Good morning, and welcome to the Avis Budget Group Fourth 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, Kimberly. 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 fourth quarter and full year results, I would like to remind everyone that the company will be discussing forward-looking information that involves risks, uncertainties and assumptions that could cause actual results to differ materially from the forward-looking information. Important risks, assumptions and other factors that could cause future results to differ materially from those expressed in the forward-looking statements are specified in the company's earnings release and other periodic filings with the SEC which are available on the Investor Relations section of our website at avisbudgetgroup.com. We have also provided slides to accompany this morning's conference call, which can be accessed on our website as well. Our comments will focus on our results, excluding certain items and other non-GAAP financial measures that are reconciled to our GAAP numbers in our press release and in the earnings call presentation on our website. 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. Before we get started, I'm going to apologize upfront for the raspiness of my voice and, if I suddenly burst into coughing, I seem to be suffering from the lingering effects of a mild flu and, hopefully, I'll get through it without interrupting your listening to our script here, but nonetheless. So we ended 2013 on a strong note and accomplished much from both a financial and strategic perspective. We delivered our second highest annual adjusted EBITDA ever, second only because of the unusually low fleet costs we had in 2012. Last year's results reflect the continued benefit from executing against the strategic plan that we laid out a few years ago, benefits that drove volume growth in our car rental operations globally and grew revenue per day in our North American and Truck Rental segments. It also guided our acquisitions of Zipcar, Payless and several of our Budget licensees around the world. And our strategic plan continues to drive our actions today, actions that focus our efforts on faster growing and more profitable segments and channels, actions that expand our global footprint by investing in higher growth markets such as India and Brazil, actions that improve the service we offer to our customers to drive loyalty and actions that are causing us to achieve efficiencies throughout the organization. And those efforts were no more evident than on our fourth quarter results. To put a finer point on it, with normalization of fleet costs, our fourth quarter results highlight the positive affect our strategies are having as they help us grow revenue in North America and international segments, expand our margins and deliver double-digit profit growth. In North America, we grew rental revenue both on- and off-airport in the quarter, increased leisure pricing year-over-year…

Thanks, Ron. In the spirit of the show must go on, that was a pretty heroic effort. Good morning, everyone. Today, I'd like to discuss our full year and fourth quarter results, our fleet costs and our integration of Zipcar, as well as our balance sheet and our 2014 outlook. As Neal mentioned, my comments will focus on our results, excluding certain items. These results are reconciled through our GAAP numbers in our press release and in the earnings call presentation on our website. The fourth quarter marked our 14th consecutive quarter of year-over-year revenue growth and our highest earnings for a fourth quarter ever. Revenue grew 9% to $1.8 billion, primarily due to higher rental volumes and the acquisitions of Zipcar and Payless. Adjusted EBITDA increased 46% to $114 million and margins expanded by 160 basis points, principally as a result of higher volume, strong cost controls and incremental synergies in our European operations. For the full year, revenue grew 8% to $7.9 billion and adjusted EBITDA declined 8% to $769 million, as North American fleet costs normalized throughout the year. For those analysts who calculate EBITDA before deferred financing fees and stock-based compensation, our 2013 adjusted EBITDA would be $45 million higher or $814 million. Our full year tax rate was 38% and our diluted earnings per share were $2.20. Revenue in our North American segment grew 11% in the quarter and was up 2%, excluding the acquisitions of Zipcar and Payless. Volume increased 3% in Q4 while pricing was unchanged, excluding Payless and currency effects. Adjusted EBITDA in North America increased 57% year-over-year and margin strengthened by 190 basis points, primarily due to lower operating and selling costs as a percentage of revenue and benefits from the acquisition of Zipcar. Revenue in our International segment grew 7%…

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

I wanted to ask a little bit more about the Budget opportunity in Europe. I know a year ago, a lot of it was focused on improving the marketing. And it sounds like now, there are some things in the digital side and the customer side that you're trying to improve. And I was just trying to see what phase you think you're in, in terms of getting the Budget brand exactly where you'd like it to compete and maybe a little bit of update where you're at from a share standpoint and what do you think the opportunity is. And also, have you seen any sort of competitive response in the kind of that leisure segment of the European market?

Well, that's a mouthful, John. I would say we're probably in the third inning of a 9-inning game with Budget. I think the digital platform is going to increase conversion and increase revenue pretty significantly. We have got a greater than -- I think it's probably right around 30% growth in volume expected for 2014. We're getting a lot smarter about how we yield Budget. I was just looking at some numbers this morning for how we yielded Budget over the Christmas season, which is actually a bigger season in Europe than it is here. And we were getting average price increases year-over-year in Budget in the low teens. And so I think that it's become a far bigger asset than even we imagined. We thought it was big, but it's big. We've tripled its presence in terms of revenue mix, if it was 3%, it's now -- or 2%, it's now 6% of our revenue in EMEA. And I think there's a lot more to go. We haven't seen significant competitive threats from the other value players in the market. I think the independents are still very challenged. I think the InterRent and Advantage in Europe have not -- don't have the same sort of brand calling that Budget does in the marketplace. And so, we're continuing to move as fast as we can and build the brand up. And as we get more and more critical mass, it gives us more and more opportunities for a bigger presence with the OTAs and then in affinity agreements like we did with Scandinavian Airlines and all the other airlines. So a lot more to come, and I think we're getting smarter and better at it as every month goes by.

Great. And then I just wanted to ask a follow-up question on the comment you made about U.S. pricing over the last 6 weeks. The 2% figure you quoted, was that inclusive of the fall [ph] to leisure and corporate? And I was hoping to see if you can maybe try to quantify what sort of headwind you might have in March just given the timing of Easter, just anything you could call out there.

Yes. Pricing has actually been fairly robust and we had a good month in January, we're having a less of a good month in February and it's -- there will, no doubt, be some volume and pricing impact in March. It's still too early, really, to get a good sense of where March is going to come out. I do think we're going to end up with positive pricing over the course of the quarter. Don't forget, our pricing in leisure was up 8% last year, in last year's first quarter. So if we come in at up 2% or more positive pricing, that's a big jump in leisure pricing. But I don't think there's any question that the shift of Easter into April this year is going to have some impact on pricing and volume in the March period. And I think our hope is and what we're counting on is that we'll hold onto the gains that we've had through the first 6 weeks of the year.

Our next question comes from Chris Agnew with MKM Partners.

Just following up on that last comment. Is the weather impacting February pricing, do you think? And can you quantify that?

Chris, weather hasn't had a lot of impact on our revenue so far. In January, given the timing of the storms, we felt it was kind of a wash. If anything, it may have hurt us a little bit in terms of revenue in the month of February, particularly since one of the big storms was on a Monday. But we don't see it having a large impact. From a pricing standpoint, at the margin, it is -- has probably been a little bit helpful because we pick up some one-way volume, but we don't see that as being the principle driver of the positive pricing that we've had so far this quarter.

Great. And moving on to free cash flow. You said the first priority is tuck-in acquisitions. Can you sort of give us a sense of size and frequency of those opportunities? And are you prepared to chase tuck-in acquisitions a little bit more than you have in the past given that you're trading on a higher multiple than you did a couple of years ago?

The answer to the last one is I sure hope not, Chris. Look, I think, as I've said before, a big tuck-in acquisition for us is going to be in the $30 million to $40 million range. At any given point in time, we've probably got half a dozen of deals of varying size in our development roster and not all of them will close. It's hard for me to see tuck-in acquisitions, with what I can see today, consuming more than $100 million plus or minus $25 million of this year's cash flow. And so, the balance is left there for free cash flow depending on what's going on for share repurchases, depending on what's going on in the business. I think as we've said, our thinking about debt reduction is that we're going to grow into our -- into the low or into the 3 to 4 range and probably not aggressively look to buy back debt to reduce our outstandings and get our leverage ratio down.

And David, just a quick follow-up for you. You had a timing difference last year that benefited 2012. Can you explain the reason for the stronger free cash flow at the end of this year, but you're still talking about $400 million of free cash flow next year?

Sure, Chris. We, again, had a number of -- we had strong working capital trends throughout the year and then we, again, had I think some positive surprises in cash receipts, cash inflows and payments that we received late in the quarter in Europe that we weren't counting on to repeat again and again, so that's part of the reason why we ended up a little bit stronger this year. But when you exclude the roughly $50 million of timing benefits or cash inflows we had late in the year, we'd still have free cash flow in the $410 million range, which is really close to the $413 million of free tax income, excluding items, that we had. And as you know, we typically view pretax income, excluding items, as being a good proxy for cash flow over time, and I really look at 2013 as a whole as being consistent with that.

Our next question comes from Brian Johnson with Barclays.

Most of my pricing questions have been taken, so I'll kind of drill down on fleet costs. I guess, first, a couple of things. You originally talked about reducing your risk mix, and now it seems to be 2/3 about where it was. Kind of what changed in that and was that just a function of good risk opportunities that you were able to buy second quarter? Kind of second question is, when we think about dealer direct, are you already giving yourself credit for the eventual disposal of cars through dealers -- I mean through direct lots in your depreciation assumption, or could that actually result in improvements down the road?

Brian, with respect to -- let me work backward there. In terms of dealer direct, I think we've incorporated a little bit of that into our expectation in the year, but I think we've been conservative in doing so. So I do think that could have a positive impact compared to where we were. In terms of the risk versus program mix, we're going to be in the 60s again in terms of our risk percentage. And really, it came down to optimization in the context of the -- primarily in the context of the various repurchase programs that were being offered to us. And we really ended up in a situation where some of the flexibility associated with program cars we wanted to take advantage of, so we're keeping the risk program mix in the 60s this year.

Okay. So the December deals you talked about, were those on program cars or risk cars?

Those ended up being primarily on program cars. We always go into -- or typically go in the November, December time period with some cars, some spots in our fleet plan not spoken for yet. We refer to them as phantom cars internally, and we look for opportunities to fill out the fleet plan with opportunities when they become available. It's not unusual for us to do that, it was a relatively small number of deals and isn't the principle driver of our costs. But at the margin, it did help a bit as we finalized our 2014 fleet plan.

And just final question around fleet cost. We've seen high inventory levels in the U.S. car market, particularly in small and mid cars, the mainstay of your fleet. We've regressed and it looks like that does spill over at some point into Manheim. How are you kind of in your used car staff kind of thinking about that situation and whether it's going to result in additional pressures above and beyond the used car supply on the market?

So we're watching it carefully, but we've been pleased with the used car market so far despite some of the weather issues that we've obviously had over the first 7 weeks of the year. We've had gains so far this quarter on vehicles that we sold in North America. They're modest, but we are in a gain position. You saw the Manheim Index in January which was positive, and that was consistent with the experience we had. We're going to be watching it very carefully now because, as we've spoken about I think in the past, the spring season, in terms of used car sales, really begins after Presidents' Day. And so how things shape up from now to the end of the quarter, now until Easter, ends up being an important time. But I think we're happy that we're starting that period of time with the used car market in fairly good shape and in a position that's allowed us to realize gains on sale.

Which is also I think reflective of having realistic depreciation estimates coming into the year, or a realistic mark on your book.

I think that's right.

Our next question comes from Afua Ahwoi with Goldman Sachs.

So 2 questions for me. First on the -- I noticed on the desire to sort of have more premium cars, I know those typically come with a little bit of lower utilization. So how do you think about balancing utilization of your fleet versus going a little heavier on the premium luxury end? And then the other question was, I noticed in your forecast for 2014, you have built in about 1 point in pricing. And I think historically, at least the most recent history, you've maybe maintained a flat view on pricing. So maybe can you talk about some of the drivers that you see that give you confidence that at least 1 point of pricing is a base case for '14?

Afua, it's Ron. Look, I think on the premium cars, we're less focused on utilization and more focused on revenue per unit per month. And ideally, you're going buy as many of those cars as there is demand that allows you to make margin. Right now, the RPUs on those cars range anywhere from 60% to 70% more than the RPU on an A, B or C car. And so you don't need -- the utilization is really less relevant. The good news is that while we -- over the course of this past year, we've seen utilization tick up on these cars from the mid-50s into the low-60s, and so it's actually been a fairly good initiative that's driven us a fair amount of very profitable revenue. But I think that, ultimately, there is a limit. There's only so much demand for these cars and you've got to find that sweet spot where you can fill all the demand and continue to keep your RPU at these profitable levels. On the lower end small cars, A, B and C cars, the commodity cars as I call them, those really are utilization-intensive and you have to -- and we monitor it very carefully and spend a lot of time adjusting the fleet to optimize the utilization on those.

And in -- with respect to pricing and the work we did in planning and ending up with a forecast of a roughly 1% increase in pricing in North America, I think there are 3 things that underpinned our decision to land there. The first is that our push, for -- to increase our realized pricing and to do so in all channels and segments, is one that we plan to continue and we really do hope and expect that, that will have a positive impact, particularly because there are 2 other items that will help that. The first is that our fleet costs are going up and have moved up from where they were in late 2012, and we think that's an industry-wide phenomenon. But that should help create some cost push pressures that help in the pricing environment. And in addition to that, we've begun to utilize our new yield management system, which we think is very helpful for optimizing pricing. At this point, it's helping significantly with the automation of our processes and making us a quicker responder to changes or developments in the marketplace. And we think that's going to have a positive impact over the course of this year as we continue to use that more and to roll out additional elements of it. So when you put together our push for pricing, yield management and a delayed cost push element here, we're comfortable with the forecast we gave of a roughly 1% increase in pricing in 2014. We do view that as our current estimate. And the reason I mention that is we're going to push for as much as we can. It's not a limit or a target that we want to stop there. We continue to feel the product that we offer is underpriced compared to the value of the service, and that's a big driver of why we think more pricing makes sense.

Our next question comes from Fred Lowrance of Avondale Partners.

I just want to dig in on fleet costs just a little bit more. I guess, first on North America, do you have a specific view on Manheim and then really just trying to get to sort of what that core market pressure is that you're going to be facing? And then secondly, as we kind of look at the total company fleet cost guidance, it would seem that the International business is going to feel a little bit more pressure on fleet costs. So you -- can you talk about the dynamics that are at play overseas that are maybe contributing to this internationally?

Let me answer your last question, Fred. Fleet costs in EMEA are actually right in line on an apples-to-apples basis with where they are in North America. What we've got is a reclass of unrepaired damage that's going into fleet costs this year. So between that and some higher eco taxes within -- in a couple other markets and mix, that accounts for the majority of the increment that would appear that is occurring in the international markets. But when you really get down to the deals and where the cars are and what they're selling for, the actual transaction for the car is roughly equal to where it is in North America.

And with respect to how we think about fleet costs, we don't have a particular Manheim number that we would look at, but what we tend to focus on is our residual values as a percentage of cap costs. And as I mentioned, we're forecasting that to be down roughly 2 points this year and are building that into our forecast of fleet costs. It's always hard to know exactly what that's going to translate into in terms of Manheim Index, particularly since the Manheim Index considers all used cars, not just our subset of typically 12- to 18-month old used cars. But it's a 2-point decline we're factoring in. And I guess if Manheim operated that sort of same way, it would probably translate into about a 2-point decline in Manheim. But we really focus on the percentage of residual value because I can't be sure that Manheim would translate just that way.

Our final question comes from Adam Jonas with Morgan Stanley.

This is Yejay, in for Adam. I wanted to drill down into commercial pricing for a second, which was a headwind throughout last year. Is that a dynamic you expect to continue this year, or given that you've been actively working to improve those renewal rates, do you expect commercial to contribute positively this year?

Well look, I think we're going to continue to try to push commercial rates up wherever and whenever we can. I think it's going to remain a small headwind just by virtue of the fact that not all contracts renew over the course of a year. And there are some contracts that actually are 3 and 4 years old where they are simply not at market. We'll renew a contract at market, but we're not going to take a contract down to a level where we're not going to make any money. What I think the opportunity for us is that will have the most immediate impact is changing the mix of our commercial business and being more aggressive on mid-market and more aggressive on small business, both of which have higher RPDs and will effectively average down the large commercial contract base that's sort of winding through. Having said that, we're pushing wherever we can. We're -- I think something like 60% of the contracts renewed have been either flat or up on rate. But we've not lost heart or initiative. We are going to continue to push because it's certainly declined in terms of profitability contribution in our revenue mix.

Got it. That's helpful. And maybe a bit more modeling related on your alternative sales channel initiatives. Could you help us think about how much benefit you expect to get from selling a car direct-to-dealer versus wholesale, and then maybe the same with direct-to-retail through your partnership with AutoNation.

Yes. I think on the direct-to-dealer, our experience is that the increment that you're getting is really a function of avoiding fees and saving interest because your time from last revenue to sale is much shorter than it is in a traditional auction. So it sits something in the $300 to $400 range, on an apples-to-apples basis -- a 30,000-mile Ford in the auction, a 30,000-mile Ford selling to the dealer. I think on our AutoNation deal, I mean you can take the average spread between wholesale and retail and divide it by 2. I mean, we're equal partners on this and that's about where the numbers are coming out. But what I would tell you is that at least for 2014, both of those segments are not going to amount to an enormous share of our risk car volume. If they were 10% of our total sales, I would be surprised. I mean, sure, they could be 15%. But certainly, that's the range that they're going to be in.

10% on a combined basis, you mean?

Yes. Yes, between direct-to-dealer and on sales into AutoNation. I mean, that's -- you think of the [indiscernible] 300,000 cars we sell, the 200,000 are risk. And so, you're talking about 15,000 to 20,000 cars, for example [ph].

Okay. And one final one, a quick one on interest expense guidance. You guys mentioned that 2014 you're expecting about $220 million of interest expense, which is going to be below roughly the $230 million that you saw in 2013. Does that guidance bake in some action regarding the refinancing of a $900 million of debt above 8% that you mentioned or is there something else driving that?

The decline is primarily driven by the refinancings that we completed last year, so it doesn't -- the assumption that we built in is that the 8.25% notes that become callable in October are called then. If we were to refinance any of those sooner, there would be some onetime costs associated with doing that but it would lower our interest expense for the year.

For closing remarks, this call will be turned back over to Mr. Ronald Nelson. Please go ahead, sir.

Thanks, Kimberly. So before we close, I think it's important to reiterate what we believe are the key points from today's call. One, we had a strong 2013, overcoming the normalization of fleet costs in North America and a less-than-robust European economy, then went on to report our second highest adjusted EBITDA ever; two, our integration efforts are going well, and we expect to achieve higher synergy benefits in 2014 compared to the year just passed; and three, while it's still early days, we're enthusiastic about the pricing that we've been able to achieve in January and February. These are exciting times in the global mobility industry which is why, as David mentioned, we're hosting our next Investor Day in New York City on Monday. The day will include presentations by all of our regional presidents, Kaye Ceille, our new President of Zipcar, as well as David and me. In addition, we'll also have more than a dozen members of our senior leadership team at the event for attendees to interact with during lunch. So I hope to see many of you there. With that, I thank you for your time and your interest in our company.

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