Good morning, and welcome to the Avis Budget Group First 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 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 first quarter results, 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 in the current economic environment, 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 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 in 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.

Thank you, Neal, and good morning. Well, we had a busy but successful quarter. Results came in a little better than expected, highlighted by positive demand in most markets, challenging economic conditions in Europe, and year-over-year pricing gains in North America that helped to offset increased fleet costs. We also repurchased an additional $50 million of our outstanding convertible debt, reducing our diluted share count by more than 3 million shares. To date, we've reduced our diluted share count by over 16 million shares or 13%, through our convertible debt repurchases. And we announced and completed the acquisition of Zipcar, which makes us the leading provider of car sharing services. But more about Zip in a moment. It should go without saying that the one highlight that was particularly encouraging was the positive pricing trends we discussed in our last earnings call. The trends we talked about in February continued throughout the balance of the quarter. To put a finer point on it, North America pricing increased 4% year-over-year, and we got there with Leisure pricing up 8% and Commercial pricing, flat. So it's even more impressive when you consider the roughly 60% of our Commercial volume that is contracted business, had pricing that was down 1% year-over-year. I think the price increases we experienced in the quarter reflect several factors: First, we were aggressive in our approach to pricing, leading rate increases on an 6 different occasions in the first quarter; second, fleet levels industry-wide appeared to be generally in line with demand in North America; third, with Hertz's acquisition of Dollar Thrifty, the basis of competition of our industry has become better balanced between service and price than it has been in recent years; and fourth, our strategic initiatives to grow volumes in more profitable segments and to…

Thanks, Ron, and good morning, everyone. Today I'd like to discuss our first quarter results, fleet costs, our performance excellence process improvement initiative, 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. The first quarter marked our 11th consecutive quarter of year-over-year revenue growth, with our top line increasing 4% to $1.7 billion, principally as a result of higher volume and improved year-over-year pricing in North America. Adjusted EBITDA declined to $93 million, primarily due to the difficult operating environment in Europe, and our ongoing efforts to reposition our Truck Rental business. Trailing 12 months adjusted EBITDA now stands at $814 million. For those analysts who calculate EBITDA before deferred financing fees and stock-based compensation, our trailing 12-month adjusted EBITDA would be $39 million higher, or more than $850 million. In the quarter, revenue in our North America segment increased 6%, driven by 4% growth in pricing and 1% growth in volume. I should also note that the first quarter had 1 less day compared to the prior year, due to 2012 being a leap year, and this had a negative impact on volume comparisons of just over 1 point. The current contributed $14 million to revenue and $1 million to adjusted EBITDA in the first quarter. Excluding Zipcar, Leisure pricing increased 8% in the quarter, the strongest year-over-year improvement since the recession, while Leisure rental days were unchanged. As a reminder, Leisure rental volume increased 13% in first quarter 2012, so this year's volume comparison was very difficult. We also saw good growth in our Commercial business in the quarter, with volume up 3% and pricing unchanged. Growth…

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

I wanted to ask a little bit about the International business. It sounded like in the quarter, there was probably some duplicative cost associated with getting the company with where you want it to be longer term, and I was wondering if you could give us maybe some thoughts in terms of what the headwind was there, as well as how that might kind of fallout of the P&L, as we move throughout the year and into next year?

It's Ron. The real headwind, as you know, is it's not quite as easy to take people out in Europe as it is here. You have to file social plans with the worker's councils and they have to be voted on, approved, and so those take a little more time than you would otherwise expect. In the meantime, we felt it necessary to staff up the functions and move them to the shared service center. And so what you have is, sort of an element of caution, in the sense that we actually do want some of these people around to make sure that the transition to Budapest goes well, and an element of just the sociopolitical issues that are in Europe that we don't have here. And so that causes the results and the ability to take people out quite as quickly as you would like to not be there.

Great. And then, kind of a -- when I heard you made some comments about the U.S. business and talked about the International business, I couldn't help but think about what you've done with the business domestically over the last few years, in terms of walking away from low margin or unprofitable business. When you think about the European business, do you see the opportunities there? I know you mentioned the insurance replacement business you walked away from, but is there that same type of philosophy that once you get things kind of situated over there, you might look to purge some of the business you're doing there, and that would be overall accretive to the margins of the business?

Yes, there's no question that, that's on the list of things to do, and first up was the insurance replacement business, predominantly in the U.K. And frankly, I think as we said in the script, that was part of the volume flatness in Q1. I think as we get better at integrating sort of our by channel, by market profitability tool, and understanding exactly how profitable certain channels are and certain customers are in that marketplace, we'll do exactly the same thing there that we did here. It's a little more challenging, just because the volume there is very peaky. And you can't always time your fleet to correspond exactly to the peakiness. So in the shoulder seasons, where you probably do have fleet, you'll take some business that may not be as profitable as you like, but actually contributes to the carry cost of the fleet. So the short answer is, yes, it's a little more complicated, but we've already started and as I said in the script, you see it in our flat volume for the quarter.

Our next question, Chris Agnew with MKM Partners.

First question, how important is June relative to April and May in terms of volume for the second quarter? And is the second quarter more of a Commercial or a Leisure quarter, in terms of demand?

Well, it's really a tale of 2 time periods. The last 2 to 3 weeks of June are important. That's when you get both Commercial and you start to see the ramp up in Leisure volume. So as we start to book June reservations, we'll start to see where pricing's going to be come in. We'll have a good sense of where pricing's going to come in for the summer by what gets booked in the last 2 or 3 weeks of June. For the most part, April and May are pure Commercial quarters. Obviously, there's leisure volume, but the skew is more heavily towards Commercial than it is Leisure.

Great. And a follow up --

Chris, it's David. June rental days end up being probably about 14% higher than what we see in April. So June is a bigger month, but not hugely so in the scheme of things.

Great. And then a follow-up question on free cash flow. First of all, presumably free cash flow's not going to run smoothly through the year. So is there, in terms of expectation, the flow, quarter by quarter? And I'm not looking for specific guidance, but do we expect cash flow -- the free cash flow to be more back-end loaded, and potentially negative in the second quarter as you're fleeting up? And then also, can you give us some indication, the size of tuck-ins? I mean is -- are these typically $5 million to $10 million transactions, and what's the sort of largest tuck-in that you would conceivably look at?

Sure, Chris. I do expect that our free cash flow this year will be back-end loaded. Over the course of the year, we would generally expect pretax income to be a proxy for free cash flow. But the timing of the cash flow may even trail 1 month or 2 behind the pretax income. So you know our split is a pretax income, and if you skew that backward even a couple months or so, it is probably a good way to estimate the timing of free cash flow. And clearly, that pushes a fair amount of it into the August to November, August to December period. And then for me, a tuck-in perspective, the acquisition of the Budget licensee in Belgium and Luxembourg was about a EUR 3 million transaction, excluding the fleet. The Apex transaction was close to the $30 million range, excluding fleet. And as a result, I certainly think tuck-in acquisitions could fall in the range from very small, up to the $30 million, $50 million range, perhaps a bit larger.

Our next question, Afua Ahwoi with Goldman Sachs.

I have 2 questions. First, I'm sorry if I missed this, but you're -- I think you mentioned that you expect the back half volume growth in North America to be similar to sort of the run rate we've seen historically, which would suggest an acceleration from the 1Q level. So maybe, you can talk a little bit about why the 1Q was a little below what you historically run that. And then separately, on Zipcar, I noticed that the membership growth of 13.5% I believe by the end of the quarter was a little -- was below the mid-teens range the company had been running at as a standalone. So maybe you can address some of the dynamics going on in that business?

Well, let me deal with the volume first. In the first quarter, we took about 500,000 fewer opaque rentals than we did last year, which amounted to about 3% of our total volume during the quarter. We were perfectly fine with that, because you make little, if any money on the opaque rentals. And as you've heard me say before, I don't think they're particularly good for our brands. So that was really the sum and substance of what could be softer volume growth than maybe the rest of the industry in the first quarter. I do think volume will increase as the year goes on. We pay careful attention to the airline capacity increases going forward. And in -- not in all areas of the country, but in most of the areas of the country, there are capacity increases in the 1% to 2% range, and we tend to get a multiple of that in terms of volume. So I think as we said, we think it's going to be -- growth is going to be consistent with last year, and some of the dynamic of who is going to be where pricing comes in. If we see an opportunity to trade price for volume, we're likely to take advantage of it. But I think it all depends on how things unfold and -- over the course of the summer.

Then on the Zipcar front, we did have 12% member growth from the end of first quarter 2012 to the end of the first quarter of 2013, which was generally consistent with our expectations for the business. With the transaction just having closed on March 14, none of the membership-related synergies that we expect to bring to the table had any effect on the first quarter numbers. So our ability to improve member satisfaction and reduce member churn by having more vehicles available on weekends is something that had no effect in the first quarter, and will ramp up over time. And we think actions we're taking along those lines will be helpful to membership retention, and therefore, to membership growth going forward. But I would look at the first quarter number of up 12% as being consistent with our expectations on a standalone basis for the business, but not yet being reflective of things we can do to help membership retention and growth.

Our next question, Adam Jonas with Morgan Stanley.

First, I was wondering if you could comment on, as you were raising your rental rates 6x during the past quarter, what was the reaction you were seeing from some of your competitors? Can you just give general comments there? And then also, could you comment on the tightness of the fleets from an industry perspective, where you kind of see that heading into Q2?

Well, I think that over the course of the first quarter, with all the price increases that we took, the more consistent best [ph] follower was the Enterprise complex. But Hertz was there on most of them. It was a little choppier. I think what we saw was that Hertz was very quick to follow on weekly rates and a little slower on daily and weekend. And Enterprise was much quicker across-the-board in all 3 segments, with all 3 brands. I think in the first quarter, fleet was fairly tight. It was in line with demand. I don't think anybody had any fleet imbalances. And I think, generally looking forward to the second quarter, the -- everybody is going to be slightly over-fleeted, because you start to ramp up your fleet in the middle of May with the deliveries to meet the summer peak, and that does create some imbalances that put some pressure on pricing. But what encourages me is the fact that, as we look towards May and June, our pricing that we're holding, the reservations we're holding is up in the upper end of the 1% to 2% range. So it -- you don't ever want to declare victory prematurely, but it does seem like there is more discipline, particularly in a quarter where there's a modest amount of over-fleeting. So we're -- we continue to be encouraged by that.

And Ron, do you think that what's driving that is just a shared industry view that fleet costs, like -- it's not a matter of whether they go down, but -- sorry, whether they rise, but kind of how much they rise? And it's just a bit more of a collective kind of sense for that to offset the fleet cost headwinds?

Yes, I think there's no question that everybody, last year, had a view that fleet costs were going to regress to the mean, and that means that residual values are going to drop and fleet costs were going to go up. And nobody likes to give back the margin that they had, and so with increasing costs, I think everybody decided that it was time that this industry got some price. And I think that, that was what occasion did. I mean historically, the industry has always gotten price when costs have risen. And so this quarter hasn't been any exception. But it does feel like now we've had, call it 4 months or 5 months of consistent price increases, increasing price, and hopefully that's a harbinger of good things to come.

Our next question, Michael Millman with Millman Research Associates.

Regarding the U.S. market, with leisure up 8%, what other things you can do to increase your Leisure volume? Are tuck-ins in the U.S. a possibility? And then, I think last call, you indicated that should you be optimistic on the pricing, there was an opportunity to raise your guidance, and just following on what you just said seems certainly to show some optimism, and so could you talk about raising your guidance, or why you didn't?

Sure. With respect to leisure volume and the growth there, I think we're in -- in achieving the growth that we did in the first quarter, we continue to optimize the channels that we're using to drive, not only volume but also profitable volume, whether it's through the marketing relationships and partnerships that we have, how we use various travel agencies, and then the intense focus on driving inbound leisure business and small business. They are all activities that I think we'll continue to pursue and can help us continue to drive volume and pricing on the leisure side. I think in addition, we've looked at opaque rentals carefully over time, and we continue to curtail our use of them. So our reported volume in the first quarter was certainly a few points weaker than it would have been, had we not stepped away to some extent from opaque rentals. We think it's a profit optimizing and profit maximizing decision to do that, and that's reflected in our numbers as well. I think the, we're -- we clearly are encouraged by the strength we're seeing on the pricing front for all the reasons Ron discussed. At this point in time, we felt it was most appropriate to keep our guidance range, which we know it's -- is relatively wide, intact rather than adjusting it in any way.

Our final question comes from Brian Johnson with Barclays.

Yes, a couple of questions, both on North America. First, the Manheim risk rental auction actually trended more positive in this quarter. Did you see that in any of your disposals, and did you just not, just depreciation schedules accordingly? And then my second question will be on corporate pricing.

I think, as you went through the quarter, our disposals actually did trend positive from January to February to March. And in April, they've actually tailed off a little bit. So -- but our experience, I think, was consistent with the direction of the Manheim Index. Mix plays an important part and -- in how accurately you track to that index and so we don't always sell the same mix of cars that Manheim measures, but I think generally, Brian, we did track the index directionally.

Okay. And second, it's a very impressive corporate strategy you laid out. It seemed to address some of the weak points that led to, frankly, your computer-driven Leisure algorithms doing a far better job of pricing than the human being sitting down on a poker table with corporate procurement officers. When did those go to into effect? Have you been through a few renewal discussions with corporate clients? And what's your sense of how it's going? And similar to the question earlier, kind of, are your competitors paying attention to take -- being paid for the value you add to corporate accounts?

Yes, I think we're in early innings in this strategy. We've been talking about it now for a long time, and I think it's -- we started acting on it in the first quarter. I think as I said in the script, with 60 of the 100 renewals that we've had are at the same or better pricing in the month of March. Whether the competitors are going to follow us, I don't know. You'll have to ask them. We're going to do what we think is in the best interest of our business. And I think part of it does come down to where you have accounts that -- where you're the incumbent and you're doing a great job, service wise, because you're not making any money, you just have to go in and get some spine and ask for a rate increase that delivers a profitable account. And in those accounts where your competitor's doing a great job, and a procurement guy asks you to come in and make a bid, you don't really want to be a stocking horse because all it does is take pricing down across the entire industry. And so, I think that we're going to think pretty carefully about how we participate in RFPs, and in those accounts, where we're not making much money, how we go about improving our profitability. But we'll see over the course of this year, how well we execute on this strategy. But you can't be minus 2% compounded for 4 years, and look forward and think that's a great business strategy. And so we're going to do something about it.

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

Okay. Before we say goodbye, what I'd like to do is reiterate what I believe are the key points from today's call: One, the North America pricing environment has improved considerably; two, our strategic initiatives continue to drive our organic results; three, we're doing all the right things to position our European operations to achieve higher levels of profitability once the economy settles; and four, the integration of Zipcar is now moving into high gear. As I look forward, not only am I optimistic about what we can achieve this year, I'm also very optimistic about the opportunities that lay ahead of us over the next few years. And I'm excited about the pace at which our colleagues are moving to capture these opportunities. With that, let me thank you for your time and your interest in our company, and we'll see you over the course of the quarter.

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