Good morning, and welcome to the Avis Budget Group's Third Quarter Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the meeting 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 Senior Executive Vice President and Chief Financial Officer. Before we discuss our results for the third 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, our most recent Form 10-Q and other SEC filings. If you did not receive a copy of our press release, it is available on our website at ir.avisbudgetgroup.com. We've also provided slides to accompany this morning's conference call, which can be accessed on our website as well. Also, certain non-GAAP financial measures will be discussed on this call, and these measures are reconciled to the GAAP numbers in our press release. 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, and thanks to all of you for joining us. As you no doubt read in our release, we have record third quarter results. And while there are many elements to that performance that we will touch on this morning, the 3 headlines that summarize my view of the quarter are: one, the acquisition of Avis Europe is making a substantial and meaningful contribution on a strategic, economic and operating basis; two, the important initiatives that had been guiding our efforts over the past year are paying meaningful dividends; and three, as fleet costs begin to normalize, pricing becomes key in our outlook for the future. Fundamentally, all of our businesses did well during the quarter despite the uneven economic environment, especially in Europe. But other than a continuing benefit for fleet cost in North America, none of them have what we would call a record setting performance in the 2 most important metrics: price and volume. The encouraging part of this is what it suggests for performance and better economic circumstances. The reassuring part is what we've achieved in less than optimal circumstances. It's hard to characterize the third quarter performance is anything other than solid. We successfully managed the summer peak in what was a period of modest economic growth in North America and challenged economic growth elsewhere. We had record earnings and recorded our highest quarterly adjusted EBITDA margin in our history at 17%. We made progress on many of our strategic initiatives, including meaningful enhancements to the customer experience we offer. We continued to successfully integrate the operations of Avis Europe. We signed a small but noteworthy tuck-in acquisition in Australia and New Zealand, and we generated significant free cash flow and continued to strengthen our balance sheet. I believe these accomplishments…

Thanks, Ron, and good morning, everyone. Today, I'd like to discuss our third quarter results, our fleet, our balance sheet and our outlook. My comments will focus on our results excluding certain items. As Neal mentioned, these results are reconciled through our GAAP numbers in our press release and in the earnings call presentation on our website. This quarter certain items include $128 million noncash income tax benefit resulting from the favorable resolution of an old tax issue. We exclude this benefit when we talk about our third quarter results and our full year expectations. In the third quarter, revenue increased nearly 35% to $2.2 billion primarily due to the acquisition of Avis Europe. Adjusted EBITDA increased at a similar rate to $377 million, the best single quarter in our history. Excluding the acquisition, revenue was up 1% and adjusted EBITDA increased 1% to $275 million. We continued to control our cost carefully. Direct operating costs declined 40 basis points as a percentage of revenue, both including and excluding the acquisition. SG&A expense declined 50 basis points as a percentage of revenue, again, whether you include or exclude the acquisition. Over the last 12 months, we've generated $825 million of adjusted EBITDA, excluding items. Our margin is over 11% and our diluted earnings per share are $2.32. For analysts who calculate EBITDA before financing fees and stock-based compensation, our LTM adjusted EBITDA would be $44 million higher or $869 million. In the third quarter, our North America revenue increased 2%, reflecting 4% growth in volume and 7% growth in high margin ancillary revenues, partially offset by a 3% decline in pricing. Leisure volume increased 6% in the quarter, a significant achievement on top of last year's 11% third quarter growth and leisure pricing declined 4%. Commercial volume increased 2% in…

[Operator Instructions] Our first question comes from Brian Johnson with Barclays.

Just a couple of strategic questions and a quick housekeeping question at the end. In Europe, in the last quarter, you talked about some of the smaller competitors potentially exiting the market due to the depressed macro there, and therefore, just benefiting the larger players. Have you seen any of that play out yet?

I don't know that we've seen a lot of it, Brian. None that I could concretely point to and say that it's happening. But when you look at what's going on, particularly in Spain, the banking industry is probably the worst there of anywhere in Spain and the likelihood that these small competitors are going to get refinancing or get the same amount of refinancing, I think, is going to be small. So I think, you just extrapolate. I think, a lot of what's happening is the fleet that they have, they're running out on a very -- on a much longer string, so they're just hanging onto it and progressively running it at lower rates because it's got 60,000, 70,000, 80,000 kilometers on it. But I do think that over the course of the next year, we'll start to see a fair amount of fallouts. We took a lot of volume out of Spain. If you look at our Spanish volume in Budget, we were up, I think, almost 300% or 400%, and that came from somewhere because I don't think that the market was up that substantially in general, so -- and it didn't come from Avis, and I don't believe it came from Hertz or Europe Cars, so -- I do think we're going to see this happen, but I can't...

Okay, so it just kind of when their financing lines run out?

Yes.

And just to kind of recap what you were saying about 2013, I get the $100 million. The fleet cost per vehicle range you were talking about was what?

Brian, we haven't gone out in -- with a specific number, but $100 million would be somewhere in the -- would work out to be somewhere in the 12% range.

Okay. And then my question is -- it goes to the strategic if. So obviously, as both you and your major competitor have pointed out, price increases are desirable to offset that. Yet your -- one of your major competitors is already very heavy into direct-to-consumer aftermarket remarketing. Another one claims to offset fleet costs by ramping it up. You, of course, have your AutoNation deal. Do you see -- how do you see that dynamic playing it out, and could you see 1 of those 2 other players saying, "Well, okay, I can sell more direct to the consumer. That will offset some of the increase in the auctions, or decrease in the auction prices, therefore, I don't have to follow the price increases you might be putting out."

I don't -- nothing that's in the last few increases that have been posted would suggest that our competitors are anything other than just as aggressive about pricing as we are. The other thing, and obviously I can't speak for Enterprise because they are private, but I think if you go -- all of us are going to have fleet costs that vary from quarter-to-quarter depending on what depreciation adjustments you make and when you make them. But I think if you go back over a 3-year period and you look at sort of a regression line on fleet costs, nobody's fleet costs are all that different. And so I don't -- I mean, I hear the comments about providing lower fleet cost by way of bigger direct-to-consumer sales, and I clearly believe the opportunity is there. But honestly, when I go back over the last 3 years, I don't see the -- I don't see it showing up in sort of a trend line on fleet costs. So I think, we're all going to have cost push on fleet costs next year. So I mean, we all have risk cars, we're all going to sell them in the market and we do believe that residual values are coming down, and they have, so...

Our next question, John Healy with Northcoast Research.

Ron, you gave us way too many things about 2013 for me not to ask this question. So when you kind of run through all the different assumptions in the outline here, is the message that you're trying to give to the investment community is when you look at EBITDA or you look at earnings, assuming that economy allows you to have similar growth trends in 2013 that you had in 2012 and that the pricing environment doesn't take a step back that -- I don't want to put it down to a number, but EBITDA and earnings levels in 2013 shouldn't take a material step down from where we are today, and maybe even have the potential of being similar to maybe slightly up a little bit. Is that the message you're trying to give here?

No, I think the only message we're trying to deliver at this point, John, is that there's pressure on fleet costs. And planning in our business and every business I've ever been in is an interim process. The first cycle comes through and everybody kitchen sinks it. And then you go back and you go -- you then go through a very detailed buildup of what's in the plan and what do they really need and what do they not need. And that's the process we're going through now, and that's why we actually didn't -- we're not prepared to put a forecast or guidance on the table for 2013. But as you know, over the last 6 months, the principal focus in our investor meetings has been fleet costs in Europe. And while we've tried to deal with Europe as plainly and transparent as we can, we felt that we had to talk about fleet costs and, at least, give some indication of where we thought they were going next year. And how all that plays into our forecast for next year, we'll be able to tell you in February. But I'm not trying to tell you that EBITDA will be up, flat or down. Only that fleet costs are going to be up.

Fair enough. Along the lines of fleet costs, and European fleet cost, should that maybe work the other way for you next year? Or is it too early to tell?

John, I think it's too early to tell for a couple of reasons. One, there has been a fair amount of movement in residual values, and so it's early to tell what those are going to look like. But the real -- the bigger issue is that our 2013 fleet purchases in Europe are really going to be taking place over the next several months. It's not on a model year basis there, it's more on a calendar year basis, with negotiations actually going into the first quarter and early part of the spring. So as a result of that, it really is too early to say about 2013 fleet costs in Europe.

Our next question comes from Afua Ahwoi with Goldman Sachs.

Just on Europe, a little bit. The 9% volume growth and the 6% constant currency pricing decline, could you please parse out the impact of Budget to both those numbers? And should we expect a similar spread maybe going forward as you continue to aggressively roll out Budget in Europe?

Sure. The trends -- the 9% up on volume and the 6% decline in pricing were both significantly driven by the expansion of the Budget brand. As we look at Avis, its volume was essentially flat year-over-year and price was down a few points there. So as Ron mentioned, I think that's probably more reflective of the overall trends in the marketplace there, where the larger growth and greater decline in price was very much driven by the growth in Budget. I think the -- with respect to the second part of your question, is that going to continue? I think it will continue but to a more limited extent going forward. The third quarter obviously contains the summer travel season, and that's where the particularly large opportunities for Budget in Spain and Italy reside. And we took advantage of those to grow revenue and to contribute in the third quarter. So rapid growth of Budget will continue to have an impact, but I think it was larger in the third quarter because of the summer leisure demand.

Great. And then just a follow-up. On the alternate channels as a means of selling fleet, I think you mentioned there was a 40% of your risk fleet this quarter. Do you have a target for where that number can go? And I apologize if you said it before but I don't recall.

There's not a specific target in that we'll look to optimize fleet costs in whatever way it makes sense. And if that's more or less use of alternate channels, we're not dogmatic about the number. We're focused on optimizing fleet costs. With that being said, I do think the trend is probably going to be toward increased use of alternate channels, both because of us taking advantage of opportunities we see in direct to dealer and direct-to-consumer, as well as the way demand from dealers and other wholesale buyers is developing.

Our next question comes from Chris Agnew with MKM Partners.

A couple of questions on cash flow. I know it can be a little bit lumpy maybe because of the fleet. Is there anything we need to be aware of in 2012 causing it to be notably higher or lower? And then also, on the use of cash, you made no mention of potential share repurchases, which I think you've mentioned before. Is that a change? And does that mean that you're prioritizing or have identified better acquisition opportunities?

Thanks for those. With respect to the first part, I don't think there's any particular lumpiness, at least, thus far in our cash flows. Our $359 million of free cash flow so far this year is in the range of pretax income -- certainly in the range of pretax income minus the amount of cash taxes that we've had. So we look at it being generally consistent with our -- with what we would look for there. In getting to the expectation of about -- of at least $375 million of free cash flow for the year, we're sort of assuming that we don't have any particular sort of timing lumpiness at the -- right at the end of the year that could swing things a little bit, up or down. But generally speaking, we're not looking for a lot of lumpiness there. I would not -- going to the second and probably more important part of your question, I would not read anything into the fact that we didn't mention share repurchases explicitly. Going forward, we will actively consider the range of alternatives available, including the opportunity to improve our credit profile by reducing our net debt, tuck-in acquisitions and share repurchases.

And then maybe a quick follow-up. What -- do you have any target leverage -- leverage targets?

We do. We continue to have the target of 3x to 4x leverage measured by net corporate debt to LTM-adjusted EBITDA. That number is currently at 2.9x. So we're slightly below the low end of that range. And we're not uncomfortable with that, but our range or target continues to be in the 3x to 4x range.

Chris, this is Ron. Let me just reiterate as well since you had it in your report last night. I mean, I think if our net debt to EBITDA gets down to the 2.5 range, we're going to be interested in share repurchases. We're not pulling back from that at all.

Our next question, Adam Jonas with Morgan Stanley.

Just one question. Going back in time, when you had guided to 3Q DNA per unit in North America of up 4% to 6%, and then it came in basically almost about 1/2 that, up 3%, what did you see that drove that outperformance relative to your expectations for the quarter itself? Was it the broader market holding up a little better or your channel dispositions or just a little extra color there?

I think coming in at 3% versus a range of 4% to 6% is probably a little bit more noise than anything else. We did all right with our vehicle dispositions in the third quarter in total. We had about $8 million of gains, and most of that was in North America. So things went reasonably well for us there even as we saw the market normalize.

Our next question comes from Steve O'Hara with Sidoti & Company. Stephen O'Hara - Sidoti & Company, LLC: I was just wondering about the distribution of revenue from Europe. Avis Europe used to have a presentation about where they kind of outline the distribution of revenue or maybe it was EBITDA, I can't remember. But could you go over that quickly, or maybe include that in some of your slides going forward?

Sure. Are you thinking about the geographic distribution? Stephen O'Hara - Sidoti & Company, LLC: Yes. That's it.

Sure. The 5 largest economies in Europe continue to represent north of 80% of our European revenue. The U.K., Germany, Spain, Italy and France are big countries there. Generally speaking, they're each between about 15% and 25% of our revenue. Some of the Southern European countries, those ones in Mediterranean tend to be a bit more seasonal, so they represent a higher percentage during the third quarter and a lower percentage during the fourth and first quarters. I think, clearly for Avis Europe, that distribution was meaningful in the scope of a larger company. I think, it's somewhat less pragmatic, but we take your point. Stephen O'Hara - Sidoti & Company, LLC: Okay. And then in terms of free cash flow, I know somebody touched on it earlier. But I mean, do you see other smaller kind of tuck-in acquisitions out there? And my assumption would be they'd be more in international space than domestic. Is that fair to say?

I think, that's right. And I think the biggest source of tuck-ins are going to be our licensees, Steve. We have a number of smaller licensees that if they -- if we get synergies out of them and they make good strategic sense, and we're able to leverage our infrastructure, then we're interested. We don't particularly chase them, but rather wait for a licensee to come to us. And we always have half a dozen or so on our development report. It doesn't mean that we'll get them done. But they don't tend to be very big.

Our next question comes from Michael Millman with Millman Research Associates.

Yesterday, Hertz said that October was up 11%. I'm wondering what you were up ,and kind of wondered to what extent there was some price involved there. And kind of related is, as you pointed out, there are a number of potential price increases in the fall because we're still in the fall, and residuals were going down, and yet those price increases did not hold. So playing devil's advocate, what makes you think that there's not going to be 1 or 2 competitors who will use any increases or potential increases as ceilings against you going forward?

With respect to volumes, we didn't comment particularly on October, but we do expect the trends in the fourth quarter in terms of volume to be generally like what we had -- what we've seen so far this year. We don't expect a significant ramp-up generally speaking. We are still trying to figure out what the impacts of Hurricane Sandy will be. Clearly, it's going to give rise to some additional insurance replacement demand, some -- short term, it's going to give rise to some additional demand for one way rentals. And I think some of the normal business and even leisure travel into the Northeast may be reduced over the next couple of weeks. And we're still trying to sort out how that's going to work out, but we're doing everything we can to try to make vehicles available to customers who need them in this area. In terms of the impact of price increases, we generally don't think that price increases of the sort that we're -- that we've been talking about will change industry-wide demand for car rental services. And as a result, I think what you'll see is the normal playing out of increases. We have seen our competitors match many, but -- of our price increases, but not necessarily in all markets. And we'll have to see how that plays out in the future. But I think as Ron mentioned, our strategy is going to be to try to look for opportunities to get some additional price from our customer base in a way that we think makes a lot of sense.

Can you talk about October? What -- did you have something like an 11% increase?

We were in the single digits, consistent with our -- generally consistent with the longer-term trends.

And so why do you think that Hertz was able to do that? Was it a pricing issue that helped them -- not issue, but promotion that helped them?

One of the things you probably -- I mean, you ought to ask Hertz that, but one of the things that I might ask is how much opaque volume did you take and how profitable was it?

Our next question, Yilma Abebe with JPMC. Yilma Abebe - JP Morgan Chase & Co, Research Division: In terms of the $100 million of higher fleet costs next year, how does that break down Europe versus the rest of your book of business?

That was the North America number that we gave you. We weren't talking about globally. Yilma Abebe - JP Morgan Chase & Co, Research Division: And so is there a similar number for the rest of the book of business you can give us on the cost side?

I don't think the order of magnitude will be anywhere near that because there hasn't been the same residual value issues in the rest of the world that there has been here. I mean, this market's benefited significantly from a run-up in used car prices, whereas used car prices are actually soft in Europe as we said, and they're steady in Latin America and Asia Pacific. So there aren't the same sort of dynamics affecting fleet cost. It will really all be about acquisition and mix in those markets.

Our next question, Jordan Hymowitz with Philadelphia Financial.

First, a couple of things on fleet cost. You said the Manheim down 3.6%. So are you assuming like 1.16% Manheim next year? I just want to know what the starting point is you're using, the current period end or the average of the year.

Jordan, to be clear, I was -- the 3-point decline I was referring to is the difference between -- I believe it's the 121-ish where the index is right now, and the year-to-date average in the 125 -- 124, 125 range.

Okay. So you're not assuming it's down 3.5% next year?

No, no. To be very clear, I was talking about where it is today, call it the most recent reading compared to the year-to-date average.

And in the $100 million to $120 million, are you assuming it stays at that $121 million or are you assuming some depreciation for next year?

Effectively, the assumption there is that the market would continue to look generally the way it looks now, not the way it has looked on average over the course of the year.

Our final question comes from John Healy with Northcoast Research.

Just a quick follow-up. I believe in the fourth quarter last year, if memory serves me right, you had a big step-up in SG&A to kind of lay the groundwork for 2012. Is there anything we should be thinking about the SG&A trends in this fourth quarter versus last fourth quarter, or maybe how we go into next year?

That's right, John. I think, if anything, we will -- that creates a little bit of an easier comp for us on that line. We'll probably look for that to come down a bit year-over-year.

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

Before we close, I think it's important to reiterate what I believe are the key points from today's call. First, we had a strong quarter. We're well on the way towards having our best year ever. Second, the strategic initiatives we've been talking about for some time now continue to position us for growth above what we are seeing in the overall market. Third, despite softness in the European economy, our efforts to streamline our operations, put the customer at the heart of everything we do, build Budget into a major competitor throughout Europe and expand our relationships with corporate clients, put us in an excellent position to benefit when the European economy ultimately turns around. And fourth, we've substantially lowered our vehicle borrowing costs, which is not only helping us this year but will benefit us in years to come. And then use a substantial portion of our free cash flow generation this year to reduce debt and potential share dilution. And finally, I hope it is abundantly clear to you from our comments today that we're not satisfied with pricing, and we're doing what we can to improve it, especially in the face of potential fleet cost increases next year. David and I, and Neal, will be presenting in a number of conferences over the course of this quarter, and we hope to see many of you during our travels. With that, I want to thank you for your time today.

This concludes today's conference call. You may disconnect at this time.