Avis Budget Group, Inc. (CAR) Q3 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to the Avis Budget Group’s Third Quarter 2019 Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce your host, David Calabria. Please go ahead, sir.

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, which are reconciled from the GAAP numbers in our press release and in our new investor presentation also 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, David, and good morning, everyone. Yesterday we reported third quarter revenues of $2.8 billion driven by a 2% increase in rental days and a 20 basis point increase in vehicle utilization year-over-year. Our Americans achieved record high revenue and adjusted EBITDA in the quarter demonstrating the continued strength of the region. Our international team saw positive year-over-year pricing excluding exchange rate effects for the first time in a 11 quarters. The average length of our rentals increased 1% from last year, lowering the frequency of vehicle cleaning and preparation resulting in more profitable rentals. And optimizing our fleet mix and pairing the right customer with the right car has also shown a positive impact on customers rental experience as seen through our record high net promoter scores throughout the world. We have now eclipsed more than 160,000 vehicles in our connected fleet, and we remain on track to connect more than 200,000 by the year-end. We continue to launch locations for our mileage optimization initiative and have 14 cities active with further locations targeted by the end of the year. This initiative allows us to balance mileage consumption and is yet another lever to lower fleet cost. Operationally our focus on efficiency improved fleet utilization by 20 basis points. As we are driving efficiencies in the core business, we are simultaneously investing in mobility initiatives, unlocking incremental profit opportunities and enriching the Avis value proposition. On the call this morning, I will provide an overview of the Americas and international segments, discuss ongoing progress with our innovation and mobility initiatives and provide an updated outlook for the remainder of the year. The Americas segment delivered record earnings in the eighth consecutive quarter of adjusted EBITDA growth totaling $321 million, up $8 million from prior year excluding currency effects. Website revenue continues to be a focus area for us, but we saw online transactions up more than 3% in the quarter, the 28th consecutive month with an improvement. Our local market strategy drove longer length of rental and increased revenue per transaction and provided solid returns growing by 5% in rental days. The growth of our Zipcar Commuter business offers a monthly membership fee, which covers fuel, insurance and other cost resulting in a lower revenue per day that provides higher utilization of vehicles and off-peak times with low mileage accretions and attractive margin. Likewise, our Budget Truck package delivery business recognizes high utilization of our delivery vehicles for a longer duration providing a greater revenue per rental. These business units capitalize on longer rentals resulting in greater vehicle utilization and profitability. Over the third quarter, fewer extreme weather events recalls and vehicular accidents created excess fleet levels, which drove pressure on pricing in the quarter. However, in September both industry-wide accelerated fleet dispositions and significantly fewer new vehicle purchases has helped to right size supply. These adjustments have delivered signs of positive pricing in the back half of October and beyond. Instrumental to the overall performance in the Americas was a 9% reduction in per-unit fleet cost due to continued strength in the market for used vehicles, growth of our alternative disposition channels and our proprietary fleet management system that optimizes vehicle purchase and disposal decisions. Through the third quarter, we have already disposed 85% of the fleet, we expect to sell in 2019 with a record high of more than 70% in alternative disposition channels. By leveraging our fleet connectivity, we can better manage vehicle usage such as ensuring miles are distributed more evenly throughout the fleet. We also extend this technology to manage our Ride-hail fleet vehicle mileage and reduce usage of vehicles that are accumulating miles to quickly to protect residual values. As a direct result, we are able to reduce fleet cost and deploy our right car right customer rental experience for customers across all segments. For the second quarter in a row our ancillary revenue strategy drove higher sales due to more small business rentals and our revised rental sales agent incentive program. This program is a success for both our customers and our employees as we're also seeing a record net promoter scores with this initiative. On a constant currency basis, our international business achieved an adjusted EBITDA of $178 million, the same as prior year. We're proud of the team's results considering the uncertainty surrounding Brexit, the weakness in intra-European travel and higher fleet cost due to the enactment of stricter vehicle regulations, such as WLTP. We continue to concentrate on maintaining and growing revenue per day to counter these impacts. In the quarter, we achieved an increase in revenue per day excluding exchange rate effects, our first positive increase in a 11 quarters. Despite seven European airlines halting operations and the recent bankruptcy in the travel and leisure market, the international team was able to mitigate loss volume while achieving a price increase. We continue to grow our light commercial vehicle operations, which provides longer and less seasonal rental demand, growing volume nearly 10% from prior year. Commercial segment rental days showed positive year-over-year growth with midmarket and small business accounts both up 9%. International made record strides driving substantial improvements in net promoter scores over prior year, exemplifying our continued focus on improving overall customer satisfaction. With that, I would like to update you on the progress we've made on our innovation initiatives around mobility. We continue to make strong progress on our goal of fully connected fleet through our partnerships with PowerFleet, formally known as I.D. Systems, Continental and our OEMs including our most recent announcement that we will be leveraging for its connected services across Europe. We're making progress every day with more than 160,000 vehicles currently connected and line of sight over 200,000 connected vehicles by the end of the year. We continue to see benefits from our connected fleet including well over $1, and incremental fuel recovery on each connected car rental, which more than pays for the cost of the technology. In addition, connectivity reduces the length of time to recover overdue vehicles, facilitates our mileage optimization initiatives, allows us to explore additional use cases powered by self-service capabilities and enhances our fleet management capabilities supporting our new fleet models with the right held [ph] companies. It has been a multiyear journey for us to mature this concept of scale, but the returns are there and we see a path towards accelerating monetization in 2020. We remain at the forefront of customer experience powered by the Avis mobile app and its capabilities to allow customers to control their end-to-end rental experience. Initiatives like specialized lost damage waiver pricing, highlight e-Toll Unlimited, and the expansion of our new ancillary incentive plan continues to drive growth and revenue and customer experience. We have established new customer ancillary touch points, provide product and service offerings tailored to customer preferences, allowing us to sell beyond the counter. We continue to grow the number of transaction on our mobile app and preferred customers who use the app report significantly higher net promoter scores than those who do not. The third quarter is also our first quarter offering Split My Bill, our split bill capability and we're already seeing an increase of products being taken with our new functionality like SiriusXM or Curbside Delivery. With the introduction of Split My Bill, our business travelers can go beyond the normal corporate rental to experience upgrades and additional services that travelers enjoy and want. We recognize that many travelers use business trips as an opportunity to explore new cities or meet up with family or friends in the area and we are thrilled to offer a feature that will help to make the reconciliation of travel expenses cleaner and easier. Our mobile app experience gives customers more customization and more personalization of their trip than any other brand. Previously, we discussed our partnership with Lyft and the last quarter we announced a partnership with Uber as well. Since then we expanded our operations to new locations and are now in 13 major cities. The fleet has grown approximately 60% in the quarter and we continue to expect growth through the remainder of the year. We believe there are several benefits through the partnership that can improve our overall economic performance, such as extending the age of a portion of our fleet and derisking our fleet sales. The value we generate from these partnerships continues to show how car rental and Ride-hail can operate in unison by providing mobility solutions to a wide array of intersecting customers. We have begun to monetize the anonymous connected car data we collect from the fleet leveraging one of the numerous benefits of having connected vehicles. Our partner Otonomo is one of the first to create a new marketplace for this information and has already gathered a growing number of customers. We look forward to new partnerships and new learnings from this relationship. Our Zipcar Flex product in London continues to expand as we're looking to grow the Flex offering to cover most of London, our largest Zipcar market globally. Zipcar Flex provides on-demand one-way mobility throughout London as well as to and from Heathrow airport. We're seeing significant growth in this model and is on course to exceed the objectives we have set for Flex. To summarize, we continue to see real success on our multiyear mobility investments with the development of our technology and mobile apps and our growth in our unique partnerships with other mobility leaders, who are successfully leveraging our vehicles and fleet management capabilities to serve new use cases together. With the summer behind us, we're proud of the record results the Americas achieved and how the international team has navigated through a difficult macroeconomic environment in Europe. Fleet costs were a benefit through September, resulting from strong residual values, although percentage improvements are not expected to be as great in the fourth quarter. Our use of alternative disposition channels will be key to unlocking continued incremental benefits. In the international region, we're continuing take steps to mitigate the effects of uncertainty in the market, but we're seeing encouraging trends in the back half of October with pricing in the Americas and international starting to show strength. And October will also be our 29th consecutive month of increased.com bookings. With that, I'd like to turn the call over to John to take you through the financial results.

Thanks, Larry, and good morning, everyone. My comments today discussing changes in revenue per day, pricing and per-unit fleet cost will all refer to changes 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 investor presentation. I would like to start with an overview of the third quarter for the total company. As Larry mentioned, we had a strong quarter. We finished with a record revenue of approximately $2.8 billion, which was up $19 million from prior year on 2% higher volume, excluding a $44 million currency headwind. Overall, per-unit fleet costs were 6% lower, while vehicle interest expense increased by $5 million. This resulted in our adjusted EBITDA being $471 million for the quarter and $645 million through September. Excluding more than $23 million of currency exchange rate movements through the first nine months, adjusted EBITDA was $668 million or a 5% improvement from prior year. Year-to-date, net income and diluted earnings per share is up 5% and 12%, respectively, due to the strong earnings as well as the shares repurchased in the third quarter. We opportunistically took advantage of market volatility and repurchased approximately 2.1 million shares at an average price of $27.46. Moving to the Americas, we had a record quarter with adjusted EBITDA of 3% higher to $321 million. Revenues excluding exchange rate effects improved 1% and rental days improved by more than 3% ,despite a softer pricing environment contributing to revenue per day being down 1.7% excluding exchange rate effects from prior year. However, the majority of our decline in revenue per day was driven by increasing our package delivery business and budget truck, increase in our Zipcar Commuter product and the increase in Ride-hail rental business, which are all utilization accretive and profitable businesses. Each of these had roughly 30 basis point impact to rate per item or over 90 basis points in total. As Larry mentioned, the ancillary revenue increase is attributable to our increased focus on ancillary sales, paired with new product offerings as well as our revised rental sales agent incentive program. Our focus on ancillary products and providing customizable product offering packages help to drive revenue per day, showing that our customers prefer optionality and personalization to complete their rental experience. The e-Toll product that we've been testing in Texas seen favorable responses since launch and we look forward to rolling the product out to new markets before the end of the year. Per-unit fleet costs decreased by 9% as we continue to utilize alternative disposition channels to take advantage of stable residual values. We continue to be focused on the growth of our alternative disposition channels, particularly our direct-to-consumer sales, which have grown 136% in 2019 from the prior year. Third quarter U.S risk vehicle dispositions grew 8% from prior year, topping 48,000 in the quarter with a record 70% of the disposals occurring through alternative channels. We now have 13 operating car sales locations, including our newest in Victorville, California and we will continue to benefit from the significant opportunity to improve fleet cost through further success in this initiative. Each vehicle we dispose through alternative channel saves us hundred of dollars in disposal costs, and each vehicle we sell direct-to-consumer can generate more than $1,000 of additional benefit. We believe our strategy to accelerate the deflating process beat our competitors to market and help us to take advantage of stable residual values over the summer. As a result, we’ve disposed of approximately 85% of the vehicles we’ve planned to sell in 2019. As we anticipated, vehicle interest continues to be a headwind, increasing due to rates by $5 million in the quarter. Although floating-rates have come down, we expect vehicle interest to continue to be a headwind to the remainder of the year [indiscernible] significant portion of fixed-rate debt. In our international business, we continue to focus on revenue per day, which increased $0.05 from prior year excluding exchange rate effects, our first positive increase in a 11 quarters. Currency continues to be the largest impact on reported revenue with $42 million in the quarter. However, excluding currency exchange rate effects, revenue is down less than 1%, even with the airline disruptions and travel agency bankruptcy Larry mentioned earlier. Per-unit fleet costs were up 1% in the quarter, driven by Brexit related inflation in the U.K and the Apex fleet refresh in Australia and New Zealand. Traditionally, the European market was at a higher program fleet mix that we've began to shift toward a heavier risk-based fleet as we take advantage of select international markets with stronger used-car demand. Third quarter EBITDA of $178 million was consistent with prior year in constant currency, expanding margin more than 19%, a 13 basis point improvement from prior year in part due to our cost reduction program as well as acquisitions and divestitures in the last year. The commercial segment in Europe showed positive signs as volume up nearly 10%. Our adjusted free cash flow was $116 million inflow through September 30 compared to a $289 million inflow last year, as the timing benefiting vehicle programs we saw in the prior year and reversed, and a temporary investment in vehicle programs in the quarter cause vehicle programs to be approximately $139 million outflow compared to a $3 million outflow in the prior year. We still anticipate cash flow to be within our guidance at year-end. Our financial position remains strong with approximately $3.9 billion of available liquidity. This comprised ending the quarter with $650 million of cash, having $853 million of unused capacity in the revolving credit facility, plus an additional $2.4 billion of availability under our vehicle programs. We remain committed to keeping our corporate net leverage ratio in the range of 3x to 4x with a preference over time for being in the lower half of that range. In October, we redeemed $75 million of the $275 million notes outstanding in 2023, as we continue to execute our capital allocation plan accordingly. Ultimately our net corporate leverage was 3.6x and remains within our targeted range. It is also approximately 2/10 lower than the 3.8x it was both at the same time last year and last quarter. During the quarter, we also repurchased $59 million of shares outstanding. We directed capital from our share buyback program to take advantage what we thought was a depressed share price returning more value to our shareholders. We will continue to take an aggressive approach to share repurchases whenever we view it as an attractive opportunity. Overall, we remain committed to allocate capital to drive the highest return possible. In the third quarter, we had an effective tax rate of 42% in comparison to our prior year rate of 38%, primarily due to foreign taxes on our international operations, state taxes and a one-time net tax effect from the sale of equity investment in our Chinese operations. We are implementing tax planning strategies that we believe will result in a lower effective tax rate in line with the guidance we provided for 2019. Our free cash flow is affected by higher cash tax payments in the quarter due to accelerated state income tax payments and impacts associated with tax reform. We anticipate a temporary increase in cash tax payments in future years as a result of the timing differences due to the repeal of like kind exchange until cumulative accelerated depreciation deductions match the ongoing level of fleet additions. As we enter the fourth quarter, we have narrowed and changed the ranges of our 2019 guidance based on our expectations for the remainder of the year. We expect to generate between $9 million and $9.2 billion of revenue, which has been impacted by a $175 million currency exchange headwind. And for our adjusted EBITDA to be between $750 million $800 million, including $14 million in unanticipated currency headwinds. We see our earnings release for definitions in the full list of assumptions. As we look to the future, we remain focused on further developing and leveraging our family of brands across our global footprint to provide value to our customers and to create value for our shareholders. Our ambitious track record [indiscernible] future state of the company, industry and the numerous opportunities we have in front of us to continue our rich history as a mobility leader. In summary, the Americas had record third quarter results. And although the international market remains competitive, we are seeing signs of pricing improvements, while continuing to get more efficient and target strategic growth opportunities. Underpinning all of this, we are investing in new technologies, mobility solutions and ways to continue to delight our customers. And with that, Larry and I'd be happy to take some questions.

Thank you. [Operator Instructions] Our first question today is coming from John Healy from Northcoast Research. Your line is now live.

Wanted to ask you guys, just to dive in a little bit more into the expectations for the Americas as it relates to fourth quarter pricing. I know you guys are still seeing 0% to 1% for the year. But given some of the items that you called out with the mobility and the truck business, should we expect those types of headwinds to persist? I’m sure it's good business, but should we expect those headwinds to kind of weigh RPD down for the next few quarters? And if that's the case, is the math of kind of low to mid single-digit kind of traditional RPD, what you're expecting for the fourth quarter to kind of get to that range? I just -- I was hoping just to kind of see if that math framework seemed reasonable.

Hi, John. Good morning. This is Larry. So what I would say is that, yes, as we continue to grow the package delivery business and as we continue to grow our Zipcar Commuter business as well as obviously we are going to be growing our car health business. All very profitable businesses, they’re utilization accretive, there's a right decision to make that they will have a drag ongoing on rate per day. And I would say as we turn the quarter in the fourth quarter without getting specifics on exact numbers, we are pretty pleased with how we are seeing bookings right now come through. October started off a little lower on pricing than what we wanted, but as the fleets tightened down in the industry coming out of the summer, then we saw that change in the back half of October. And as we take a look at bookings coming through for the remainder of the year, particularly around the holidays, both volume and rate look pretty good. So I think just -- you have to kind of work through the balance of those, but your point that there we will have a drag on RPD on these products that we are working very hard to expand, once again for the right decisions, for the right profitability decisions.

Understood. Makes sense. And then just a follow-up question. I was hoping to see if there was any sort of qualitative update you guys could give us about the CEO succession planning, and kind of where you guys are at with that opportunity?

Yes, sure. What I would say is the Board is performing a very diligent delivered search to find the very best candidates they can to make sure we stay on course to continue our leadership position and mobility. The good news is we’ve a very strong strategy in place and fortunately we’ve a very strong -- great management team that's out there executing every single day and none of that will change. So we will update everyone as soon as decisions have been made, but the process just continues on.

Thank you.

Thank you. Our next question is coming from Brian Johnson from Barclays. Your line is now live.

Yes. Good morning. And hopefully we will have you on a call for at least a couple more, Larry, but if not pleasure to have worked with you. I wanted to drill down on the two key financial drivers in the Americas, and maybe try to get some waterfall like color on each fleet costs as well as pricing. So in fleet costs, could you may be separate out the positive impact in terms of dollars per month from the retail and alternative disposal channel from what appeared to be some negative headwinds in the auction links?

Brian, good morning. How are you doing?

Good.

Good. And by the way this is my last call. So there won't be any more calls from me after this. But let me just talk a little bit about fleet costs. Obviously, we've had a number of initiatives in this area. So if you put just residual values [indiscernible] for a second, just take a look at the initiatives that we had in place. We've been working a number of initiatives that really first start with data analytics. And we have enhanced and strengthened the data analytics team. We’ve got a lot of data scientists who are really using data to really understand how we're buying fleet, mix and models, trend levels, colors, where we end fleet, where we run the vehicles, where we defleet, what time of the year we deflate them. Coming miles we defleet them with not every cars the same as the next. And so through that data analytics capability and we're looking at tons of data both internal trends as well external data to really get a good handle over how we acquire and how we dispose of the fleet. Then you couple that with the fact that we're growing our alternative channels, alternative channels were up eight points, so up to 70% now that are sold through the alternative channels. So just in that area alone we still have a lot of -- a lot of runway to go to continue growing that number. But what's even more important is the mix of alternative channels that we can continue to grow as well. So our direct-to-consumer is up quite a bit in the quarter, but we have a long runway to go. I think we're up 136% in the number of cars that were sold direct-to-consumers in the quarter, but we have a lot of cars yet to move into that channel. And so we're up to 13 retail locations and we're -- continue to improve our ultimate test drive, which is our online platform selling cars. And -- but we -- we're going to continue to grow that channel. So when you look at what you get for the car, it's hard to kind of dice out how much of the gain on sale, for example was due to this versus this. But the residual value market through the summer continue to be strong and as you go into the fourth quarter, I think what you're seeing this fourth quarter is kind of the normal downtick that you would see in pricing, that we didn't really see in the last couple of years, couple of years ago we had the hurricanes, last year we had I think it was really kind of starting with the threat of tariffs. And we had some other events that caused residual values to be stronger in the fourth quarter than what you normally anticipate. I think this year we are kind of back to a normal downtick, but nothing to be concerned about. In fact, we’ve already sold over 85% of our fleet that we need to sell for this year, so we can be pretty choosy and picky as we go into the fourth quarter about what we sell and where we sell it. So there's just been -- these last few years, it was a great deal of science and data and analytics that have gone into our purchasing and disposal decisions that are just helping us maximize these opportunities.

Okay. But in terms of the year-over-year change in monthly depreciation, down -- well, down $3 despite some potential weakening in the residual markets. You can't -- excuse me, down $30. You can't really break it out of $10 of optimization, $10 of channel how -- you’ve been tracking that internally just to judge how your efforts are doing and picking out the noise of the -- outside market?

Yes. We are tracking it internally. I don't want to go through it on this call, but of course as we take a look at how we're performing in each of the initiatives, that I walked us -- that I just walked you through. We are kind of tracking those metrics as close as we possibly can. But once again, we are really pretty excited in this area and we just think that there's more opportunity there than what we've been able to harvest so far.

Okay. And second place to try to get color on is within the Americas RPD. Is there any way you could break out the impact, for example, you’re beginning to grow with the TNC fleets shifts and Mix and channel from just pricing pressures due to what sounded like a -- due to lack of recalls. Recalls are sometimes bad. Well, seems like recalls are always bad. It they happen, they’re bad, if they don’t happen, they’re bad. But the impact of that on pricing.

Yes, I think as we said that if you take a look at the three businesses that we're talking about, that we've been growing that impact RPD, so the Ride-hail business that we continue to grow that had about 30 basis points impact, the package delivery business that we continue to grow that had about 30% basis impact, and then also the Commuter product and Zipcar also around 30 basis points. So over 90 basis points of the drop were due to kind of those three products that we've been working pretty hard to continue to grow.

Thank you. [Operator Instructions] Our next question is coming from Adam Jonas from Morgan Stanley. Your line is now live.

Thanks, everybody. And I do have one question, one follow-up. Larry, first I wanted to kind of offer thanks and a farewell, given this as your last call. I think you’ve done some really very innovative and some extraordinary things during a challenging -- during some challenges to your business. And I just want to say well done and good luck to your next endeavor.

Thanks, Adam. I appreciate that.

And again, we’ve had disagreements and things, but thank you -- we’ve always handled -- you've always been really, really classy and very enlightening. So I want to thank you for that. All right. So, how -- out of the 450, I guess, on average over the year, I guess you’ve 450,000 cars in the North American fleet, give or take. Roughly what percentage, or maybe the individual unit count, what percentage are pure electric vehicles?

Yes, we don't really …

I know its low, and everyone's low, I just was curious if you had a number.

Yes, we don't really run electric vehicles at this point in the U.S.

Okay.

We do internationally. But in the U.S fleet, no, we do not -- if we have any, we basically have some hybrid vehicles, but we do not have any pure electric vehicles.

Okay. And you’re not the only one, so I’m not just calling out, I was just curious if there was anything. My follow-up Larry is, does enterprise to your knowledge rent to TNC companies right now?

You know, Adam …

And I’m just curious why not? Because I’m not aware of they -- I don’t think they do, but and I think they tried it once and then pulled out. And I’m just kind of curious, what do you know they don’t kind of any?

As not to my knowledge. You’ve to ask them if they’re running any to them. I mean, not to my knowledge they’re. But I think the way I would answer that question is, as we work through the partnership with Lyft and now with Uber, we've approached it very differently I think than maybe others have in the past. Number one, we rent only by the week and we rent only connected vehicles. So we manage the fleet, we manage the usage of the fleet, and we manage the miles on the fleet. And if see anything in those areas that we don't like, then we don't re-rent. That’s the [indiscernible]. So our biggest exposure to anyone driver is one week. So -- and what we -- what I can say is, as we -- we saw very -- only about 4,000 cars in the fleet at this point, but we’re going to be probably about 5,500 cars by the end of the year. And we will continue to grow that next year. What I can say is we watch the results of this, that there's really been nothing that’s been too surprising for us. And so far we like what we see. We are integrated into the Lyft app, so the driver experience is good, we're getting a good selection of drivers coming through. So -- and we have the flexibility to change the arrangements around the deal. So if it looks like pricing needs to be improved, we have the flexibility to do that within the contract. So, so far so good and nothing that we're seeing in there that really tells us that we shouldn't continue to pursue this product.

Thanks, Larry. Good luck.

Thanks, Adam.

Thank you. Our next question today is coming from Ryan Brinkman from J.P. Morgan. Your line is now live.

Thanks for taking my question. Can you just help further unpack the drivers of the 2% lower revenue per day in the Americas segment? How much of it was due to, I guess underlying or pure pricing relative to how much was due to the ancillary revenue or changes in mix to the budget package delivery or Zipcar Commuter? And then, do you think of the drivers of the underlying pricing, the demand environment, industry-wide utilization etcetera. How do you see these factors tracking going forward relative to in 3Q?

Yes. So once again, yes, we did have some pricing weakness just in the regular business in the quarter. But as I said that we've kind of turn the corner on that now that we are into the fourth quarter. Volume is looking good and pricing has improved and is looking much stronger and looks like it will be positive for the quarter. So that's one piece. And then the other pieces are the pieces I just talked about. So they’ve had almost a point impact on price. And we will continue to grow in those three areas as we go forward. Now at some point we will overlap the -- a lot of the growth, and so that over time that will continue, that will start to kind of moderate. But for a while we’re in a trajectory of growth in those three areas, we will probably continue to feel that impact going forward. But I would say that the pricing on just the core rental car business in the quarter, there was probably a bit too much fleet. We just didn't see the tightness in the quarter that we had hoped to see, but and I think it was due to the fact that recalls for at least for us were down over 70% in the third quarter this year versus last year. The number of weather events that occur in the quarter that causes cars to be sucked up just did not happen this year versus last year. And so -- and in fact insurance claims as well are just down when you take a look year-over-year. So the number of cars are probably going into the replacement businesses is down -- certainly down for us. So I think those are kind of the key movements that were happening in the second quarter. And then as you turn into the third quarter, a lot of that has kind of gone away as fleets have tightened down and we are starting to see kind of more of the normal length of rental restrictions by the industry being put in place, kind of city by city.

Okay. That's helpful. Thanks. And then lastly, can you just sort of help us dimension what the trend in fleet costs could be in 2020 in the event that used-car prices track sequentially flat from here and maybe that’s not your assumption. But just it would be great if you could try to separate the tailwind to 2019 earnings for maybe the lower normal course perspective rate of depreciation that should continue at this level of coverage versus separately the sort of more a one-time gains you could've recorded from unexpectedly higher disposal crisis?

Yes. I won't really comment on 2020 fleet cost at this point, because we’re not really ready to yet as -- from a perspective of the buy, but I will point out the fact that what we will continue to see is the further development of our alternative channel, so where a 70% now that will continue to grow next year. Our direct-to-consumer where we will see our largest benefit will continue to grow as our -- as the locations that we're selling cars through continue to maturing as we open new locations next year. So we have a lot of runways still ahead of us as it relates to the data science behind the decisions, behind the buying, behind the sell as well as the methods of which we're selling. We are still -- we have a lot of maturity left to go in those areas, and so I would say we continue to see benefits coming from those as we go through 2020. Right now as far as residual values for next year, we're still looking at the data and a lot of data hasn't really come out yet about expectations, external data around expectations for 2020. We are obviously modeling our own trends of how we're been performing and we continue to perform very, very well in this area. So we will balance all those as we get closer to the end of the year and as we put our budget to bed. But it's overall, it's probably just a bit too soon to talk about overall fleet cost for next year.

Okay. That’s helpful. Thank you.

Thank you. Our next question is from Michael Millman from Millman Research Associates. Your line is now live.

Thank you. I don’t think you talked much about the corporate market. So what are you seeing in the corporate market? What did you see in the corporate market in the third quarter? And what’s your expectation? Also, what’s the tax rate should be, which should we be assuming for next year and so related to that is, what we, The Street, just simply way off on the third quarter to start with and that was exacerbated by the weakness. Thank you.

Sure. Michael, I'll take the first one and John can take the second question. So, good news on corporate market is that we're now back into a volume growth period of time here. So we’ve had now a number of months where we’ve been able to improve volume on our corporate business in the U.S and the corporate volume in EMEA has been extremely strong, was up 10 points this past quarter. So we’ve kind of turn the corner on volume. Now we just have to work on rate. And so, rate continues to be under pressure. The small business kind of moves along with the leisure rate, so as fleets tighten up, and we get leisure rate improvements, we will see improvements in the small business rate per day. The midmarket and large commercials continues to be extremely competitive when those get renewed. So I'm hoping at some point we can turn the corner on pricing on those contracts, but the good news is that we're seeing commercial volume strength and we’re seeing volume improvements kind of month after month now in both regions.

Hey, Michael, this is John. Good morning. As it pertains to taxes, I think without getting too esoteric on the call, the short answer is there is often fluctuation from quarter-to-quarter. If you look at our guidance for the full-year, which is in the press release, you can see that we expect the tax rate to come down from the sort of 40 percentage rate you saw in the third quarter. And that should help you in terms of what we think the full-year is going to look like, which is basically unchanged. And we mentioned in the prepared section that we are going to take some actions in the fourth quarter that we think are going to -- they’re going to result in a lower tax rate in that quarter and help take the year kind of down into the range we expect. In terms of 2020, I think you can expect something similar. At this point based on what you're seeing for the full-year '19 and we will continue to update you on our outlook and try to refine that particularly on a quarter-to-quarter basis as we get into early next year, and have more visibility there.

Thank you. Our next question is coming from Chris Woronka from Deutsche Bank. Your line is now live.

Hey, good morning, guys, and Larry congratulations on a really good run at the company and best of luck in the future. First question was just on the truck rentals. I know that was an area that I think a lot of years ago, it was kind of left dead and there's a new delivery opportunity. Does that make you want to expand your fleet there? And maybe just a quick overview of the economics of how that might play out if you decided to do that?

We -- Chris, thank you. We -- this is Larry. We went through kind of a rightsizing initiative with budget truck and really kind of change the areas that we're focusing on. So we brought down some segments that weren’t just as profitable as we had hope them to be. We reduced our truck fleet to accommodate for that and we really started focusing on more of a round-trip model, more around local rentals and a lot more around package delivery. And we’ve been then growing the fleet in accordance with the appropriate fleet for that kind of business. So we’re seeing a lot more cargo vans and things like that as you would expect, this package delivery business - as that segment continues to grow. So we've spent a few years kind of just really digging deep into budget truck and understanding where we think the profitability opportunities really are there and getting the fleet mix and number of vehicles correct. And then from there as we grow the package delivery business, we will grow the fleet and the type of fleet accordingly with it. And those are longer length rentals. And so they impact the rate per day, but there are much more profitable rentals. So I think the decisions of the truck team has taken to really right size that business has been the right ones to do. I’m pretty proud of how they really reengineered that business. So we will continue down that path and grow appropriately to make sure we keep the utilization of our fleet up and that we buy the right mix of fleet and we go after the right mix of the segments of that business.

Okay. Very good. And a follow-up is, kind of thinking about the numerous investments in technology you've made over the years. And know some of that were more tangible and visible than others, but as we look out and without asking for specific number, but is there a point where kind of that DOE line in Flex and you actually get, this becomes a less labor-intensive business and actually get savings there, kind of irrespective of wherever volume and pricing might be.

Yes. What I would say is, over the last few years we’ve been investing in modernizing all of our core systems in the business. So we had to start there. So if you want to really be able to offer new use cases and connect in a seamless way with partners in the future in mobility, we really have to modernize all of our core systems. So we did that. We modernize our rental reservation systems, our revenue management systems, our fleet systems, our websites, our mobile apps, our HR systems and then mobile -- and then we’re modernizing our accounting systems. And then we started investing in other technologies around replatforming. Zipcar and also connected car fleet and now we’re building our next generation platform to be able to manage mobility in a different way and be able to manage connected fleet data in a different way. And so when you get into connected car and you start looking at the benefits and we've been seeing these in Kansas City as we’ve been running the mobility lab, and you start to see the benefits of data and how data can instruct you to manage the fleet in a different way and more efficient way that you could never possibly do without the data and just depending on people to execute. So we're now starting to see the benefits of that. We are seeing the benefits come through in gas collection as we continue to increase the penetration of gas that's being recorded. The gas profits are being recorded as it relates to connected car transaction. And just how you manage your fleet and how your employees work with the fleet through data is very different than what we’ve been able to do without connected fleet. And then as you take a look at new used cases, where connected car can allow a more seamless interaction with consumers to where you can really start driving more self-service, which we’ve been piloting on the rental side and take out some of the cost that’s in between the customer and the car, that's the opportunity going forward as well. So, the technology kind of building up and modernizing the whole -- all of the systems to be able to be ready for a kind of a new world of mobility and connecting the fleet allows us to really look at the opportunities around how we deliver the product to the customer in a lower-cost way and we're starting to see those benefits come through.

Okay. Very good. Thanks, Larry.

Thank you. Our next question is coming from Derek Glynn from Consumer Edge Research. Your line is now live.

Yes. Good morning. Just on international, how are you thinking about that price and volume trade-off? And then can you provide some more color on what you’re seeing from a competitive standpoint there, particularly from some of the third tier players?

Sure, Derek. Good morning. This is Larry. What I would say on international is that we've gone down a path now of modernizing our volume growth a little bit and really trying to push for rate. It's extremely competitive marketplace. The summer was really competitive. Its under a lot of economic pressures. The Brexit delay continues to weigh heavy on the region. So what we've really been working on is, is how do we can -- how do we turn the corner on this rate per day issue that we've been having as we said earlier in the last 11 quarters, and start to turn that positive, which we were able to do during the third quarter. Now we’ve been very picky about the volume that we’ve taken and we've actually -- part of our volume issue in the third quarter was self-inflicted where we actually got out of some low yielding business that we decided just wasn’t in our best interest to continue to pursue. So as we worked our way out of that, that did impact volume in the third quarter, but that's done now. And we hope to kind of grow the two in balance a little bit better in balance than what we’ve been in the past. So investments in DFP and other things like that help us to look at that differently to help us find those opportunities. And based on how reservations are looking so far for this quarter, I'm pretty pleased with what we’re seeing so far on the rate side for the international team. But the -- competitive set is difficult. There's still a lot of third tier players that are in the marketplace and those don't seem to be going away anytime soon. So we just have to kind of find a way to manage through it. I think we've got very good partnership relationships, long-standing partnerships with our airlines and very good relationships with our corporate accounts. So we continue to work that business and continue to grow that business. So we just have to keep really focused on striking that right balance and not getting too far ahead of volume and it will end up losing it out on price, that’s not what we're there for, we really want to grow the price side of the business and have the right balance going forward.

Okay, got it. That’s helpful. And in the script, I think you mentioned shifting to a higher risk-based fleet into international markets. Are OEMs [indiscernible] do program vehicles there, or are you trying to be more opportunistic with respect to use values? Just any additional comments there will be helpful.

Just as we’ve learned how to manage a greater risk fleet, I think that we have opportunities internationally like we have in North America. Now will we ever be a risk fleet size in international that we are North America? I don't think so, because the OEMs -- the balance of what they sell is not that. So -- but there are opportunities to grow our risk fleet, but we're doing it very specifically in markets where we feel like we've got the capabilities to come remarket the cars and where we feel like the remarketing -- the marketplace for residual values are in the right place. So we're growing it slowly. We will increase our risk fleet for 2020 over 2019. We grew '19 over '18. So each year we will just kind of methodically keep working our way up, that we want to make sure that we’ve got the right capability and the bandwidth, the right methods to remarket our vehicle. So, we will continue to increase that. But once again, it won't be the scale that it is in the U.S., because the OEMs just don't sell that number of risk cars to the industry.

Okay. Thank you. And Larry, wish you the best of luck as well.

Thank you very much.

Thank you. Our next question is from John Healy from Northcoast Research. Your line is now live.

Thank you. Larry, I just wanted to ask a follow-up question regarding just the calendar for the holidays this year. Just as you look at the late Thanksgiving and I think Christmas falling in the middle of the week, does that typically help the business, or does that hurt the business? Just any color there. And then, again it's been a pleasure working with you in the last few years and I wish you all the best there.

Thanks, John. Yes, it's interesting the calendar of the holidays is amazing how -- what it really changes is the booking patterns. So Christmas is just one day later this year as kind of still falls in the middle of the week. But just that one day shift does change, a, how the bookings come through and then the behavior of consumers around where they put their holidays. So there will be an opportunity for hopefully, kind of a Christmas Eve, kind of a week before Christmas Eve leading over through Christmas and you hope that there's the Christmas Eve that leads over New Year's. I think, though when you take a look at it shifting a day that you'll see more of the vacations move to the back half of December than to the week prior to Christmas, which will put some of that rental activity into January as it checks in versus checking in, in December. And so -- so that you have to really watch. So what we do when these day shift like this as we go back to the -- we go back to the year where the day fell the same day of the week, and then we kind of model how those booking trends occurred coming into it and then how the activity actually occurred to the holiday as you go from Christmas into New Year's. And then we tried to apply those trends and any other changes that we may have happened since the holiday fell in that period of time. So there's lot of kind of science that goes into it and trending models that go into it. But one day shift can actually change very significantly the booking patterns of how people book their holidays over the Christmas period. So we're watching that very closely and as we are in international as well.

Okay.

Thank you. We’ve reached end of our question-and-answer session. I would like to turn the floor back over to Larry for any further closing comments.

Thank you very much. So just to summarize, we had this pretty strong third quarter with record earnings in the Americas and positive price in the international region. Year-to-date, we’ve generated $645 million in adjusted EBITDA, approximately 1% higher than prior year despite the numerous challenges we faced in the international region. And the strategic focus on ancillary revenues and a shift in rentals to our direct website channel will continue to provide positive returns in the Americas. So we made significant progress and key strategic initiatives like our partnerships, connected car and direct-to-consumer sales in the third quarter, and we remain focused on improving our profitability as we go through the balance of the year and next year. So, for those of you that I don't talk to between now and the end of the year, I will stay off until the end of the year. But if I don’t catch up with you, thank you very much. It's been great working with you and we'll see you hopefully again. Thanks. Thanks, guys. Have a good day.

Thank you. That does conclude today’s teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.