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'd like to turn the meeting over to Mr. Matthew Flaherty, Director of Investor Relations. Please go ahead, sir.

Thank you, Cathy. Good morning, everyone, and thank you for joining us. On the call with me are Larry De Shon, our Chief Executive Officer; and John North, our Chief Financial Officer. Before we begin, I would like to remind everyone that we will be discussing forward-looking information that involves risks, uncertainties and assumptions that could cause actual results to differ materially from such forward-looking statements and information. Such risks, assumptions, uncertainties and other factors are identified in our earnings release and other periodic filings with the SEC as well as the Investor Relations section of our company website. We undertake no obligation to update or revise our forward-looking statements. Our comments today will focus on our adjusted results. We believe that our financial performance is better demonstrated using these non-GAAP financial measures. All non-GAAP financial measures are reconciled from the GAAP numbers in our press release and in the earnings call presentation, which is available on our website. With that, I'd like to turn the call over to Avis Budget Group's Chief Executive Officer, Larry De Shon.

Thank you, Matt, and good morning. In February, we discussed our overall strategy to grow profitable revenue while investing in the future to unlock incremental profit opportunities. During the first quarter of 2019, we continued to execute on that strategy and delivered strong results despite feeling the effects of a government shutdown, severe weather and Easter shifting into the second quarter. Overall, we've responded well and delivered a small adjusted EBITDA loss of $1 million, down only $3 million compared to last year. In addition, we executed on our initiatives throughout the quarter as we build a future where all mobility is connected, integrated, digital and on-demand. We continue to add features and functionality to our Avis app, expand our connected fleet and enhance relationships with our valued partners. As we move into the second quarter, we see several signs that point towards a strong summer. Lead levels appear to be appropriately sized in the United States, which allows us to leverage our technology and use our state-of-the-art revenue management system to drive yielding opportunities during the peak demand months. These opportunities are most evident in our Leisure segment, where we've just delivered the seventh straight quarter of year-over-year growth and underlying leisure pricing. Residual values have stayed strong, and we have seen additional benefits to fleet costs through our use of alternative disposition channels, which increased 8 percentage points over the prior year. In addition, our Lyft partnership is off to a strong start with approximately 1,500 cars on rent in our pilot cities. Finally, as you saw in our release last night, we reaffirmed our full year guidance and key metrics. While John will go through the details in a few minutes, our first quarter results and accomplishments provide confidence on our full year expectations. With that, I…

Thanks, Larry, and good morning, everyone. I appreciate the warm welcome. I really enjoyed my brief time here, and I'm energized by all of the opportunity I see as we continue our transformation into a global mobility leader. I'm now going to discuss our first quarter results together with our cash flow, liquidity and outlook. My comments today discussing changes in revenue per day, pricing and per-unit fleet costs will all refer to changes in constant currency, that is excluding exchange rate effects. My comments will also focus on our adjusted results, which are reconciled from our GAAP numbers in both our press release and earnings call presentation. First, starting with an overview of the first quarter for the total company. As Larry mentioned, we had a strong first quarter. We ended the quarter with $1.9 billion of revenue, down 2%, due to a $56 million headwind from currency, with 2% higher volume and 2% lower revenue per day. Overall per-unit fleet costs were 5% lower, while vehicle interest expense increased by $9 million. This resulted in our adjusted EBITDA decreasing by $3 million to a $1 million loss in the quarter after a $1 million adverse impact from foreign exchange movements. Moving now to a review of our results for the first quarter, beginning with the Americas. In the quarter, revenue was 2% lower, which was driven by a 1% decrease in rental days, combined with flat revenue per day. We started the quarter with softness in January in rental days, as industry fleet levels normalized from the holiday period, along with some impact from the U.S. government shutdown. However, we continue to push pricing of our volume in the peak of this -- of the peaks of a seasonally weaker quarter, and we started to see our metrics…

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

I wanted to ask a little bit more about the transportation networks business. I appreciate the details about the cars with Lyft. And Larry, I was hoping maybe you could dive in a little bit more about, what are the assumptions that are kind of baking into how you're assessing the economics of this business just in terms of how you think about the type of vehicle that goes into this program, the mileage levels you'd like to receive with -- max those cars out, too, and kind of how you operationally are building the business and planning for the business? And then ultimately, any sort of big-picture thoughts in terms of how the profits of this business might compare to the current margins in business today?

Thanks, John. For sure. So the partnership we have with Lyft so far has been really terrific. They've been great to work with. We only have about 3 cities up and running. We're going to launch our fourth city here in a few weeks. So we're at the very early stages of this with just about 1,500 cars out on rent. Yes, I think the difference here with us is that we have fully integrated onto that Lyft driver's app, and the entire back-office is all integrated with them as well. So it's a very easy transaction for the Lyft driver. The types of vehicles or types of vehicles that they're actually looking for, they select the models that make the most sense for them. So we're offering both sedans and SUVs as well. And we're cascading these vehicles out of our rental fleet at around 30,000, 35,000 miles. So we have run a number of different simulations and models as far as what vehicle types we sell at what mileage range. We pretty much feel like every derivative should kind of have a different mission of how long it lives and its life with us. And so we're trying to optimize the perfect time to take it out of the fleet at the right types of mileage and the right age. So that will differ by the type of car it is, but you can, for assumptions, assume that we'll probably run those cars to 80,000 miles, perhaps a little bit higher. Well, it just depends on what our experience will show us as we go to market and start to sell them. And we will continue to grow this. We have a number of cities that we have teed up and are planned to deploy through the balance…

Our next question comes from Chris Woronka from Deutsche Bank.

I noticed that your kind of core operating expenses were down year-over-year, and I know a little bit of that would relate to FX as well, but can you maybe talk a little bit about directionally some of the initiatives you've undertaken, and whether it's actually possible to, going forward, keep expense growth below revenue growth?

We have, Chris, as you know, a number of initiatives that are running across the company globally. Many of the -- there are several revenue initiatives that we're running, but there are many cost-savings initiatives as well that we would continue to look at. Every year, we've got to fight off inflation and wage increases and so forth that we see throughout the operations. And so we have to constantly find ways and innovate to find ways to offset that and continue to try to shrink our operating costs as a percent of revenue. There are many -- way many more than I could ever try to cover on this call. One of the things, though, that we are looking at is how we use connected fleet to really help us automate some of the processes that we do today, which are fairly manual or labor-intensive, just try to find ways to offset that through automating through the technology. And we'll continue to explore that avenue as I think that has a lot of promise for us over the long run. In the other areas, we continue to streamline organizations, take a look at opportunities to streamline and to expand responsibilities of key folks in the organization to be able to bring down overall S&W cost. And so we had a big initiative around that this year. We will continue to do that. So it's a constant focus of every expense line of working hard to try to find out where we can, through data, through dashboards, through better data analytics, find ways to continue to reduce our costs. There's really nothing in our business we don't have a dashboard for and then we don't have the key leaders of the team really focus on how do we continually drive that metric lower. So it's an overall focus that we've had for a number of years. We will continue to focus on it, and I think that there's opportunity just to continue to bring the costs down over time.

Okay, great. And just one for John, if I could. John, welcome on board. Just given your background, do you see making any kind of wholesale changes on how you guys acquire and resell fleet? I mean, I know some of your peers have gotten a little bit more into the horsetrading or flipping business. Is there any changes you see that can be helpful to margins?

Hey, Chris. Thanks for the welcome, and good morning. What I would say is, I've been here six weeks, so I'd love to tell you that I've had the opportunity to do a deep dive and really get into where opportunity may lie. But frankly, it's still pretty early. What I am impressed by is it that these initiatives are already in place. As we mentioned, we've got 9 locations that are open. Very clearly, there's about a $1,000 benefit in terms of direct to consumer, so I think those are well understood. We've been buying fleet here for decades. I think the team does a really good job of that. So I think there's always probably incremental opportunity, but the good news is everyone's aligned in understanding kind of big picture where those opportunities are. And I think a number of those initiatives are in place and are already starting to see some traction. And hopefully, I can lean into those and help accelerate them, which is a big part, I think, of what Larry and I are excited about.

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

Regarding technology, can you give us some help in how we incorporate this into our models?

Michael, we've -- as you know, we've been on a journey to modernize all of our systems to bring them all up to current code and functionality. We modernized our core rental reservation system. We modernized our fleet systems. We modernized our revenue management system. And on top of that, we're building out our next-generation platform to be able to find ways to operationalize Connected Car data that we're now collecting and to be able to build out APIs, so that we can connect the partnerships in a lot easier way. So the technology improvements are kind of across the business, if you will, which allows us to integrate with Lyft on their app, on their driver's app, and to be able to make that a seamless, full-integration process for the drivers. The -- all the technology that we put onto the Avis app, for example, to allow a customer to rent a car completely from booking all the way through the actual renting of the car and returning the car through the app, to be able to do everything on the app that a rental agent could do for them. We're seeing Net Promoter Scores up 25% of those people that use the app, and that continues to grow. Now we're launching the -- we just relaunched the Budget app. So the websites have all been modernized. We're now selling ancillary revenue on our websites that we could never really do before. We're doing that globally. We're seeing very strong take rates of people buying ancillary revenue products and also packages of products online. So it's across the business. And it should help every -- all those things I just said should all help with repeat customers and loyalty, and continue to drive ancillary sales and continue to drive satisfaction overall. So as we get further along the line of Connected Car and we implement mileage optimization and other things, over time, we'll be able to start feeling really confident about, at a global scale, what does that actually look like for the business. But all the Connected Car initiatives are all in kind of the testing stages of the Mobility Lab in Kansas City. And we saw the ways to go to start looking at how we can expand those and start to monetize those benefits.

To keep on, should we expect an acceleration in some of these savings as -- in the next couple of years? I guess another way to look at it is in operating costs. Should we expect continuing something and discuss that to growth to decline driven by technology, driven by other savings?

Yes. I mean, over time, we should expect that. I mean, we have a certain initiatives, for example, mileage optimization, which we've now got running in two cities. If our assumptions are correct and our thesis is correct on that, that will deliver results next year. So -- and we'll be able to help understand what those might look like when we get kind of towards the end of this year. So there will be specific ones that will gain traction and we can kind of deploy more easily over the years. There'll be others that will just take a little bit longer. But as we learn about each one, as we feel like they're ready for prime time and we're able to roll them out in some markets, we'll try to help you understand what those kinds of benefits might be.

And just a quick question on corporate. Can you talk about what changes you're seeing in LOR for corporate and how that may be affecting the bottom line, helping the bottom line for corporate?

Yes. Actually, corporate, as we've said these last kind of couple of quarters, volume has finally now flattened out or starting to get a little bit better. Pricing is still under pressure, particularly in the large commercial segments, but we are growing length. And particularly this last quarter, we grew length fairly significantly in the small business segment. And of course, that doesn't help pricing, but it does help profitability of the business overall. So we're all for that when we can grow length and grow into more profitable rentals. So we need to continue working on growing the volume back now that we've kind of plateaued on the volume decline that we've had previous, and we got to start kind of growing our rate per day. But the length of rental has been strong. And International has been extremely strong. Commercial volume is up significantly, and length of rental is up significantly as well. So we are seeing good volume growth there, and we're seeing a plateau of the decline here and turning the corner on volume, but we are starting to see length of rental grow as well.

Our next question comes from Derek Glynn of Consumer Edge Research.

Regarding the Waymo partnership, I realize this is still relatively new partnership, but can you give us a sense of the economics of that fleet management service? And as this presumably grows over time, what sort of margins do you think you could see on that relative to your corporate average?

It really depends on how fast Waymo fleets up for their markets that they're in. So our plan is to grow with Waymo as they grow. We've been handling their business in Phoenix now and in San Francisco for a while. It works extremely well. We have a great partnership relationship with them. We meet with them every single month to review how we're performing and to get ready for any growth plans that they have. So as they grow, obviously, we'll grow that business and start to grow it to scale. Right now, it's a very small piece of our business, but an important one as we're learning a lot about how to kind of manage these types of vehicles in our business and our operations at our facilities. So our people are excited about it. They learn a lot about managing the fleet. And we -- as Waymo continues to grow down the path, then we'll be able to kind of really get a sense for, at a bigger operation, what sort of contribution that business is going to be able to make. But I think it's just still really early on at this point.

Okay, great. And then just secondly, how would you characterize the competitive environment today and the size of the industry fleet today? And as we approach the more seasonally important quarters, do you feel like you have the optimal fleet size and mix at this point to meet that increase in demand?

Yes, I would say fleet sizes for the industry in the U.S. are very good. As you look at the first quarter, of course, the first month of the quarter, you're always, as an industry, going to be overfleeted because you come out of the biggest peak of the year and then you go into a slow period. So -- but as the quarter progress, fleets tighten down, and then you start seeing all the other metrics start to improve month by month by month as you go through the 3 months of the quarter. I was pretty pleased with how the business overall performed in the quarter with Easter moving out of it and with the disruption we have with the weather events that we have with over 20,000 flight cancellations. Even with that, we had a really good quarter. And that can't happen if fleets aren't positioned right. So I would say that fleets look good in the industry in the United States, and that helps me be more optimistic as we think about summer. There should be no reason why fleets won't be right-sized as we go through the summer months.

Next question comes from Adam Jonas of Morgan Stanley.

John, also add my welcome. A couple of more questions on the TNC rideshare fleet. Did you disclose how many cars are in the fleet right now?

I just mentioned that. We have 1,500 cars approximately on rent at the 3 locations that we're piloting the program.

I'm sorry, I missed that. How many by the end of the year?

We haven't disclosed that. So -- but we are working with them on the deployment plan that we think it's really robust. And we're excited about it, and we're energized by what they think they can commit in volume. So -- but we haven't disclosed the number yet.

No problems. And what experience does your company have in maintaining and selling cars with 80,000 miles? I mean, I just want to -- I don't know if there was -- if this is like uncharted territory or whether you kind of had a part of the business where you really had a lot of experience doing that on the commercial side.

We do sell Payless cars, which we keep a lot longer than our Avis Budget fleet. And those sell a lot higher mileage. And our Apex brand, we can -- we'll hang onto those cars, gosh, 3 to 5 years, and we run the mileage fairly high on our Apex brand. So yes, we do have experience selling cars at that level.

And just last one, what is Enterprise doing in rideshare? Because Hertz, obviously, you had a -- really committed quite a lot to this. You're starting now. And my understanding is Enterprise started to do something and kind of wounded up, but really, to date, hasn't done jack on this particular opportunity. And just it makes me think, when the giant in the room isn't doing something, kind of -- well, are they doing anything? And I guess, if they're not, why do you suspect they're not?

You've had to ask Enterprise. I can just comment on what we're doing. I think we've approached this in a very different way. Once again, these cars are all connected. So we have total visibility into the fleet and how it's being used. We can watch the miles dynamically. We have a 1-week exposure to the car, to the rental...

Yes. But you do confirm that you don't see Enterprise doing anything right now at this point?

I don't see anything. But like I said, you'd have to ask Enterprise to respond to those. But once again, we're fully integrated on the driver's app. We're using a lot of technology in this area, which is different, and the connectivity allows us to have a better visibility in actually how the cars are being used and run.

Our next question comes from Rajat Gupta from JPMorgan.

I just wanted to touch a little bit on the full year guidance range. I mean, it looks like International is stuck, sight off a little bit weaker here. You raised your FX headwind guidance for the year, but you're still maintaining the midpoint of your full year guide, including the high end. Just trying to understand, are there any offsets from your better trends in Americas or including some contingency in your fleet cost assumptions for the year? And I have a follow-up.

Rajat, this is John. I think you're right. What we saw in the first quarter was probably slightly better than expected performance in the Americas segment and maybe slightly lower performance in the International segment. But these are pretty marginal moves. And in aggregate, we sort of came right in where we expected. So as we roll that forward, I think our outlook for the year is unchanged because we do expect the momentum to continue, as we saw in the first quarter for the remainder of the year. You mentioned fleet costs, and you're correct. We had a great performance in fleet costs, particularly in the Americas. Overall, we were down 5%. In the Americas, we were down 8%. But we're expecting that number to tick up slightly in the back half of the year, where we're making some assumptions, I think, around maybe the used vehicle market not being quite as strong as it has been, which we think is just pretty prudent, given how early we are in the year, and particularly as we see kind of how the retail SAR and the overall SAR unfolds in the U.S. in 2019, which we obviously saw a 16.4 million unit print yesterday for April. So we're monitoring all that closely. I think it's very controllable, and that's sort of how we see things.

Understood. Just also wanted to follow up on the second quarter. I know numbers have bounced around a bit here in the past, and you also have the Easter shift from 1Q to 2Q. Would it be possible to frame or bracket the 2Q -- the dollar range a little bit just so consensus is fairly calibrated, something like what percentage of the full year EBITDA it could range just to make sure we have that correctly baked in?

Yes. This is John again. I mean, we haven't typically given directionally specific guidance. The first quarter was basically flat. We're not expecting big changes. But I think in terms of a specific range, it's probably not something that we're going to share at this time. But I think we're expecting marginally probably a bit stronger 2Q than we saw last year in terms of contribution overall. So hopefully, that's directionally helpful.

And our last question comes from John Healy of Northcoast Research.

I just wanted to ask a follow-up question to John. It just might not be fair since you've only been with the company just a few weeks now, but when you take your experience with and you think about some of the investments they've made most recently in ships, do you think there's any reason why an opportunity like that or even development of your own kind of e-commerce direct platform potentially under another umbrella might not be something that might make sense for the company to look at maybe over the next couple of years?

Yes, John. This is John again. The thing I'd point out, first and foremost, is that we have the ultimate test drive with Avis, which, in a way, is a direct to consumer. So people have the ability to, for a very marginal amount, rent a car, try it for a number of days, if they like it, actually get the rental credit back. And I think almost half the cars we sold direct to consumer last year were in that channel. So I would say we're already experimenting with that. I think more specifically to my background, I think my belief is that people still want to test drive a car. It's one of the most expensive things that people buy outside of a home usually during -- usually every day for 5, 6, 7 years on average. And so I think people investing a little bit of time to go drive it and make sure they like it and that they see it, and especially when it's a used car because every one is a little bit different. I think that people still want that opportunity to sample what they're going to purchase. And so I think that there's lots of things we can explore. I do think there's a segment of population that wants a very frictionless process, and we can deliver that a number of ways. But I think we're off to a good start with retail locations. Our view, when I was at Lithia, was kind of similar. The test drive is still really important, and that people certainly are doing a lot more work online to prepare to know what they want, how much it should cost, that kind of thing. But there's still a point where the transaction needs to sort of move into the physical world, and I'm glad that we've got a number of retail locations. We're starting to make that happen.

For closing remarks, the call is being turned back to Mr. Larry De Shon. Please go ahead, sir.

Thanks. So to summarize, we had a strong first quarter despite several macro-related challenges. Higher leisure pricing in the Americas and lower per-unit fleet costs were offset by continued challenges in International. We just finished a strong Easter period, and we're optimistic for the summer in the Americas, and we're taking decisive action to respond to the marketplace dynamics in Europe. We have made significant progress on key strategic initiatives in the first quarter and remain focused on improving our profitability. With that, I want to thank you for your interest in our company.

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