Greetings and welcome to the Avis Budget Group’s Fourth Quarter and Full Year 2019 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, David Calabria, Treasurer and Senior Vice President of Corporate Finance. Please go ahead, sir.

Good morning and thank you for joining us. On the call with me are Joe Ferraro, our Interim 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 our other periodic filings with the SEC as well as the Investor Relations section of our 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 investor presentation also available on our website. With that, I'd like to turn the call over to Avis Budget Group's Interim Chief Executive Officer, Joe Ferraro.

Thank you, David, and good morning everyone. It's been an invigorating seven weeks since I stepped into the role of interim CEO. There were three things I wanted to accomplish early in my tenure. First, I wanted to finish 2019 strong and we did just that. Second, I wanted a solid 2020 financial plan in place along with clear and strategic initiatives to push improved performance. And finally, I wanted to minimize any distractions for our operations during this transition, so that we were all focused on the required targets. I'm pleased to say that we finished the year strong with another record quarter in the Americas and stabilization in the International segment. We have a plan in place that will continue the momentum we ended in 2019 and I'm excited by our results so far this year. We closed the year on another high note reporting record revenues for both the quarter and the year. 2019 now marks a decade of consecutive annual revenue growth, a combination of increased volume and improved pricing helped deliver $9.2 billion in revenues for the year. Our adjusted EBITDA was $788 million or $800 million when adjusting for currency exchange rate movements and at the high-end of the range we provided in October of last year. The Americas delivered $94 million more of adjusted EBIT than prior year, while the International team was able to drive year-over-year pricing for the second consecutive quarter to help achieve higher revenue than last year excluding currency exchange effects. I'm also pleased to announce, in December, we are awarded the 2019 top rental car travel app, receiving the highest score in the J.D. Power 2019 U.S. Travel App Satisfaction Study. If you haven't tried it yet, I would encourage you to download the app and see what…

Thanks, Joe, and good morning everyone. My comments today discussing changes in revenue per day and per-unit fleet costs will 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. As Joe said, we had a great quarter in the Americas. International tracked in line with our expectations and we finished the year at the high end of the guidance we provided in October. We finished the quarter with a record revenue of approximately $2.2 billion, up $112 million from prior year on 5% higher volume, 1% higher rate and 100 basis point increase in utilization. Despite facing tougher year-over-year comparisons in our fleet costs and used vehicle markets normalizing per-unit fleet cost still improved 3% year-over-year and the quarter. This resulted in our adjusted EBITDA being $143 million for the quarter and $788 million for the year, excluding $12 million of currency exchange rate movements, adjusted EBITDA was $800 million for the full year and $19 million improvement from the prior year. Net income and diluted earnings per share for the quarter was up 32% and 38% respectively due to the outstanding earnings performance. As part of our programmatic approach to our share repurchase program, for the full year of 2019, we have repurchased just over 2.2 million shares at an average price of $27.38, returning over $62 million to our shareholders. We continued to take an aggressive approach to share repurchases whenever we review it as an attractive opportunity. Overall, we remain committed to allocate capital to drive the highest return possible. Our adjusted free cash flow was $277 million for the full year, primarily due to the timing of vehicle programs that occurred at the end…

Thank you. At this time we'll be conducting a question-and-answer session. [Operator Instructions] The first question today comes from John Healy of Northcoast Research. Please go ahead.

Thank you. Joe, I wanted to talk a little bit more about the ride-hailing opportunities for you guys. I apologize if I missed some of it, but could you maybe talk to how much of your fleet in 2019 domestically is in ride-hail and where you think that number might go in 2020? And as you guys build the business case for that offering, how do you think the margin of that business compared to kind of the corporate levels today?

Hi, John. This is Joe. If you have – the first part of your question was how many cars we would have in it. And I'd say it's probably – we've finished 2019 with probably 1% of the fleet associated with ride-hail. I know there has been a lot of questions about ride-hail and ride-hail profitability. And I have to tell you, we pro-form this for a good period of time. We’re probably the last group in on this ride-hail business because we did test it for a bit. Right now – and I'll tell you this, honestly, we won't participate in anything that we don't think is accretive to earnings and right now it is. A core competency of ours is renting cars. And renting cars, whether it would be at the airport or in the local market is what we do well. Things that we looked into and the questions that we all had were what a residual value is going to be like, what are the mileage going to be on the cars, how's the maintenance and damage going to run, what's the rate, liability, et cetera. And like I said, our early finding is that it's accretive to earnings and we're pretty pleased with that and we have great partners. And there's certainly a significant amount of demand in this book of business. We separated the fleet. So we know what cars we have and you guys know we also have devices in them that can – that are connected and we get readings on mileage, so we know outliers. And quite frankly, we're pretty pleased with the mileage that we've seen. It's on target to what we've – what we anticipated. We've sold some cars so far. To be honest we’re testing mileage bands, when is the best time to sell the car through its residual value life and curve. And so far, all of them, every one of them that we sold, whether they would be north of 30,000 or in the 70 plus have been pretty much right on and what we anticipated. We’re selling them through many different channels: retail, direct to dealer, et cetera. And so far it's been successful and we look to grow this going forward.

Great. And then just a follow up question, I thought it was a rather encouraging statement you guys had in the press release about your comments, Joe, about the month of December and your history in the business. And then on the call today, you guys are indicating that that momentum is carried forward into January or February. Could you explain why it's happened? I know this business is always one that's a little bit uneven and unpredictable, but maybe what are the tenants that are taking place right now that you think have caused the business to make a turn for the better? And how sustainable do you think that is as we moved into the big part of the year, the middle part of the year for you guys?

Yes. Okay. This is Joe. I think in order to understand where we are, it's best to look backward a minute and see what happened in the quarter in December. Volume was up significantly for us. And when you unpack it, it was a combination of both commercial and leisure and it was both at the airport and the local market. We saw a good growth in commercial as we said, rental days were up in the range of 4%. And that was on our exclusive accounts and our shared accounts as well and really strong business in the – in our small business segment. On the leisure side, the holidays were terrific. We saw early – I think on the last call we commented that the holidays look good. We saw early that the holidays look favorable. As you know in our industry, the closer you get, the better understanding that you have of it. But further out, they looked pretty good, encouraging enough for us to start thinking about fleet situations by city. And that was important to us to understand where the demand was, and not only where it was, but where it was best suited for us to participate in. And that demand, whether it would be longer length of rental or quite frankly better rate and we did just that. I think the Christmas holiday, we talked about it being one day later, but that one day later changed the whole dynamic and created a holiday that influence January a little bit because many people didn't return in December. They kept the cars out into January, especially International travelers. So we thought that was interesting and it gave us a good start to the quarter. And local market, I talked about it in the prepared…

Great. Thank you guys and congrats.

Thanks John.

The next question is from Adam Jonas of Morgan Stanley. Please go ahead.

Hi, this is Billy Kovanis dialing in for Adam Jonas. Congrats on the solid quarter. Just following up on the earlier question on TNC, I have a two part question. So first, what is the plan for TNC business in the long-term? And do you see the TNC business becoming more incrementally margin accretive? And second, can you please describe how the cars that cycle out of the TNC fleet with high mileage at 80,000 miles are disposed of in terms of the channel mix? And if there are any risks disposing these vehicles? Thanks guys.

Yes, this is Joe. As I mentioned earlier, we are starting to sell cars out of our TNC fleet. Now they are fully connected, and we do operate them isolated the regular cars, so there's no intermingling of fleet. Our process of selling them, both in open retail channels and all our channels, actually, we tested in and as I said earlier, we've seen no change in what we anticipated in the residual value. So they're actually holding to what we thought. And we've checked many different mileage bands to just ensure that we were making the right choices. So, so far, we're comfortable with that. As far as margin, it's been accretive for us. We wouldn't participate in something that we didn't believe that would be nonaccretive. And I happen to believe, after a number of different tests, that this is a good book of business to get involved in. There's plenty of demand, as you are well aware, and we have good partners which we are participating with. And like I said, it's a core competency of ours to rent cars, right? We've been doing it for 70 years, and we're good at it, quite frankly. So our guys look at it by month. If there are any changes to the trends or abnormalities, we act on them. And so far, so good. : Thanks for the color. Appreciate it.

The next question is from Michael Millman of Millman Research Associates. Please go ahead.

Thank you. Can you talk about what you're seeing in the marketplace from you and your competition regarding re-fleeting, given the strengths that presumably others enjoyed at the end of the year and into this year?

Yes, this is Joe. I could tell you that, from where I sit, there is a rationalization of the fleet, right? I think it appears to me, at least early on, that the basic principles of supply and demand are solid.

When you say solid, I'm not sure how to define that. Meaning that there's not been too much of an increase in fleet? Or fleet has been moving along with just demand?

Well, I mean I guess the way I would say it is that I don't see any over-fleeting in the industry right now. I think that you have to think about how the quarter ended, right? There was a strike. And so that pushed orders back. So it's hard to say what the future looks like. But from where I sit today, it looks rational.

The next question is from Hamzah Mazari of Jefferies. Please go ahead.

This is Mario Cortellacci on for Hamzah. Just regarding the volume guide in the Americas, you guys are guiding up 2% to 5%. Just I guess – wondering what kind of confidence – or what gives you confidence in that guide? Is it just being that there's longer length of rentals? And I think you might have given some breakdown on what the contributions were from a volume perspective from traditional rack and then from TNC and then from budget. But I guess, what are your expectations for the year in terms of the breakdown of that 2% to 5% from each of those contributors?

This is Joe again. I think we said in the fourth quarter and in the prepared remarks, the breakdown was, if we were at – if number was 8%, it was 6% car rental, 1% ride-hail, 1% the last mile delivery stuff. I would think – I would kind of use – utilize that as a proxy. We – in the release, we talked a lot about the off-airport and the local market. We think there's a lot of growth in that opportunity. So – and there is longer length. Our proprietary demand fleet pricing system really allows us to grow contribution. And you could tell our length of rental was up in the quarter as well, and we see that trend moving forward.

Great. And then maybe you could also comment on why pricing in this sector just seems to always be in this 0% to 2% range? The space is highly consolidated 90% or so if not more. I mean is there a price ceiling here? Or are there any other variables that we're not seeing? Or something that has to do with the supply-demand balance that you just mentioned?

Yes. I think that’s where I would lean towards. It's about supply and demand, right? We had – in the fourth quarter – and it's about travel trends, right? In the fourth quarter, we had a 2.8% improvement in rate per day, and it was highly leveraged towards the leisure side. And that was on top of a 2.8% improvement in the prior December. So in the fourth quarter, which is highly leveraged towards leisure, there was a, for us, almost 6% improvement in rate per day. I think the other thing that we think about or we talk about that influences rate per day outside of supply and demand is really our ancillary products. We mentioned that in our remarks. We've had a good run of ancillary revenue in the last three quarters. We see that continuing. That's accretive to the overall rate that you would charge on our rental agreement. And that's been improving with a lot of great initiatives and a lot of products that we've been selling of late. Not just the traditional insurance-related products, but we came out with a Split My Bill product, which has had some pretty good early success, which allows our corporate customer to pay for their contracted business and price. And then if they want, they can extend their rental, even rent a larger car or maybe add a service like XM Radio on their own credit card. And we think that could be – that's taken – can take advantage of that and be accretive to our overall rate per day. So it's our ancillary products that we have a lot of confidence in that we've been growing of late. We have a great team who runs that for us. We created a new incentive program that helps our agents better understand what and how to sell. And we've done a terrific job in selling some of these products online before the customer even arrives at our counters.

Great thank you.

The next question is from Brian Johnson of Barclays. We'll move on to the next question. It's from Derek Glynn of Consumer Edge Research. Please go ahead.

Good morning. Can you speak to the strength you're seeing in ancillary? I think you mentioned up 11.5% during the quarter. What are the drivers there? And how sustainable do you think that momentum is as you think about 2020?

Yes, as I mentioned this is Joe. We’ve have three solid quarters of ancillary revenue performance, and the last quarter being up pretty significantly at north of 11%. So we feel pretty good about it, right? It's not just the traditional products that we're selling, like the insurance-related products, that still are growing quite frankly but it is the other ones that we put out that have a lot of interest. We have this new toll product that we have developed, where in the past, we would charge a usage day for every day that you've had the vehicles and gone through tolls. And now we have a – it's probably an all-in package that we've rolled out to two states, I think, with three or so more to come in the first quarter and then throughout the rest of the business this year. And customers like it, especially if you think about commercial customers who have an all-in one bill now that they can expense. We have our Split My Bill that I just talked about that allows a traveler to pay a corporate way on their own on their corporate card and then maybe take a larger car or a car they drive at home and take it for the four or five days they have it on the road, which has created some excitement as well as maybe XM Radio or something along those lines that that people seem to enjoy. We have Curbside Delivery, where if you want to get dropped off at the terminal, you can do that. And we have counter bypass, which is kind of like a – for international travelers, which usually buy packages and are all-in, that we're testing that allows them to bypass the counter for a nominal fee. So there are a number of initiatives, there are many more that we're working on, that we're thinking through. And the beauty of ancillary revenue, it has terrific drop-throughs.

Okay, great. And Joe I think you touched on this as well and there's a slide in the deck. But what kind of opportunity do you see to get more efficient and optimize the cost structure on the International side? Can you speak to any initiatives underway? Or what does the time frame look like on that potential opportunity?

Yes. Listen, I've just started to get involved with the International team, and they're a good group. They want to win in the worst way. They've had some challenges. And I think all the companies have had challenges with maybe a bit of over-fleeting, the pan-European travel hasn't been so great, the economy in Brexit, there's price – pressure on price. And that's the environment that we're in. And so what are we going to do about it? And I think there are some things that we do in the Americas that we can move over there. Our demand fleet pricing strategy, I think, is one. There's no way that someone can come up with the algorithms required to suggest what's the right car to rent at this time to this customer. And we have that in the U.S., and it's worked very favorably for us. We need to continue to roll that out. That'll go through this year and then some maybe. This whole supply and demand – there's a rigor around supply and demand. In the U.S., we look at our fleets virtually every week, 52 weeks a year by city to determine where the needs are and what the strength is. And we do that in International, but a little more rigor, I think, would certainly help us as far as making the right decisions. And there are a number of things that we're looking at with the footprint and country profitability and then integrating our new businesses that we've put in. So we believe we have a path, and I'm excited to work with the gang. I'm going to be going out there in a couple of weeks. And the great part is that both the President of International, Keith Rankin, and I are completely aligned. So more to come.

Okay, great. And if I could just squeeze one more in. Just on the fleet cost guidance in the Americas. What's the underlying residual value assumption there? Just trying to parse that out from potentially some expected impact from other initiatives like direct-to-consumer and whatnot.

Yes. This is Joe. We’ve had great success in our per-unit fleet costs over the last two years, right? I think if you add them both together, it's probably somewhere in the range of about 15% improvement in the last two years. So yes, we came out with guidance at 0% to 3%. There's some used car industry experts that are suggesting residual values due to the pressures of the return of maybe small or midsized SUVS and put pressure on residual values, I've heard, in some cases, a point, point and a half. For us, we've taken that into consideration a bit. And I think when I think about fleet costs in general, to me, it's always a three part solution: it's how you buy the cars; how do you utilize the cars; and then really how you dispose of the cars. So I think all three of them, we've gotten efficient in, over the years. We do a lot of data analytics to suggest what cars to buy, where to buy them, with what trim levels and what the percent should be of risk and program. So we think we have that down and to utilize them, we came out with a mileage optimization activity, which is basically smoothing mileage out along all the cars in the fleet, so we don't have really any out layers there. We think that's an opportunity for us. And lastly, it's how we dispose of cars, and we had 73% of our vehicles disposed in the fourth quarter through alternate channels. December was probably a record for us at 83%. We're going to continue to do those things to help offset whatever residual value headwinds we may see. And so we had a good run of it, and we think that, that will continue for us.

Great, thank you.

The next question is from Rajat Gupta of JPMorgan. Please go ahead.

Hi good morning, thanks for taking my questions. This is Rajat on for Ryan Brinkman. I just had a question on the 2020 EBITDA guidance, which is up only slightly at the midpoint. Based on the comments on the call and how 1Q started, albeit seasonally light, but then U.S. seems to be holding steady, International pricing is getting better, you have the TNC opportunity expanding, there's also the B2C opportunity. And you also highlighted some International integration and organizational efficiency opportunities. So I'm just getting, just trying to get a sense of what – why wouldn't the guidance be higher for 2020? What are the puts and takes there in terms of what are the headwinds that you might see to offset some of the benefits that are ongoing here? And then I have a follow-up. Thanks.

Okay, great. This is Joe. I think we are going to tag team this one. I'll start off, and then I'll turn it over to John. We talked a lot about this subject. Here's what I would say. We generated $788 million worth of EBITDA last year, right, on a reported basis. In the first quarter, we generated, I think, zero or negative one. So the road is long. While I am excited about the first quarter, the large portion of our profit opportunity comes really back half of the second and into the third. And I think it would be prudent for us to get out of the box quickly – which I think we will, in the quarter, but get a better read what business looks like as we get closer into the next earnings call – which will be closer into the back end of the second and into the third. I think that's really the underlying assumption of what we looked at. So, I’ll turn it over to John, but the way I see it is, yes, I think the trends we saw in the fourth will continue, but the height of the – of our business cycle occurs in the last part of the second and the third.

Yes, this is John. I think it is great to finish the year as strong as we did. Obviously, we had a road to navigate to get there and it went well. We've got a great plan in place for 2020. I think one other thing I'd point out is we do have headwinds that exist outside of our operations and things like currency. The euro is down, that has an effect. Where that ends and where the volatility is, is up in the air. So to Joe's point, the first quarter is traditionally the smallest. I think we're excited about what we're seeing. We think that there's opportunity to hopefully continue to find areas where we can outperform, but we do want to make sure that we do that incrementally and continue the momentum that we finished 2019 with as we continue the path forward.

Got it. That is helpful. And just on the capital allocation plans going forward based on where leverage is and what you're targeting, could we expect some pickup in activity there here in 2020? What's your thought process on buyback and some potential M&A, probably internationally? That will be all thanks.

Yes, this is John. The beauty of this business is the cash flow. It's something that I appreciated before I came here, and I've come to appreciate even more since I've spent more time in the business. I'm coming up on about a year with the company. And I think we've got a great team. Our goal is always to prioritize capital allocation to the best return. If you look at last year, we did buy back some stock, we retired a little bit of debt, and we did some acquisitions as well as invest in the core business. Those are the fur pillars. I think we, obviously, believe that directing to the highest returning category is the most important thing, and so I think we're going to be somewhat flexible in terms of that. But I think Joe and I certainly see a path for the company to do better over time, and I think 2020 is a great foundational start to that. So I think that you'll continue to see us take a balanced approach, but certainly, there's opportunities for us to look to repurchase shares.

Got it, that’s helpful. Thank you so much.

The next question is from Chris Woronka of Deutsche Bank. Please go ahead.

Hey, good morning guys. Wanted to ask you about the – your comments about growing the off-airport business. And also the retail operation – retail resale operation, which I think you said doubled in the quarter. I guess the question is, what kind of – are there a lot of upfront or ongoing investments you need to make associated with those? What's kind of the – if there is one, what's kind of the algo or the step function of profitability for those outlets?

Yes. This is John. You know in terms of the off-airport, one of the things that Joe really pointed out to me is that this is an area where we can grow in excess of what you're going to see on-airport. On-airport is growing GDPs because it's a function of planes and runways. Off-airport is a place where our network has opportunity to expand. And we've done some really interesting things. We have a partnership with Loews, the hotel company, where we've been able to go into some of their locations, which minimizes our Capex. It's not a significant amount of money if we're going to do our own facility. Historically, we've looked for leases that don't require a lot of upfront investment. And so I don't think there's a big step function there. We're going to look at that. We have plans to open a number of locations. And I think we're excited about it, but I don't think it's going to be a significant amount of capital. In terms of the retail business, we’ve doubled our vehicle sales last year, we're up over 100%. And I think the operational team has done a phenomenal job of really getting some good positive traction in our business. We have big plans for next year. Historically, we've used existing locations where we have excess capacity, extra lots, those kind of things as we kind of try this and get our feet wet. I think more recently, we're up to 15 locations now. The last few have been really a dedicated sort of off-site location that's more of a retail-specific opportunity for us and nearby, close proximity with other retail stores that are selling vehicles. And we've seen better results, I think, initially out of the gate there. We've talked a little bit about the profitability of the vehicles, they're about $1,000 a unit better. And that's a fully loaded cost. So while there would be potentially some facility costs and some investment there, we're factoring that into the uplift that we expect to see from retail vehicle sales, which is kind of how I think about it and the company thinks about vehicle profitability is a loaded cost with your facility. So I don't think you'll see significant investment there, and I don't think that, that, over time, is going to change the algorithm of the incremental unit profitability that exists if we can grow the retail operations. So there'll be some investment, but I don't think significant enough that we feel like we need to call anything out. And both of those are totally within our control. So we have the ability to modulate them based on how they're going, and we can accelerate or we can slow down as appropriate. So I think it should be pretty manageable.

Okay, that’s great color John. Just a follow-up is on the ride share fleet. As you – I hear what you said you're going to expand it judiciously as you see profitability that meets their requirements. But as you do that, I guess, with some of the truck delivery vehicles, does that change in anyway – the way that you are buying vehicles in terms of – are you – do you dip into the used car market to actually buy cars for those fleets? Or do you plan to do that? Or are you just going to keep everything kind of on the same way that you've been for the core fleet?

Hi, this is Joe. I think just as a general business, we buy our cars to serve two purposes. One is to the rental car customer, certainly, but also with an eye on sales. So that could be different trim levels, different packages in different parts of the country, et cetera. I think the beauty of the two businesses that you talk about, whether the ride-hail or the last mile delivery, it's a different car. It's not a car that we utilize in the regular fleet, but we can utilize the channels that we have in our businesses to remote them. So cargo vans with very big package delivery, you're not going to get a commercial customer per se renting them the same way, but you will get a commercial customer who rent them at their facilities and things of that nature. So we think that while they're in different businesses and different objectives, we can have dual-purpose if there's a need, and it doesn't take away from core competency of day-to-day rental. So that's why I like it, right? It's accretive. So when you think about what the question is, is it airport or off-airport, John talked about it, you're encumbered by runways and employments. These other businesses don't have any of that.

Okay, understood. Thanks guys.

The next question is from John Healy of Northcoast Research. Please go ahead.

Thank you. Just wanted to ask a follow-up to you guys about some of the changes at the Board level. Just maybe some comments there in terms of where you would stand with SRS as well as where you guys might be at in terms of the finalizing the CEO appointment. Thank you.

Thanks John, this is Joe. I don't really want to speculate on the timing of the outcome of the search. The Board is conducting, I think we've said this last time, a diligent process to select a suitable candidate. What I will say this is we have a terrific strategy to grow our business, both near and long term. And we have some really good well thought-out initiatives, I have to say, driven by experienced and skillful leaders. And the good news is there's a lot of energy within our company, so while there is talk about Board and other things, there's a lot of energy in our company. People are really proud of 2019 especially how we finished. And I have to say, really excited about 2020. So, I tried to keep this stuff separate. We are laser-focused on driving our initiatives and our performance. And I happened to meet the new Chairman, Bernardo, last week. I spent two days with him. It was a great meeting. He asked a lot of questions, he is very engaging, and I think very insightful. And he could help us – will help us, and I look forward to working with him in the weeks and months to come. So thank you.

Thank you, guys.

There are no additional questions at this time. I would like to turn the call back over to Joe Ferraro for closing remarks.

Yes, so thank you. Just to summarize, we had strong fourth quarter with record earnings in the Americas and positive price in the International, achieving the first goal we set. In addition, we developed a business plan with goals and targets in 2020 and in my opinion, are entirely achievable. Thank you for your interest in our company, and I look forward to speaking to you again soon. Thank you, and have a nice day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.