Greetings. Welcome to the Avis Budget Group Fourth Quarter 2023 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]. Please note, this conference is being recorded. I will now turn the conference over to David Calabria, Treasurer and Senior Vice President of Corporate Finance. Thank you. You may begin.

Good morning, everyone, and thank you for joining us. On the call with me are Joe Ferraro, our Chief Executive Officer; Izzy Martins, our Chief Financial Officer; and Brian Choi, our Chief Transformation Officer. Before we begin, I would like to remind everyone that we will be discussing forward-looking information, including potential future financial performance, which is subject to risks, uncertainties and assumptions that could cause actual results to differ materially from such forward-looking statements and information. Such risks and 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 website. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results and any or all of our forward-looking statements may prove to be inaccurate, and we can make no guarantees about our future performance. We undertake no obligation to update or revise our forward-looking statements. On this call, we will discuss certain non-GAAP financial measures. Please refer to our earnings press release, which is available on our website for how we define these measures and reconciliations to the closest comparable GAAP measures. With that, I'd like to turn the call over to Joe.

Thank you, David. Good morning, everyone, and thank you for joining us today. I want to welcome Izzy Martins, who has recently moved from a prior role as Head of the Americas, and is now our new Chief Financial Officer. Izzy has been instrumental in delivering the record-setting performance in the Americas over these last three years and a prior experience as the VP of Tax, Chief Accounting Officer and CFO of the Americas sets us up well for her new role. She and I have worked together for nearly 20 years, and I'm excited to leverage her experience and depth of knowledge as we grow this business profitably for the years to come. Before I get into our results, I'm happy to be talking to everyone on this conference call from our new world headquarters. Although just a few miles from our previous building, our new state-of-the-art facility features advanced technologies as well as great opportunities for increased collaboration and thought development between the teams, and we believe this allows for increased productivity and performance benefits. We have been located in New Jersey for over 20 years, and we purposely stayed close to retain what I consider to be world-class talent while giving us a place we can be proud of and call home. I would like to thank our team that worked on finding this new home as it is an impressive headquarters. Yesterday, we reported our fourth quarter and full year results. For the quarter, we delivered approximately $2.8 billion of revenue and $311 million of adjusted EBITDA. And for the full year, we achieved an all-time annual revenue record for our company of over $12 billion and our second highest adjusted EBITDA ever of approximately $2.5 billion. Looking at our fourth quarter results, our expectations were…

Thank you, Joe, for the kind words and for entrusting me to be your CFO during such a tumultuous period of our company's history. It's been an incredible learning experience and I'm going to continue to lean on your guidance in this new role. I'm only comfortable taking on this position because I know the finance team here is left in very capable hands. Let me now turn it over to our new CFO, Izzy, so she can introduce herself and take you through our liquidity and outlook.

Thank you, Brian and Joe, for your kind introduction. Good morning, everyone. I look forward to getting to know you more, our investment community in the coming months. Before I get into my prepared remarks, I want to take a minute to say how excited I am to assume the CFO role. I am also truly honored to lead our talented finance team that I have worked with for many years. Brian has done an exceptional job since he joined our team 3 years ago and we will continue to support each other to drive sustainable margins for our company. I will now discuss our liquidity and near-term outlook. My comments today will focus on our adjusted results, which are reconciled from our GAAP numbers in our press release. Let me start off by addressing capital allocation. Once again, we were quite active. We deployed nearly $260 million in the fourth quarter alone, repurchasing 1.4 million shares that brings our total share buybacks throughout 2023 to nearly $900 million or 4.3 million shares. We also paid a special dividend of $10 per share to our shareholders. This is the first cash dividend in our company's history. In addition, we've reinvested $330 million throughout the year into our core business to drive long-term efficiencies and overall profitability. Examples of these investments include enhancing several operational facilities, the continual migration of data to the cloud, promoting speed, reliability and a more certain cost outcome, developing and enhancing technology to track and increase productivity. And lastly, but just as important, introduced and refined several technological solutions to streamline our customers' journey, enhance their experience and allow increased throughput. Actually, we have reinvested nearly $800 million over the last the years in these areas, including our new state-of-the-art headquarters in Parsippany, New Jersey. We…

[Operator Instructions]. Our first questions come from the line of John Healy with Northcoast Research. Please proceed with your questions.

Thank you. And Brian, congrats on the transition here and Izzy as well. Just wanted to ask a question about the plans to kind of defleet in Q1. The $325 in depreciation expense, is that a global number? And how do you see that number kind of faring compared to what you expect as we roll throughout the year? Are there some step-ups because maybe you're selling cars sooner? I'm just trying to understand that $325 number because it just seems like a big step-up from where we were.

Okay. This is Izzy. Thank you for the warm welcome. So you're right. When you went through the prepared remarks, actually, Joe mentioned that the Americas per-unit fleet costs were $306 at the end of the fourth quarter. I mentioned that on a total company basis, I expect us to be closer to $325 per unit. We also said that our fourth quarter gains were around $50 million, which is about $180 million or 60% reduction despite the fact that we sold a lot more vehicles in the fourth quarter. So the way I would think about it for 2024 is that our gross depreciation and our net depreciation should align. Now your question about is that a huge step-up I don't expect as the exit trend being closer, call it, the lower $300s, but in excess of the $300 that we had been saying over time, I expect it to get to $325 and may not get to that $325 level by the end of the first quarter. But I think the more important thing is I do expect the gross and net depreciation to be more in alignment.

And John, let me just jump in here. Let me just jump in here for 1 second and just give you some strategies behind it. When you think about managing fleet in the long term, fleet rotation is extremely important. How you buy cars and deliver them into your business and then exit cars out at the proper time at the right place is extremely critical. And I think over the long haul, when you think about buying and selling, one of the more important and overlooked aspects is how you rotate your fleet because it allows you to have or maintain a certain age level or mileage level that is both operationally prudent from an efficiency standpoint as it turns out to be in light vehicle costs as well as from a customer acceptance. And we've been doing that. I mentioned that throughout the entirety of last year, how we were rotating our fleet, thinking about how where we came from in post pandemic where the cars there were shortages of vehicles and the agent and mileage was getting up there. It was important to rightsize, and we will continue to do that even into the first quarter. And frankly, the way I look at it right now, we are going to get our fleet levels down as we continue to go from the first quarter, potentially into the second until we get to the peak

Got it. Makes sense. And then a question for Brian. Just I was hoping, Brian, if you could give us maybe some color on kind of early day learnings about some of the initiatives or efforts that you're trying to execute upon a way to maybe conceptualize the areas of the business that are the first set of priorities for you? And any way to think about the totality of maybe cost savings potential?

Sure. John. So Joe highlighted a bit about the role during his prepared remarks, and I don't have too much more to add at this time. At a high level though, let me describe it this way. I firmly believe that our teams are best at what they do given the resources that they have available. And I think our results have reflected that over time. But if we've modernized the tools at their disposal, if we rearchitected key functions of the business from a first principles perspective, that fully leveraged technology and data available to us today, I think our operators would deliver a step function improvement in productivity and efficiency. And that's what the group here is going to be focused on providing resources to our teams that are embedded in the day-to-day workflow processes to make them even better at what they do. Let me preempt kind of future questions on this. For competitive reasons, we won't be providing regular updates on this going forward. We're going to take the same communication approach to this function as we did with our EV group a few years ago. I would just say we'll let our actions and outcomes speak for themselves.

Got it. Thank you guys.

Thank you. Our next questions come from the line of Adam Jonas with Morgan Stanley. Please proceed with your questions.

Thanks, everybody. And congrats, Izzy and Brian. So your net vehicle suite is around $30,000 a per unit, then I'm using your average 4Q fleet. So just -- I'm using the $700,000 number on that versus $19,000 in 2019. So carrying costs divided by fleet size, and that might not be the perfect metric, but just bear with me. It's up 60% from 2019 to 2023. But yet your fleet cost guide is up less than half that kind of into the low $300s. So why wouldn't depreciation per unit fleet cost per unit mean revert closer to $400 and $300 or continue to err on the side higher, given just the massive growth in the carrying cost per unit on your books. Thanks. I have a follow-up.

Hi Adam, it's Izzy. Thank you for that question. I think what we see right now, given the increase to the $325 that we're seeing, I don't disagree that as time progresses, as you know, we evaluate our monthly depreciation actually depreciation rates on a monthly basis. So if things change, we will be changing. But based on our -- what we're seeing right now, the $325 is what we expect in the near term for 2024.

Adam, just to add to that, sorry, this is Brian. Yes, the carrying cost is up 60% higher. So where we're buying the cars is more expensive. But what we're selling the cars is higher as well and depreciation reflects kind of that total carrying cost. So you won't see a one-for-one step up that way.

Okay. Thanks, Brian. Just a follow-up. Hertz has really struggled with collision and repair challenges with their EV fleet. Now obviously, there -- I know you don't disclose the EV fleet and you're not going to do that on this call. And I respect that there are a multiple higher than you in terms of the intensity of that fleet particularly relative to the infrastructure. But how much of that would you -- are you kind of, let's say, confronting some of the similar challenges on collision and repair? And if so, how much of a headwind has that been for you? And how are you mitigating it?

Thanks, Adam. This is Joe. Let me just say this. We haven't experienced any out-of-the-norm headwinds as associated with our EV supply chain and maintenance-related issues. I think if you think about what we tried to do with EVs, when I was visiting and talking to our OEM partners, back in 2021, they all talked about how there was going to be a larger portion of EVs coming in our -- on our future buys. And I left those meetings thinking that we had a first and foremost, figure out how we were going to charge them. If you think about providing a vehicle to a consumer, you can't provide a vehicle without gas and you certainly can't provide a vehicle in this time without a charge. So we spent a lot of time doing that. And then we dealt with a lot of OEMs. So we wanted a varied approach to fleet like we do with ice cars. We think it has a material benefit on supply chain or maintenance and damage related expenses over the long haul. It insulates us from recalls that may pop up from time to time, and it gives customers a more diverse product offering. We were watching what the demand curves will like from buying new car EVs versus gas cars. And there was uncertainty from us and from a rental standpoint about what demand would really be like in the rental environment because it was clear that people were buying them and charging them at their homes, but what was it going to be like when they took a car out on the road. And part of our strategy was to align and try to get as many of these rented at our airports in the places that would develop like the West Coast and more of the sunshine states. So we went in a -- like we do regular cars, more of a conservative approach on how we wanted to buy them, how many we wanted to have, while learning the logistics around what happens with them, how long it takes to charge them and get them ready for rental, the maintenance and damage associated with products and tried to rent them in segments that had the best possible drop through. I hope that helps. And you're right about your earlier comment. It's not a meaningful part of our fleet size.

Thanks, Joe.

Thank you. Our next questions come from the line of Chris Stathoulopoulos with SIG. Please proceed with your questions.

Good morning. Thanks for taking my question. So the Americas RPD. I get the comp issue last year with the operational challenges experienced by some of the U.S. airlines here. But could you perhaps expand or give a finer detail on how core pricing track through 4Q and how it's tracking into 1Q so far? Thank you.

Sure. I think there's the strong demand that we're seeing mostly coming out of the Americas in the last year and the year prior to that. So there is this demand curve that we are seeing, which causes us to have a lot of cars that we put on the road. And once you have a lot of demand, we have these -- we have our system, which is DFP. It's our proprietary system, which kind of measures, forecasting and prices in the marketplace and the amount of inventory that we have and gives us our best optimal price. One thing that I'm pretty pleased with is the fact that for the past 11 quarters, our pricing has maintained at a level above 2019. Now that's a long period of time. And during that period of time, obviously, there was the supply imbalances in the early years, post-COVID that created enormous rate generation. That is normalized and seasonality is certainly more apparent. I think as we go forward, you're going to see those elevated prices compared to 2019, I look at our advanced reservations going out, that hasn't seemed to change, certainly from a leisure standpoint. And if you think about our sometimes not spoken about our commercial book of business, which has grown since 2019. I know a lot of travel companies are talking about that getting back to 2019, but our commercial business has grown since 2019. And especially on the strategic ones, which are long-term larger commercial business have all come with a relative price increase. So the way I see it, the first quarter kind of be like a little more of the same as how we were compared to 2019, I fully expect the prices compared to '19 to be elevated. And I do believe that once we get into the peak, we continue to do what I said earlier about rationalizing and rotating our fleet out that it gets close to the 2023 levels.

Okay. And as a follow-up, for you, Joe, or perhaps Brian or both. There's a lot of moving parts here around these various enterprise-level initiatives. If you could perhaps just size those for the top three or five projects rank order and KPIs and more importantly, how do we -- where and sort of how should we think about those ultimately flowing through RPD and your direct operating costs. Thank you.

Yeah, thanks. Yes. I'll start and Brian can add a little color. We've been talking about using the word transforming over the past number of calls. We've been heavily involved in generating efficiency in our business through an operational drop-throughs through cost efficiencies. We spent an inordinate amount of time looking at our productivity systems and how we developed and improve the amount of rate of efficiency, especially as it pertains to cleaning and renting cars. If you look at our overall performance, our productivity is better than where we were in 2019 with many more rentals. So I think we've established the framework of that level of activity. When you think about our in-life vehicle maintenance-related costs is in general. As we de-fleeted as I talked earlier about rotating some of our fleet out, as we de-fleeted some of our age and mileage cars, we've seen a definite improvement in how we organize around our in-life maintenance-related costs, also with differentiators and processes and procedures to organize around particular spend as it pertains to tires and glass, vehicle parts and things of that nature. So we've done that. We've been proved by overall operating efficiency of our systems. And I think what gets me excited about the Brian role, and I'll turn it over to him, is that we no longer what do we believe is our people need to be data miner. And Brian talked about earlier, getting the information, the technology, the data in front of them makes all boats rise at the same level and allows them to do what they do best, and that's operationally execute. So you'll see a continuation of that and a more normalization around our business. While we get into some of the other things that deal with revenue generation through advanced segmentation or fleet dynamics on how we buy and purchase and sell cars. I hope that helps. Brian?

Yes. I think Joe touched on all of it. Just maybe a little color I would think of the big towers that we have on our operational cost funds as being the initial focus of the group. So think of supply chain, workforce planning and our real estate portfolio. And these are big buckets of cost that you see inflationary pressures. And what we need to do is have 100% visibility and have that disseminate across our organization so that our operators can make timely business decisions. And you'll see our focus around that. Kind of dovetail with the revenue side of things as the year progresses. But right now, we're focused more on the cost side of things. And in terms of sizing it, we're not getting into putting out numbers out there right now.

Okay. Thank you.

Thank you. Our next questions come from the line of Ryan Brinkman with JPMorgan. Please proceed with your question.

Hi, great. Thanks for taking my questions. I wanted to start on some questions around the typically negative income tax rate in the quarter and any benefits you might have received from the Inflation Reduction Act that could have contributed to that. What is the potential do you think to maybe continue to generate such credits in the future? How does the timing of the credits work? I think when consumers buy EVs under the IRA is essentially like a refundable credit extended at the time of the purchase, but for corporates, maybe it's more of a traditional credit. And so maybe results initially an increase to deferred tax assets rather than immediately convert to cash, but would be interested if you have any of the details around how the mechanics of that works? And then how should this inform our modelling of tax rate do you think going forward? Thanks.

Hi, Ryan. It's Izzy. Thank you for the question. I think there's a lot there to unpack. So let me just start with what happened in the fourth quarter. So as you mentioned, the Inflation Reduction Act does allow us to take credits on hybrids and EVs. And the other piece that's happening that's kind of not as one-for-one is the fact that full expensing is phasing out as of right now, right? There's still a chance that the government reassesses that and brings back just full expensing. But in 2023, it starts phasing out. So as we were going through the years, not only the current year, but the future years, we felt it was prudent to actually record that credit. Now you hit the nail on the head. It is a deferred tax asset. So it has an indefinite life. We won't use it in the current year, most likely, but we have the ability to use it in future years. When it comes from a modelling perspective, I think the best way to look at it and when we file our K, you'll see it. But I think the best rate to model would be around 26%. For '23, and I would say for '24, it should hover around that maybe up one or two points. I hope that was helpful.

Very helpful. Thank you. And then just as a somewhat related follow-up. Do the benefits that you're receiving relate more to the purchase of plug-in hybrid electric vehicles rather than battery electric vehicles with no internal combustion engines? What is the split there in your EV fleet now between BEVs and PHEVs. And what kind of residual trend are you seeing out there for PHEVs versus BEVs? Because there's been a lot of discussion about growing demand for hybrids amidst decelerating demand for EVs. And I just wonder if maybe you sidestep some of that EV depreciation exposure that your competitors have seen benefiting from the IRA but not being hurt by the depreciation via your BEV strategy? What could you say there?

I'll just start and then I'll throw it over to Izzy for more of the depreciation aspect. I will tell you that we have vehicle makes models of all types and especially around the hybrid PHEV. So we it's really early on those. We've gotten those in late during this past year. I can tell you the customer acceptance on them is pretty strong. But I think it's early for us to kind of give a feel of how they are doing, whether it be from a residual value effect because we haven't sold many or a supply chain effect as far as maintenance damage.

And Ryan, none of those, call it, mix or anything of that nature would have any impact as to how we calculate the credit under the IRA.

That's helpful. Maybe just very finally, I wanted to get your thoughts on budget trucks as it might relate to electrification. Obviously, very early days there, too. But with vehicles like the E-Transit and BrightDrop beginning to enter, there's been more discussion about those being in commercial fleets that operate in the same paths or routes every day. Just curious what any implications, maybe it makes more sense to proceed slowly there after some of the depreciation we've seen on the pass car side. But I do think the commercial side might be a little bit different. Just curious how you're thinking about electrification as it relates to budget trucks.

Great question. We normally get a question about that. But our budget truck business has -- a large part of it is last-mile delivery. And you're very right about, is there a business aspect to having some electrification of vehicles in that business. To answer your question, we have explored it. We have some in our fleet currently today. And like we explored the EVs in the rental fleet, it's a little -- this is a little bit different because you actually know the consumer who's renting it for you. It's a large package companies that go out and have skilled at managing their productivity and their teams. The only thing that we always look for in scenarios like that, they do operate in somewhat urban settings. So we are prudent about that. But we have we have some in our fleet now, and we have explored that. And so far, the acceptances from a consumer -- from a business standpoint, people are renting is pretty popular. Again, early on outside cost, but we haven't really seen anything materialize that I would be apprehensive about currently.

Great. Thank you.

Thank you. Our next questions come from the line of Chris Woronka with Deutsche Bank. Please proceed with your questions.

Hi, good morning, everyone. And yes, congratulations to Brian and Izzy on the new roles. I was hoping we could talk a little bit about, I guess, mix, Joe. You mentioned normalization a lot. Clearly, we're kind of seeing it throughout the business. Can you give us any sense kind of on where you were you trended through the fourth quarter, where you're at now or where you expect to be in '24 on kind of commercial versus leisure broadly? I know it's something I think you normally put in the K, which isn't out yet. So maybe any commentary you can give us there? And kind of what you see like-for-like pricing if we took all this mix adjustment away.

Yes. Okay. So like I said, I think the underlying business economics as it pertains to the consumer, I think, are strong. And we will continue to see that throughout 2024 as it pertains Chris, to both demand and price. So let's start off with demand. Demand we saw in 2023, we had the best summer on record, yet we come out of it, and we have the strongest October and a good holiday season. I think the fourth quarter depicts like that segmentation of travel. October, you would say, well, why would that be the business? Well, the busiest? Well, it has the biggest impact of both commercial and leisure in any given month. Commercial because there's a lot of business travel, a lot of conventions, leisure because all getaways and like I said, some combination of both, which I think is incredibly powerful. You have a person who goes on a business trip to a city. And we saw the cities start to develop bigger and bigger books of business last year than we had in the past. So it goes on a business trip to a city and then takes a weekend football game or something. I mean we've seen that combination of commercial that leads to leisure. And I do think that's pretty powerful when it comes to rental and rental demand. And we have a good number of commercial accounts. We have, like I said, more business than we did in 2019. I think you'll start seeing that kind of normalize from the big jumps that we had -- what we saw in previous years, the commercial and leisure spread. But price, as I said, we signed a lot of our -- in 2023, our larger commercial accounts at a price improvement, which is helpful…

Yes. Super helpful. Thanks, Joe. Just as a follow-up, it's pretty clear you guys gained market share. And I don't know if it's possible to look at it by segment. But how durable do you think those gains are, Joe? I mean there's reasons for it, most of which are -- you guys are terrific operators and have been, like you said, had the right cars and things like that. But do you think it's sustainable if one or more of your competitors maybe optimizes their fleet a little differently.

Yes. We don't really ever talk about market share as a company strategy or is something that we're driving. It's an outcome of how you perform in business is really that. And I think over the years, what we've tried to do is insulate ourselves by how we look at our segments and how we manage our business. Right now, inbound business is very, very strong, right? And it wasn't apparent in the prior years. And I believe that, that certainly will continue. What other people do with their fleets and their -- and how they go about is not something that I would suggest that we do here. We look at our own business, our own internal metrics, how we believe we need to grow it. We set our strategies. We have the performance metrics that we manage and look at market share for me is kind of an outcome.

Okay. Thanks, Joe.

Thank you. Our final questions will come from the line of Stephanie Moore with Jefferies. Please proceed with your questions.

Hi, good morning. Thank you. So I think, I appreciate the color provided on the DPU [ph] expectations in 2024. I think there's understandably a lot of moving pieces that go into that DPU. But can you talk about the levers that can be pulled to help mitigate outside on DPU going forward? Or maybe ask another way, how can investors get comfortable that there's not incremental pressure to earnings from here as the year progresses? Thanks.

I think it's – hi, Stephanie, it's Izzy. I think it's one of those things that as we were preparing for this is how we're thinking about how the first quarter, the second quarter and the third quarter kind of progress. So your question about the $325 that we're saying for the total company. As you can imagine, there's many -- not many, but there are levers that we think about. We think about the mix of the fleet, how long we're going to hold on to the fleet, how many mileage are we putting in it, as Brian stated in the prior in the prior question, right? It has a lot to do also how the used car market is performing. So there are times, there's ups and downs of the used car market. But of course, we're always trying to, as I said earlier, trying to actually depreciate to no gain or loss. So really, as the coming months progress, as we see what happens in the first quarter and we're not just only going to defleet in the first quarter, we're going to defleet as well in the second quarter. We'll continue to evaluate it, but our assumptions right now is that our total company depreciation per unit will be in the range of $325.

Got it. And then just as a quick follow-up on RPD. So just a clarification. So it sounds like you expect normal seasonality in RPD throughout the year. And continuing to use 2019 as that benchmark from, so to say, a spread standpoint. So are you saying that the spread should remain pretty consistent as we move throughout 2019? We move throughout 2024 versus 2019 levels just following normal seasonality?

Yes. That's what I would suggest. It would be -- second quarter being better than the first and the third quarter being the pinnacle. That's not going to change. It's just going to be a certainly a more elevated level than it was pre-pandemic.

Right. Thank you so much.

Thank you. We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Joe Ferraro for closing remarks.

Thank you. So to recap, we reported our best full year revenue in our company's history and our second highest adjusted EBITDA ever. We believe demand to continue to be strong and price elevated well above the 2019 levels as we manage efficiency improvements while keeping our vehicle supply tight. I want to take this time to thank all of our employees around the world for their tireless efforts in helping us achieve these results, and I'm excited to see what we can accomplish in 2024. As always, thank you for your time and interest in our company and be safe with this weather.

Thank you. That does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.