Good morning, and welcome to the Avis Budget Group Fourth Quarter Earnings Conference Call. [Operator Instructions] At this time for opening remarks and introductions, I would like to turn the conference over to Mr. Neal Goldner, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Tanya. Good morning, everyone, and thank you for joining us. On the call with me are Ron Nelson, our Chairman and Chief Executive Officer; and David Wyshner, our Executive Vice President and Chief Financial Officer. Before we discuss our results for the quarter, I would like to remind everyone that the company will be making statements about its future results and expectations which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Such statements are based on current expectations and the current economic environment and are inherently subject to economic, competitive, and other uncertainties and contingencies beyond the control of management. You should be cautioned that these statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements. Important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements are specified in our earnings release, which was issued last night and our third quarter Form 10-Q, our Form 10-K, and other SEC filings. If you did not receive a copy of our press release, it is available on our website at www.avisbudgetgroup.com. Comments on this call regarding our results are intended to be in reference to our results excluding certain items, which are non-GAAP financial measures and are reconciled to GAAP numbers in our press release and on our website. Now I’d like to turn the call over to Avis Budget Group’s Chairman and Chief Executive Officer, Ron Nelson.

Thanks, Neal, and good morning to all of you. As I look back, 2010 was really an outstanding year. It was a year that the travel industry began to recover from an unusually severe recession. It was a year in which our difficult first-half volume comparisons gave way to volume growth acceleration in the second half. It was a year in which every segment of our company recorded double-digit growth in adjusted EBITDA. It was the year that our profitability returned to pre-recession levels, despite revenue, it was $800 million lower. And it was a year, once again, where we ask all of our employees to accomplish more with less and they delivered. And as I'll discuss in a moment, it was a year in which we set a course for revenue and profit growth that I believe will move us from being not just a good company but a great one. My enthusiasm has never been greater and I hope that over the next hour or so, you will take away an understanding about why we are so optimistic. However, since I do want our strategies and outlook to be the focus so much of this call, let me tackle the elephant in the room, our proposed acquisition of Dollar Thrifty. We remain committed to acquiring Dollar Thrifty. It's an important growth opportunity for our company, one which moves us squarely in to the deep value runner space, one which results in significant consolidation efficiencies and one which we believe enhances competition in the marketplace. We have been working closely with BTG and their counsel in order to obtain NI trust clearance for our proposed transaction. We've had good dialog with the FTC staff over the last few months about the complexities of our industry, and we hope to…

Thanks, Ron, and good morning, everyone. Today, I'd like to discuss our fourth quarter and full year 2010 results, our ongoing cost saving initiatives and our balance sheet, as well as expand on some of Ron's comments regarding our outlook. My comments will focus on our results, excluding certain items. As Neal mentioned, these results are reconciled to our GAAP numbers in our press release and on our website. In the fourth quarter, revenue increased 6% over $1.2 billion with a year-over-year revenue growth accelerating from the 3% increase we reported in the third quarter. Adjusted EBITDA more than tripled to $54 million. Margins in this seasonally slower quarter expanded 320 basis points to 4.4%. Our full year revenue increased 1% to $5.2 billion. Adjusted EBITDA increased to $410 million in 2010, equaling pre-recession levels despite $800 million of less revenues than in 2007. Adjusted EBITDA margins increased 320 basis points year-over-year to 7.9% and all three of our operating segments reported substantial EBITDA growth, underscoring the fact that our company-wide cost reduction efforts have proven to be both sizable and sustainable. For those investors and analysts who compare companies' EBITDA, excluding deferred financing fees and stock-based compensation, our full year adjusted EBITDA on that basis is $450 million. Pretax income increased to $158 million in 2010 compared to a $6 million pretax loss in the prior year. Net income increased to $107 million and diluted earnings were $0.90 per share. Turning to our segments. In the fourth quarter, Domestic Car Rental revenue increased 4% to $905 million, reflecting a 7% increase in volume, partially offset by a 3% decline in pricing. Volume growth would've been about two points higher were it not for a decision to return budget at LAX to its licensee and select off-airport store closing. The…

[Operator Instructions] Our first question comes from John Healy with North Coast Research.

I wanted to ask you a little bit about your comment that you made earlier in the call about industry rental growth rate and I wanted to get your view of how you think about the industry and its growth rate. If you think using a multiple GDP or trends versus [ph] employments, how do you think about the industry's growth rate versus those metrics? And how do you feel Avis should be able to perform over the next couple of years versus those metrics?

I think John, overtime that employments, at least for our business, are probably the best metric. I think we're still 80% to 81% on airport and obviously, the traffic on airport this is driven by the number of people that get off airplanes. I think when you're in an environment where you're moving upward though, we do tend to get better growth in rentals than the growth in employments. But I think overtime, that does level out. And so that, in conjunction with whatever you think pricing will do in the markets should be sort of the inherent growth rate in the industry. We're not going to put a number on what we think we've moved the growth rate to with these initiatives. I do think it's meaningful though and I think it will take us well above what I think employments are going to be over the next couple of three years. I just think there's a lot of opportunity out there that can be harvested by things that -- we actually have a very clear line-of-sight on but we're not groping for -- see there's this opportunity and -- but we haven't quite figured out how to crack the code yet. I think there's a number of things we're clearly focused on. They are going to add incremental growth. And more importantly, they're impactful. Things like small business have inbounded our national. Our volume-related profit margins are probably several multiples above what our core commercial business drops through. So they can have a disproportionate impact on margins relative to the amount of revenue growth that they in fact, generate. So rather than put a number on it, let's just say I'm pretty optimistic that it's going to increase the NI growth rate in the industry pretty significantly.

And when I thought about the growth initiatives you talked about in the call, it seems like you're taking a very balanced approach in investing in all areas of the business, but I want to take a more shorter term viewpoint of how you think 2011 will fare? As you guys plan the business, are you expecting commercial or leisure to really be the growth side of the business in 2011 or maybe you feel like they're pretty balanced and interested in your thoughts?

I think if you look back over the last year, commercial sort of started out being the driver of growth. But probably around May or June, it started to turn around. It actually continued through the fourth quarter, leisure was a bigger driver of volume gains than was commercial. And looking at the first two months or first six weeks of the year that we've got under our belt, leisure continues to hold the slight margin in year-over-year. The numbers are going to be skewed a little bit because our fleet was so tight last year in the first six months and we weren't delivering -- there was more commercial volume out there than we were getting. If you recall in our first-half comparisons, I think our commercial growth was flat to down and our competitors was up fairly significantly. So I think with more fleet, we're going to capture more commercial growth, but I think from an industry's standpoint right now, it would appear to me that leisure is outstripping commercial in terms of growth rates.

And with that said, I was wondering if you could give a little bit color on the pricing environment. You're down 3% in the 4Q and looking like trends are similar in the first quarter, is that reflective of the market or is there some sort of mix issue going on there? And could you give us some color on if there is a market issue going on right now, what part of the market is it focused on?

I think pricing, like David said it right, pricing for the fourth quarter and the third quarter has been relatively stable. I think our comps are a little skewed by the fact that we had higher pricing that we're comparing to. Certainly in the fourth quarter of '09 versus '10 and that's probably going to persist for the first two quarters of this year although at a lesser degree. With tight fleet in the first half of last year, we try to keep pricing as tightly as we could, but as this leisure comes back into the market, lengths are going to extend a little bit and that's puts a downward pressure on pricing. I think everybody, certainly Avis or us and Hearst are going after the off-airport market with more fleet, obviously, tends to be a little over RPD so that's going to put pressure on reported price comps. But I think the right way to characterize pricing right now in the environment is that it's stable. We're not getting any price increases, but we don't see pricing declining either.

Just one housekeeping question, David, I was trying to reconcile one of the tables in the release to the adjusted net income number and the adjusted pretax number, it looks like it was both the loss of $6 million for the quarter. I was trying to get a little bit of color if there was any tax implications or were there are no taxes paid, I was just a little confused by that exhibit.

Sure, John. I think the key issue is that when you're dealing with this small denominator is very easy to get caught up or to get it in odd tax rate. When you look at both our reported numbers and our non-GAAP numbers, it works out to about a 35%, 36% tax rate plus $2 million and I know it looks odd in the non-GAAP number where we are very close to break even, but there's nothing more to it than a couple million dollars of noise around it and normal tax rate.

Our next question comes from Chris Agnew with MKM Partners.

I want to ask about leverage and free cash flow. Just how are you thinking about leverage? Are you looking to become investment grade? And over the next couple of -- you could free cash flow generation this year but, should we expect to see free cash flow going forward or are the investments in your growth initiatives going to soak up a greater amount of your cash flow?

With respect to our balance sheet and our leverage position, I feel good about where we currently are, operating at around 3.8x to 3.5x leverage. So I think on a net basis, I think that's a reasonable place for us to be. For what it's worth, I think our debt is a little bit underrated right now in light of where our credit metrics are. But that, I think, will sort itself out over time. Looking forward with respect to free cash flow, we would expect that pretax income would continue to be a proxy for free cash flow in our business. Our cash taxes, as I mentioned, will be relatively manageable this year in the $35 million to $40 million range and the investments that we're talking about would either -- would not be a use of that free cash flow. Essentially, they would either be expenses, such as additional marketing that we talked about for [ph] EBIT or budget or would be at capital spending as part of the roughly $90 million of CapEx we're looking for this year. So I wouldn't view those as changing our free cash flow from being in the ballpark of pretax income.

And then a question on operating expenses. If I look just in the amount in 4Q as a percentage of revenue, it was lower than in the previous -- in the first three quarters of the year, you were lower on a year-over-year basis looking at OpEx' percentage of revenue, particularly third quarter I think was 300 basis points lower. In the fourth quarter, it rose and I was wondering if there's anything in particular and there and how should we see we be thinking about operating expenses next year, what are the moving pieces?

With respect to the fourth quarter, I think the key challenge becomes the fact that pricing was down and other things equal and price being down, that will tend to bring the operating costs up. Our goal is both in 2010 and going forward into 2011 is to try to offset any sort of impact either from pricing being down or from inflation through our cost-saving initiatives and by improving productivity and that's really a key issue for us being able to offset as much of the effects of inflation as we possibly can by taking cost out throughout the business, finding ways to be more productive and more efficient in everything we do. And so we actively think about the productivity work that we're actively engaged in as being a key way to offset the significant amount of the effects of inflation.

Is it fair to assume with a large chunk of or a certain chunk of fixed costs, volume growth and hopefully pricing, not as much of a headwind maybe a tailwind, that should continue to come down as a percentage of revenues going forward?

I'm not going to forecast a number but the first point you make there, Chris, is a very good one. We do also -- we should also see benefits from some increased operating leverage as volume strengthens.

Our next question comes from Fred Lowrance with Avondale Partners.

David, if you could just break out on the depreciation line, I guess maybe in your filings, we'll eventually get the break up between depreciation expense, gain loss on sale of vehicles, do you have those numbers handy or at a minimum, do you have what that number was for the -- I would assume its gains from the sale of vehicles but anything on that?

I do. We had about $6 million in gains in the fourth quarter and the majority of it was in our international operations.

And then, Ron, for you I know one of your near-term opportunities for growth is driving more ancillary revenue, you've done a pretty good job of that. I'm just wondering where you think you are on that process? If you want to think about it in terms of innings in a baseball game or something, but how much more do you see that there is to do in terms of what you want to call it up selling or selling extras to customers, how far along are we in the process?

I think there's two parts to where we are, Fred. Every time I make a prediction like this I tend to be proven wrong and I'm sure this won't be an exception. I would guess that we're probably in the sixth or seventh inning of that. We have pretty well penetrated the top 50 airports where we do a fairly significant part of our volume. We've now moved on to the next 50. And just as important, we just started the local market initiatives in terms of our ancillary sales training. So there is still some left. What's interesting to me is when I look at the January numbers a couple of weeks ago, even in an environment where volume was tough to come by because of the winter storms, we were getting increased ancillary penetration. So the selling effects of this trade are really holding and driving growth, even in the top 50 markets where frankly, where they have been -- we have more than lapped the one-year anniversary of having trained those folks. I continue to be surprised at the increasing amount of penetration that we're able to get in the growth we're able to get. But I will probably say that we're 2/3 of the way through this initiative and one of the things that I think we continue to look for are what are some other products that we can add to the portfolio. We added emergency road service insurance this year which, you know, it's a very high profit item and it's an extra $2 or $3 or $4, or $5 actually per day of revenue and almost as much margin. With the pressure on us is to keep innovating and adding products and at the same time, continue to drive the penetration in the markets where we haven't really completed the training yet.

And are there any products in particular -- you mentioned emergency roadside services, one of the new ones, but where are you seeing, I guess, the most success whether it would be just from vehicle upsells or if it's roadside assistance, are you seeing any superstars in that group in terms of what's really delivering the bulk of the upside?

The superstars in the group is upsells. That is proven to be a very big revenue item for us. Probably of the products that we sell, it probably has the lowest margin, but frankly, when I say low, the incremental margins are probably 50% or 60%, it's just not 80% or 90% like it is on GPS. Garment is staying stable and emergency roadside services, growing. Insurance penetration is growing modestly. And we introduced portable XM radio last year that it continues to do well. But the big revenue items are still GPS, upsells and insurance.

Our next question comes from Brian Johnson with Barclays Capital.

Is there any way you're quantifying the various growth initiatives that you laid out in terms of either hundreds of millions of dollars of revenue or kind of percent growth that it could add to the overall earnings?

I guess, Brian, the answer is the ancillary is. We're not going to put a number on it, but what I would point you to is in the local market we have $750 million revenue. There's clearly a fair amount of room for margin growth in that business. So if you think we can improve margins by three points, four points, two points, that at least brackets the opportunity for you. In terms of building increased loyalty, there's a $2 billion number out there that we know goes to other customers. I would tell you right off the bat that 40% or 45% of that is because of price and you have to look at that and say that that's probably not going to be eligible but the number gets to be somewhere around $1 billion in a quarter, increased loyalty by 5%, 10%. You can get a sense of the incremental revenue and our margin dropped through on incremental revenue on the volumes side, it's probably around 30% on average. So you can come up with some estimates there. Small business, profitable segment, we really don't put a number on how big that market is. But in terms of the markets that we serve on our commercial business, it is probably the second or third largest. And if our average dropped through on volumes 30%, you can assume that small business is bigger than that. That's a sense of how you can model it, Brian, but again we're not going to put specific numbers on each of these.

Also projects of incrementals, how should we be thinking about incrementals on that currency adjusted basis international. It looks like x currency that there would've actually been a rental revenue increase of 7% minus 2% would be roughly 5%, year adjusted EBITDA was flat, so does the 30% rule not apply to international expansion? Incremental volume?

Generally speaking, the 30% on additional volume will tend to hold true. Given a little bit of noise in international, we'll probably sell a couple million dollars short of that in the fourth quarter, but I view that as more noise than trying to read into that any sort of trend.

Our final question comes from Emily Shanks with Barclays Capital.

I have just a couple of line item questions. The first is around non-Fleet CapEx for fiscal year '11. Can we assume that it's going to be relatively flat for the guidance we provided for fiscal year '10, $75 million to $90-ish million?

Yes, I would look for around $90 million of non-vehicle CapEx for 2011.

And then for the Avis Budget base business alone, what is the minimum cash balance that you need to operate the business that you ideally like to keep on your balance sheet?

I think when you look at our balance sheet overtime, we've probably have never been lower than a couple hundred million dollars. And so I generally use a number in the $150 million to $200 million range when I do that sort of modeling.

In terms of the $450 million of adjusted EBITDA that you noted, is that the EBITDA number at LLC? Is that the way we should think about it?

I don't have the operating subsidiary number, but I think it should -- it would typically be very close. We can get it for you, but generally, the best way to estimate it is to take the number we reported for Avis Budget Group and then add back any losses related to our corporate and other segment, which would typically make the operating subsidiary a little bit larger.

As I look at the $410 million that was reported versus the [ph] prophecy in your prepared remarks, what exactly is the delta there?

The point I was making in my remarks is that I know some analysts and investors use an EBITDA measure that adds back stock-based compensation as well as deferred financing fees. And in fact, it's a typical way for debt covenants to be written. And so if you take our reported number of reported adjusted number of $410 million and were to add back the stock-based compensation and deferred financing fees for comparison or covenant purposes, you’d have a number of $450 million.

Do you have the breakout on those two line items?

Yes, I believe it's $25 million of deferred financing fees and $15 million of stock-based compensation.

I just have one last question around the Fleet age. I was hoping you could give us a little color around what's the average fleet age? Is it the car fleet, the truck fleet and then what your target age is for fiscal '11 or how we should we think about it?

Our current fleet is right around six months old on average and we're typically deleting or disposing of deals of cars when they're 12 to 14 months old with some being a little longer and some program vehicles being shorter. But our typical hold period on average will be in the 12 to 14 month range. And our truck fleet is nearly five years old on average.

For closing remarks, the call is being turned back over to Mr. Ronald Nelson. Please go ahead, sir.

And just to recap, we feel great about our position and where we're heading. We're investing on our brand, upping our commitment to the inbound business, reshaping our local market business and investing to accelerate the growth of the small commercial business. We're using the insights from our customer-lead teams to create a more customer-centric experience, more confident with these strategic initiatives will help us drive growth, to realize incremental profits and delve the strength of our brands by enhancing the customer experience we offer. Those three things will help us achieve what we know is your principal objective. Building shareholder value. So if you take this one message away today, it is that we are investing to drive sustainable revenue and profit growth. I want to thank you all for staying on the call today. I know it's a lengthy one, but hopefully, you'll believe that it was worth it. And I look forward to discussing our progress again with you in May.

This concludes today's conference call. You may disconnect.