Good morning and welcome to the Avis Budget Group Second Quarter Earnings Conference Call. Today's call is being recorded. 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 second 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, our Form 10-K, and in 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 a reference to our results, excluding certain items which are non-GAAP financial measures, and are reconciled to the 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. Needless to say, we had a very strong, in fact record, second quarter, with revenue up 9%, adjusted EBITDA of 95% and margins up 600 basis points, excluding certain items. Our domestic rental volumes increased significantly, growing 9% on airport and 7% in local markets. We reported a 2% decline in domestic pricing, but that primarily reflected a somewhat exaggerated seasonal overfleeting. We and likely the rest of the industry held more cars than otherwise would have been the case due to concerns about potential supply disruptions following the earthquake in Japan. Fortunately, supply problems never really materialized and pricing started to strengthen in late June as the summer season kicked off. To be sure, our results were bolstered by the strength of the domestic used car market, which remained at record levels for most of the quarter. Frankly, our results could have been even stronger were it not for the investments we've been making in our strategic initiatives to drive brand awareness, increase our presence in faster-growing and more profitable segments of our industry, and improve our long-term competitive position, but in a somewhat cyclical industry like ours, we believe this is absolutely the right time to be making these investments. While our strong quarter and year-to-date results certainly merit attention, I'd actually like to focus this morning on our strategic investments: both our pending acquisition of Avis Europe, as well as some of the initiatives we've been executing against to strengthen our existing business. I'll also comment on our outlook before I turn it over to David to discuss our financials. As we mentioned in June, we have agreed to acquire Avis Europe, an independently, publicly traded company operating in Avis and Budget brands across Europe, the Middle East,…

Thanks, Ron, and good morning, everyone. Today, I'd like to discuss our second quarter results, our fleet, our investing in technology and our balance sheet. I'll also 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 second quarter, revenue increased 9% to more than $1.4 billion. Adjusted EBITDA nearly doubled to $191 million, and margins expanded 600 basis points to 13.5%. Our Domestic and Truck Rental segments once again reported growth in adjusted EBITDA, reflecting strong rental volumes and the benefits of our company-wide cost reduction and productivity efforts, while our International segment was able to repeat the record adjusted EBITDA performance of last year, despite natural disasters that impacted demand in Australia and New Zealand, 2 of our largest international markets. While our reported direct operating costs increased as a percentage of revenue, they actually declined as a percentage of revenue if you exclude the nearly $7 million of hail damage we incurred in the quarter and the margin effects of higher gasoline costs, foreign currency movements and lower pricing. SG&A expenses increased 18% in the quarter, which was in line with the first quarter, and reflected our strategic decision to invest in our brands through incremental advertising, as well as co-marketing partnerships with airlines and others. Net income increased to $79 million, our best second quarter results as a standalone public company, and diluted earnings were $0.63 per share. Over the last 12 months, our adjusted EBITDA is $547 million, and for those investors and analysts who compare companies' EBITDA excluding deferred financing fees and stock-based compensation, our trailing 12-month EBITDA with those adjustments is $587 million.…

[Operator Instructions] Our first question comes from Fred Lowrance with Avondale.

Just a couple of quick questions. First one, obviously fleet costs way down, a big Japan impact in there, wonder if there's any way that you can quantify what that Japan impact was of the 30% drop, what piece of that was Japan? And as you look at the used car market, when do you think the -- I know we've peaked with the Japan-related issues but when do you think Japan will completely be washed out of the used car numbers?

Fred, it's Ron. I think it's hard to separate out one impact from another. I think there's, as we said in our comments, I think there's a variety of things that sort of came together in the second quarter to affect the used car prices, and I think that Japan just exaggerated it. I think when you look at the number of cars that we sold and the average gain that we engendered, it's probably $1,500 to $2,000 a car over what we were generating a year ago or even in the first quarter, so that may be one way to look at it. I think the longer-term issues that David cited reduced SAR [ph] and off-lease cars and extending the lives of rental cars are going to continue to impact the used car values. We think they'll be strong through the end of the year and probably into 2012, but I would say in middle of June, we started to see some pushback from dealers and prices dropped and gains dropped somewhat, but I would say above-normal gains actually did persist through July. But I think -- a lot of how quickly they normalize will depend on the de-fleeting decisions that get made by us and our competitors in terms of timing the number of cars in September, so I'm not sure it's easy to quantify with a single-point estimate, but certainly that's going to have an impact on where values go.

That's fine. And then just quickly, when I look at your operating cost, obviously that creeped up a little bit, was a little bit of an offset on the margin side and you identified foreign exchange and increased marketing. Any way that you can quantify what those individual impacts were? I mean specifically, I'm kind of thinking about the impact of just simply having to hold more cars for longer. That's gone now. That headwind should be gone. As foreign exchange headwinds subside, when we start lapping the same kind of exchange rates that we've been seeing in recent months, how much we could expect to see operating costs improve?

Well, I think there are a couple of things we can guide you at least. I mean, as David pointed out, there was $7 million dollars of hail costs in the M&D line that normally wouldn't have been there. So that's one item. Two, if you look at our fleet growth versus our rental day growth, there's about a 3-point gap, so you can quantify the impact of lower utilization. I mean there's always maybe 1-point, 1.5-point gap between fleet growth and rental day volume, but that extra 1.5-point utilization you can quantify that using the chart that we have in one of our presentations. I think it's about $3 million a quarter impact per point. And in terms of the marketing costs, I mean, what I would say is that our SG&A costs, while we've added some people, maybe our SG&A costs, if you take out the incremental marketing we're spending, are up 5% instead of 2% or 3%, which would normally be the case, so anything over that is going to be marketing money that we've spent. Now what I would say about marketing money, I think, just to keep in the back of your mind, the money we're spending on Budget, I kind of view it like online marketing, it's driving business, it has an ROI, and it's money that I think it's fully paid for. The money that we're spending on Avis is really about brand awareness and building the brand. We hadn't done any brand advertising, I think as I pointed out last quarter, in 4 or 5 years. So that's money that you don't have to spend every year, and while I do believe it's driving incremental volume, I can't tie it directly to volume like we can with the Budget advertising.

Our next question comes from Neil Portus with Goldman Sachs.

On your virtual or car sharing technology, where are those 5,000 car -- the existing 5,000 cars located now, and where do you see that number going by next spring? Could you also detail maybe a little bit more of your long-term vision for that segment and how you plan to promote it so more people know about it?

Well, a couple of things. In terms of where those 5,000 cars are now, they're principally in the Northwestern United States. We have some other customers in the Northeast that are using it, but it's on a much smaller scale. The bulk of the cars are in the Northwestern United States. When we say it'll grow significantly, I'm reluctant to put a number on it, but it will clearly be a multiple of the 5,000. It's -- I would say if it's 3x, 4x, 5x the 5,000 that's not out of bounds in terms of the range that -- it all depends on how quickly we can get the technology manufactured. It's very easy to install, it's a 15-minute job, so it's not a -- that isn't any kind of hangup, it's all about manufacturing. The long-term, or at least the near-term, the medium-term promotion of this is going to be with our corporate accounts. We think this is a real opportunity to expand what you might loosely call the car share market by capturing incremental business. Longer-term, I think it allows us to build our local market presence without having to invest in infrastructure. But I think near term, you should look for us to be driving this business through our -- the corporate side or the commercial side of our business.

Okay. I wanted to clarify one thing. Did you -- on fleet industry fleet sizes, do you think they've right-sized this quarter or is there still some excess fleets out there?

No, I think they're by and large right-sized. I think we probably have a little more fleet than everybody else. I feel like we're getting the last [ph] rental at the airport, which is always a good thing, and the way you measure it is you look at when your competitors go on LOR restrictions and who goes first and who goes last, and we seem to be in a lot of markets the last one to put LOR restrictions in place over the summer. But I would say for the most part, I think the industry has right-sized the fleet.

Maybe just one more. On the cost savings, you increased your range by $5 million. What are some of the areas that those extra savings come from?

The -- we did increase the range of savings, and really, we've seen them in a number of areas, including yield management activities throughout our operation and just an ability to roll out additional cost savings projects throughout our operations at a faster rate than we've anticipated. So we just feel good about how they've gone, but there haven't been any significant changes in the nature of those cost savings. They continue to be driven primarily by productivity improvements in our field operations.

Our next question comes from John Healy with Northcoast Research.

David, I want to ask a little bit more about your thought process on vehicle depreciation expense. Can you give us some color on kind of what your depreciating vehicles do? What sort of view of the used car market you have? I don't know if you can compare it to a month that we've seen over the last 6 to 12 months the -- what -- the used car market in that time of the year. I'm just trying to get comfortable with the cars that are in your fleet today and what you're assuming in these market you're depreciating those cars to.

John, thanks. It's a good question, particularly in light of the significant gains we had in the second quarter. The background there, I think, is helpful and that is following the earthquake in Japan, it was -- we started to see an impact in the used car market. It was really hard for us to estimate both how significant an impact that would have on values, as well as how prolonged that impact would be. And I would say the piece that's been somewhat surprising to us and helped result in the gains that we had is that the impact ended up being both more significant, but particularly, more prolonged than we'd anticipated. And as a result, I think we were a little bit slower to reduce our depreciation rates than if we had known in February or March that the impact of the earthquake was going to last as long as it has throughout the second quarter, really into July as well. With that being said, we do look to adjust our depreciation rates to have little or no gain on this position. And so if we looked at the cars in our fleet, our fleet at this point is primarily model year 2011 cars, that we'll be disposing of over the next 12 to 15 months. And as we mentioned on the call, we don't expect the used car market to be at a quite the same record levels that it was at throughout most of the second quarter. And as a result, we're assuming more normalized depreciation rates and a more normalized used car market than what we've seen on the model year 2010s. I guess, it's a long way of saying we're depreciating the cars based on where we expect to sell them, not -- and usually, there's not that much of a difference between where we expect to sell cars going forward, but where we sold them in the recent past. But in this environment, given that we think that the second quarter, if that were somewhat anomalous, we do have a difference between what we're assuming going forward and where we've been in the recent past.

Is it safe to assume that the type of normalized used car market that you're establishing in your kind of depreciation schedules is like what we saw maybe in December or January, February than in prior months? Or I guess, I'm just trying to understand kind of what really is that view? I know you guys sort of moderate them. I'm just -- I don't know if you can put it in terms of the Manheim Index number, or maybe even some months that we've seen in the prior periods?

John, I think December, January, February is probably the right proxy. We don't find it that helpful to try to translate our numbers into a precise Manheim Index number for a variety of reasons. But that time period is probably the best proxy for what the market will look like as it normalizes. The other point that we have to consider is as we move into late August, in the beginning of September, as the model year calendar flips over as well. And so there will be the normal calendar effects and seasonality effects that we see in used car dispositions. But even with that, I think December to February is a decent proxy.

Our next question, Emmanuel Rosner with Barclays Capital.

I wanted to ask you about your local markets, gross initiative. Would you be able to size the opportunity for us, maybe in terms of what sort of revenues or market share of that market you have currently? And where your goal is to take it over time?

Sure, Emmanuel. The local market is about a $10 billion market. And we generally have been doing about $750 million of revenue in that space. So we think we have about 7% to 8% share or so. And as a result, we have a significantly smaller presence there than we have in our on airport locations, where we're responsible for about 3 of every 10 rentals. The local market is attractive to us for a number of reasons, it's a relatively faster growing part of the car-rental market. And the opportunity we see is that half of our customers, customers who use us on airport, don't use us off airport. And as a result, the opportunity for us is to really improve the customer retention or share of wallet associated with those customers. At the same time, as Ron mentioned, we have the opportunity to dual brands like locations, which gives us the benefit of operating leverage as we move more transactions through the same infrastructure. But the growth opportunity comes from retaining our on-airport customers and our commercial customers when they have local market needs as well.

So you're just saying half of Avis customers right now don't use the off-airport, is the goal to keep them all? Are you trying to double your revenues overtime, is that a realistic goal?

I think we certainly, we'd like to keep them all, whether it translates into -- I think, it's probably unrealistic to assume it translates into doubling the revenues. But there's certainly is a significant opportunity here. And the good news is that our share of non-insurance replacement business in the local market is significantly higher were at significantly less than 8% in the insurance replacement business, and the area that where we've been focused on, which is non-insurance replacement portion of local markets, which we think tend to be a bit higher margin. We're closer to 20% to 25% share there.

Our next question, Chris Agnew with MKM Partners.

I wonder if you could clarify, I think you made comments on a stable pricing going into July. Is that month-on-month, quarter-on-quarter, year-on-year? I guess, I'm trying to think about those comments you've got easier comps this year for pricing, I think you're down 3.5% last year. And you described your fleet levels sort of currently being tight, and volume trends improving a little bit in August. So I mean, I would assume that's very positive. But we had your competitor yesterday describing the price environment this summer as soft, which leaves me a little bit confused and that's why hopefully, clarify the stable pricing comments.

Thanks, Chris. For starters, the comment about stable pricing is a year-over-year comment. We're looking at numbers that are relatively stable to year-over-year. And that translates into sort of a month-over-month, actually being up due to the seasonality of the business, the seasonality of pricing, where summer pricing is typically higher than spring pricing. But stable referred to being -- referred to year-over-year. I think, we were also a little bit surprised by some of the comments we heard yesterday, because we've been -- we felt that the pricing environment has been quite okay going into the summer. I don't think it's necessarily due to comps in one direction or another. But we've been able to achieve relatively stable pricing and we're surprised by our competitors seeing something a little bit different, which typically, isn't the case in our industry as you know. So I can't really reconcile between the 2 at this point other than to tell you, you're right to know a little bit of a disconnect in how we're seeing things right now.

And as a follow-up, I mean what's the level of visibility you have at the moment? Is it any different from what you'd had previously? What are your corporate customers telling you in terms of their spending intentions? And if -- would it be right to assume the fleets are relatively tight and there's a little bit demand strengthening, but that we could maybe be optimistic directionally on pricing?

I don't think our visibility has changed from where we'd typically be at this time of year. What we do have the advantage of it being early August, is that we've seen how July has played out, and we've taken a fair amount of our bookings for the summer travel season as a whole, including the next 3 or so weeks. So I think our visibility on the summer is reasonably good. I think as we look at the September through mid-November periods, that tends to be a heavier commercial season. And I think the best proxy we have is sort of where commercial volumes had been recently, with second quarter commercial volume being up around 4%, not quite as strong as it's been on the leisure side. And I don't see anything -- I don't want to project, but I also don't see any trends that are significantly different than what we've seen over the last several months.

Our next question, Steve O'Hara with Sidoti and Company. Stephen O'Hara - Sidoti & Company, LLC: I've had some connectivity issues here. Could you just repeat what the gain was for the quarter on the vehicles?

Sure. In Domestic Car Rental, the gain on sale was $100 million. Stephen O'Hara - Sidoti & Company, LLC: Okay. $100 million. And then just kind of switching gears a little bit. You guys have kind of talked about prepaid rentals, and can you kind of tell me where that stands? And what you think of that push going forward?

Well, we continue to roll out prepaid rentals. We launched Budget I think about a year ago, and Avis came online about 6 months ago. And I don't think it's gotten to a point where I would say it's a steady state levels, but it grows every month, where yield managing the amount of discount that we give for prepaid, it can range from 5% to 15%, depending on when you book and what time of the year, not unlike the airline model. But we continue to believe it has an important place in the pricing hierarchy of car rental. And so we're encouraged by the growth that it's had and by what it does in terms of allowing us to plan our fleet better.

We have time for one more question, Emily Shanks with Barclays Capital.

I had a question around the announcement related to the credit facility amendment. And specifically, I was curious. One, are you going to be seeking incremental financing in the unsecured markets? And then two, will the Avis European fleet actually be partially financed on balance sheet, still part of that security package?

Good morning, Emily. The answer to both questions is yes. We will be looking as Ron mentioned, at both the term loan and the high-yield market as potential sources of financing for the Avis Europe transaction. And at this point, we would also expect that the European fleet would initially be financed largely on the balance sheet in many ways, similar to the way that the Avis Europe balance sheet currently works.

Okay. And then just to be clear, that incremental -- excuse me, the unsecured market financing potentials, would that be above and beyond the $900 million incremental term loans?

The term loan amount isn't going to be that much. I think as we look at the financing needs, is they're likely to be split, roughly 50-50 between term loan and high yield.

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

Thanks. Just a recap, we feel great about our position. Our strategic initiatives are profitability accelerating our revenue growth. Investments we're making are positioning us to compete for the longer-term. And we are enthusiastically planning for the close of the Avis Europe acquisition. David, Neal and I will be presenting at several conferences over the next 3 months. We do look forward to seeing many of you with these. With that, we thank you for your time today and look forward to speaking with you either at the conferences or on our call in November. Thanks again.

This concludes today's conference. You may disconnect.