still believe this is the overall macro cost the industry will take, this quarter continues to show that it won't be a straight line. And while this still holds true, we did see an improvement this quarter with volume up 3% versus prior year and only down 20% compared to the fourth quarter of 2019. This after being down in the 30% range in the third quarter as compared to 2019. While Europe continued to have a slow return from domestic and cross-border segments, we saw a 12% increase compared to the fourth quarter of 2022 from international inbound travelers. Again, instead of chasing volume, we have made the conscious business decision to forego low RPD business to concentrate on those transactions that meet our return on invested capital hurdles. RPD was only down 2%, excluding exchange rate effects compared to the fourth quarter of 2022, and up almost 20% versus 2019 on a reported basis. Overall, and including exchange rate effects, international saw revenue up 5%. Our international team was also focused on the cost they could control. This focus resulted in our international direct operating expenses and SG&A to be down 3% compared to the fourth quarter of 2022. In an environment where monthly per unit fleet costs were up 52% and monthly interest costs a multiple of that, We remained disciplined, focused on margin accretive business, and kept costs out in an inflationary environment. Full-year adjusted EBITDA came in at $400 million with a 15% margin. While early, reservations going into 2024 are showing growth in both inbound from North America as well as intra-Europe, with pricing slightly better than the first quarter of 2023. We continue to believe that there is substantial opportunity for recovery in this region, and the team is ready to capture it as it returns. Moving on to fleet, where, as usual, we'll focus more on the Americas segment. We said last quarter that we expected our monthly depreciation to increase towards gross depreciation of roughly $300 per vehicle. Our gains on sale of vehicles in the quarter were approximately $50 million, which led to net depreciation 272 per vehicle, and gross depreciation of 306 per vehicle, a difference of 34 per vehicle. As I mentioned earlier, we sold a record number of vehicles in the fourth quarter compared to other fourth quarters. This was driven in part by our forecast of a normalizing used car market, and we wanted to harvest gains on older model year fleets while the opportunity was still there. But another factor that contributed to our outsized fleeting in the quarter was delayed deliveries of new fleet by several of our OEM partners. Given that new model year vehicles were delivered after the summer peak, it was necessary to exit older vehicles to right-size our fleet size to demand. We worked through most of that throughout the fourth quarter, but we'll continue to right-size into the first quarter of this year. As I stated in past earnings calls, fleet rotation and cycling of fleet is a critical element of fleet management. This addresses mileage and age as we bring in new vehicles while disposing of older units and creating a stabilization of cost and utilization over time. We did this throughout this past year and into the fourth quarter, and we'll continue to do this throughout the first quarter and balance of this year as we ensure our fleets are in line with demand, creating stability in our fleet management. There continues to be demand for vehicles of our type as used cars still represent a value to consumers as the price point is some $20,000 less than a new vehicle. Let's shift gears now to monthly vehicle interest. Our total company's monthly per unit interest costs were 106 per vehicle in the fourth quarter of 2023, compared to 62 per vehicle in the fourth quarter of 2022, a 70% increase. On a total company fleet size of more than 700,000, that equates to more than $90 million of additional cash outflow from interest expense from the fourth quarter of 2022. I said this the last time, but I feel it important to reiterate. In an environment where our car input costs are rising, both the cost of vehicles and the cost of finance, we must be hypervigilant in matching our vehicle supply to just under demand. And this year, it's more important than ever. Before I leave the fleet section, Let me take a moment and talk about EVs. We have always taken a prudent approach to fleet in general, and EVs are no exception. Our goal was to have a fleet size that is in line with demand and allows for flexibility and growth if required. Our strategy was to first develop the infrastructure, the properly charged vehicles of this type, in a way that allows for a seamless rental and efficient use of this asset. We have been on this for over a year now. and we are just about complete with most of our facility upgrades. As with ICE vehicles, we ensured we purchased vehicle types from a varied group of manufacturers. Having a varied inventory insulates us from maintenance-related concerns and recalls in general and protects us from any residual value pressures that may be associated with vehicles of one make or model type. Our goal has been to have customers experience our product primarily at our airports, because this allows for a more certain profit outcome and additionally creates consistency for the staff to be trained on the rental logistics and readiness criteria while keeping per unit economics in line with our expectations. We are quite comfortable with our EV strategy and supply-demand relationships, and we will continue to monitor this ever-changing environment should it be required. Turning to technology, which is a key aspect of our day-to-day performance and creates efficiency in the business and allows for an improved customer experience as we continue to iterate and redefine our systems and processes. We are incredibly focused on driving efficiency in our business, so much so that I asked Brian to head up our business transformation process, a much-needed step in our business evolution as we utilize data, technology, and machine learning to inform operational improvements and decision-making, allowing for sustainable outcomes. In addition, over the past several years, we have continued to improve our proprietary demand fleet pricing system, which gives us tremendous insight on demand down to the vehicle location and prices our cars accordingly. The combination of rate strategy, forecast accuracy, and vehicle inventories produces an optimization that has been a large part of our revenue success and contribution margin. 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 own on-the-ground productivity system, has created efficiency in our location level throughput, increasing our performance well above levels experienced in 2019. This is one of the many reasons why our direct operating and SG&A expenses have stayed relatively consistent as a percent of revenue in an environment that is challenged by inflationary wage pressures. The modernization of our IT systems have provided benefits and system stability, producing record uptimes, allowing our partners to seamlessly create reservations, generating real-time demand and increased revenue. As you know, we have been early adopters of in-car telematics, which has improved our gas collections, provided asset control improvements, and provided an improved customer experience due to automated check-in upon return. On the customer experience side, our 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 facility through an automated exit gate process. Customers using this level of technology score us up to 10 points higher in MPS than traditional rentals. Facial technology rolled out at a majority of our airport locations, quickly transfer first time Avis preferred customers to their vehicles thus bypassing our current counter verification process. During the year, we have rolled down an improved budget fast break choice application. Customers upon arrival at a budget facility, choose their vehicle from the reserve zone, take a picture of the license plate, allowing the rental agreement to be sent to them digitally for a quick exit and an unmanned gate. These technologies have improved our customer experience and enhanced our overall MPS scores to the record highs they are currently at. So to conclude, we are in another great quarter, culminating with record-setting full-year revenue and the second highest adjusted EBITDA on record. Both the Americas and international employed stringent cost discipline continuing to drive towards margin attainment with profitable revenue and cost efficiencies. The demand environment is strong with pricing dynamics have leveled to normal seasonality and our team is focused and driven to once again deliver another strong year in 2024. The expectation is that the quarters perform with the same seasonality we have seen in the past with the second quarter larger than the first and the third quarter representing another terrific summer peak, finishing with a strong fall and winter season. We expect price to continue to moderate in the first half and adjust seasonally throughout the year, while peaking in the third quarter, maintaining high elevated levels compared to 2019. And while fleet costs will present challenges, we will continue to de-fleet our vehicles to keep them in line with the demand, and our team is focused and driven to once again deliver another strong year. Before I turn it over to Izzy, I would like to take a minute and thank Brian for the last three years in his role as CFO and his great work helping us develop into the company we are today. And while I'm thankful for his past work, I'm even more excited about what he's going to bring in the future as our new Chief Transformation Officer, partnering with stakeholders both in our headquarters and in the field operations. Brian and his team are off to a running start, as many of these opportunities were identified during his time as CFO. I look forward to seeing the transformation group now operationalize these efficiencies across our business and throughout the year. With that, let me turn it over to Brian.