Greetings. Welcome to the Avis Budget Group Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief 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; and Izzy Martins, our Chief Financial 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 measure, we are unable to reconcile forward-looking adjusted EBITDA to net income without unreasonable efforts given uncertainty in calculating necessary adjustments including the after-tax effect of such adjustments, which would -- could be significant. 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. Yesterday, we reported our second quarter results, which delivered quarterly revenue of more than $3 billion and an adjusted EBITDA of $214 million. As we discussed on our last call, to accurately portray the business in this quarter and beyond, we need to bifurcate the impacts of nonrecurring fleet gains, higher vehicle interest and decisions made to rightsize our fleet. In fact, we have taken the necessary steps to adjust our fleet in the first half of the year by selling a record amount of vehicles, which allowed us to achieve utilization in the month of June in the Americas, more than a point above prior year, setting us up to be in a strong position to drive additional utilization and pricing benefits through our transition into the summer peak. With the improved utilization, we focus on what we can control to strengthen pricing and reduce our overall holding cost. Our goal has been and always will be to ensure that our fleet is kept inside of our demand. And while the quarter shows our fleet size to be up 2%, we started July with fleet down over prior year. The environment for our business remains robust with record-setting second quarter volume in the Americas. Pricing improved sequentially in May and June from April, with June exiting down 2% year-over-year, but still up significantly compared to 2019 with the Americas showing positive signs for summer pricing. Before I dive into the results in greater detail, I'd like to thank our employees for all their efforts. What we have accomplished over the last six months, especially as it pertains to fleet logistics, has set us up to take advantage of the strong summer and beyond. More importantly, through…

Thank you, Joe, and good morning, everyone. 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 discussing our second quarter earnings. We earned $214 million of adjusted EBITDA in the quarter. Similar to last quarter and as Joe just mentioned, we need to bifurcate the impacts of non-recurring fleet gains and greater vehicle interest. Last year, we had more than $650 million of fleet gains with more than $200 million in the second quarter alone. These oversized fleet gains were a holdover coming out of the pandemic, and the gains will not be replicated given that these were a byproduct of the post-pandemic supply chain imbalance. Our priority in the first half of the year was to rightsize our fleet. For the quarter, these sales generated a loss of approximately $40 million as compared to more than $200 million of gains last year. In total, $245 million of our year-over-year quarterly variance was solely from the disposition of vehicles. Our straight-line depreciation increased from approximately $280 per unit per month to nearly $330 with U.S. rental car being within our previous call guidance. The increase in holding costs resulted in a year-over-year $115 million incremental expense. We will continue to monitor the market and make any adjustments as needed. But right now, we believe our total company net depreciation per unit per month will approximate $350 for the remainder of the year. Irrespective of the impact of the overall net depreciation expense, our goal will always be to manage our fleet inside of demand to give ultimate flexibility to our business. As Joe mentioned earlier, our 2025 fleet purchases are more affordable. While there is still more to do, model year 2025 purchases are…

[Operator Instructions] Our first question is from Chris Woronka with Deutsche Bank. Please proceed.

Hi good morning everyone. Thanks for taking my question. So Joe, trying to square your commentary. Do you think there's any kind of seismic shift in the industry landscape in terms of where some of the lower price volume is going and maybe that's a competitor fleet action, because you've talked about fleet being down year-over-year in July. Your public competitor said the same thing, yet there is the industry volume is clearly growing a lot faster than that. So is there -- have there been some seismic shifts in other competitors, what they're doing with fleet and who's willing to take lower price demand in your opinion?

Yes. Let me just try to tackle this pricing demand commentary. We clearly preferenced price in the quarter. We thought that, that was a prudent thing to do for us, largely because of the inflationary effects on products and services, the interest costs that we've been talking about and the inflated vehicle costs. So it made sense for us to do that and our systems allow us to take one type of margin business over the other. I think if you look at in totality of demand, we still had a record demand quarter, Chris, in the second quarter for us. And if you look at volumes and TSA volumes just in general, we're double digit over 2019 and TSA volumes are not at that level yet. So maybe we took -- we have taken action to grow our company maybe in different ways. But pretty comfortable with the demand aspect. And then lastly, in the quarter, the calendar had a -- I think, a pretty significant effect. If you think about what happened, we were up 5% rental days in the first quarter in the Americas. And some of that 5% could have been second quarter activity as Easter fell in March this year and not April. And then if you think about how the quarter exited, the 4th of July holiday, we had the most cars on rent last year in June. So there was some of that, that took place largely because of that. As far as like competitor’s fleets and things of that nature, I haven't seen anything that would suggest that they're out of line and things of that nature. For us, we wanted to get our fleet size down. We came into the quarter with that as a significant objective. And I believe that we can do demand and days with better utilization than we had in the past.

Great. Thanks Joe. Super helpful. And then as a follow-up, thinking about your model 2025 buys. Can you maybe tell us roughly what percentage you've already done? And then also does the timing shift at all? I mean, do you kind of -- can you maybe give us a little bit of an education on how far in advance you're buying? And is there an opportunity to maybe lock in these lower prices more in advance than you would? Or do you want to wait and kind of see where the market takes you?

Yes, that's a great question, Chris. I think we're kind of fluid in our decision-making process. I said in my prepared remarks, we're about halfway done with our buy. And we've seen significant improvement in our holding costs on vehicle like-for-like basis and in general, frankly. I think you're going to see more of that as time goes on. And we did take out a good number of cars early, and we're -- I have flexibility. Should we see increase in the buy opportunities at prices that we feel get us to a margin that we want, that we can certainly sell more cars and rotate out of some older cars. But we took a pretty significant approach early on in the quarter to rotate some of the fleets out. But I have to say we put the vehicle buy under Brian Troy, you remember him a past CFO, on the transformation team, and we've done a whole lot with data analytics and supporting what we believe through our own data and external data, what holding cost will be as we go out. And so I'm pretty pleased with that, and we're about halfway there.

Great. Thanks, Joe.

Our next question is from Ryan Brinkman with JPMorgan. Please proceed.

Hi, thanks for taking my question. I wanted to ask on liquidity, including as it relates to the equity that you might have in AESOP or some of the other fleet securitization facilities around the world, above and beyond that which you're required to maintain by your lenders? I recall you contributing something $1 billion or so last year beyond which you were required. I'm curious that based on how the vehicle values have trended since then, how much cash you could theoretically extract if you wanted to? And alternatively, maybe how much cushion that means there could be if vehicle prices did track worse than expected for any reason relative to your expectations before you would then be required to put cash into the facilities?

Hi Ryan, good morning. Thank you for the question. I think I'll start with -- when you look at the balance sheet on Table One really what you see the advance rate there. You see it as at about 87%. The real way to calculate it is that we're at about an 83% given the way our structure works. But the point is we can go as high as 87%. So although we have equity in our fleet of about nearly $3.8 billion. I think the main takeaway is that in total, we have the ability to issue more than $1 billion of debt out of our financing structures, which obviously represents further liquidity cushion for our company. And in addition to that, we have been paying in our minimum depreciation, which also continues to further enhance our cushion. So in short, we have more than $1 billion in Cushion.

Okay, great. And then just as a follow-up. I wanted to ask what you thought were like the key benefits that this cushion converse here? I mean, obviously, it means that your free cash flow could be stronger. If you wanted it to be taking cash out or is it that it could more protect it in a downside scenario? Or do you think that this gives additional flexibility to maybe return some of that capital to shareholders? Is it not really prudent to do that now given sort of the uncertainty of where prices could go. But what are the conditions under which you would think about maybe doing that? Or is it better to allow you to run with structurally higher level of EBITDA because you've got less interest expense in there? Or does it allow you to, maybe gaining more market share in the future? If you have the flexibility around fleet sizing that others don't? Or just how are you thinking about maximizing the benefit of this cushion that you do have?

Well, I think you can hit on two things that are clear, right? One is protection is obviously -- or absolutely correct. And the second thing is obviously having ultimate flexibility. So the key thing for us right now is the flexibility as to how we're going to in fleet our model year 2025. And then obviously, try to maintain the appropriate mix of that fleet. So in essence, I'll go back to the protection that you mentioned is correct, but really what we're trying to achieve is that flexibility. And I think our financing structures give us that ultimate flexibility.

Great. Thank you.

Our next question is from John Babcock with Bank of America. Please proceed.

Good morning and thanks for taking my questions. I guess just a quick question. Are you done rightsizing the fleet? And then also, as you go about refreshing the fleet, I was just wondering if you could talk about whether there's going to be any sort of shift in mix? And I'll kind of start from there.

Hi, this is Joe. As far as shift in mix, we go -- we tend to buy cars that people want to drive, right? So we have reservation data that will determine what type of vehicles people are interested in driving, and we also have data that -- on vehicles and what people are interested in buying based on trim levels and things of that nature. So there hasn't been any real seismic shift in the mix or how we plan on going about it. We have both real core and what we call core and non-core cars in our vehicles. Non-core cars are more of the people movers. They seem to be popular these days. We have plenty of those to support the demand. And as you know, they come with a higher price, maybe a tad bit less utilization, but the margin benefit on those is pretty impressive. As far as rotating the fleet, we went into the year with a fleet size that we thought was a little bit higher than I would have liked. So we did a whole lot to kind of get some of those cars out. When I talk about 70% of our vehicles have been disposed of, deleted, whatever you want to call, we're talking about hundreds of thousands of cars here. It's not a small amount. As a matter of fact, it's probably closer to 200 than it is 100. Giving you an idea of how we rotated some of these cars out. And we've been pretty good at making sure that we rotate our cars out based on certain criteria. And we took advantage, quite frankly, of a rising wholesale market earlier on in the year to dispose of a good deal of our vehicles. If you look from kind of like March period to April, there was time that the market improved and we took advantage of that by selling cars and we thought it was right. Are there more to do? Of course. I would never say that's not an opportunity for us as we go forward. But I think that's going to depend on our vehicle buy, when deliveries are coming in, things of that nature. And that will determine our strategy. As I said in my prepared remarks, we're going to have better utilization in the third quarter. We believe that, that will continue. And I want to go into next year with the fleet size that I feel is rightsized as compared to what we believe our demand is. And I think if I'll end it on this, our overriding principle has been and always will be to have our fleet size inside of demand. It gives us the best opportunity for margin drop-through and efficiency in our company.

That’s helpful. And then also, could you just talk about what your view as an ideal level for utilization? And then also, if you could follow up on that with just a little bit of kind of discussion on supply/demand. I just want to understand where the market is right now.

Yes. Look, there's a lot of elements to utilization. And we have systems and technology and also on the ground experience for many, many years now. That allow us to put cars in the spots that we believe are the most attractive from both the supply -- I'm sorry, from both demand standpoint and a pricing standpoint. So we know in advance. We have systems that tell us what close-in demand is like, what longer-term demand is like, by city throughout the country, and by country now that we deployed it in Europe. As far as utilization, our utilization has been pretty stable. If you go back decades, quite frankly. And we believe, though, that there is an opportunity to do more, especially what we've learned in this higher price car cost environment. We have pilots going on right now. We're in flight that we believe we can generate a better utilization outcome within our cities by developing machine learning and task analytics to give us the disposition of every car in our fleet. We know what the issue is. And if we know what the issue is, then task-based analytics going to our teams that will determine what car to fix and when. I think we can make tremendous inroads into utilization as we go forward based on that. And quite frankly, what we've seen in the past couple of years with the price of vehicles, it's a necessary step in the evolution of our company.

Great. Thanks for the detail.

Our next question is from Lizzie Dove with Goldman Sachs. Please proceed.

Hi, thanks for taking the question. You mentioned that the kind of losses have been a little bit better in the quarter than you had expected, which is despite kind of Mannheim declining 6% sequentially in June. I think the DPU guide also changed a little bit in terms of the cadence for the year with 4Q kind of remaining elevated. Just want to understand kind of the moving pieces there and kind of what's changed since you last kind of gave an update.

Good morning Lizzie, I'll take that one. As Joe just mentioned, obviously, one of our top priorities was to have our fleet size inside demand. So that resulted us in disposing quite a bit of vehicles. Actually, it ended up that we disposed 70% of our full year estimated dispositions in the first half. So of course, as you just said, we actually did perform better than what we expected. Even though we do have losses, I would say those losses are really on a per unit basis, pretty nominal. So at this time, given the results of the first six months, although I did say gross debt at $350, we are now changing that our net debt for the remaining two quarters. So for the remainder of the year will be on or close to the $350. I hope that helps.

Yes. That's helpful, thank you. And then I just wanted to touch on capital allocation briefly like as we maybe kind of get towards over this hump with DPU and losses and things like that, like and with the kind of share price where it is? Does that change how you evaluate kind of whether to kind of meaningfully step up buybacks again? I guess what would it take for you to kind of feel comfortable to do that?

I think given what you've seen us do in the past, I would say the overarching theme is that our strategy for capital allocation is not changing. As I mentioned in my prepared remarks, though, in the first half of the year, and similar to what we've done in the first half and in recent years, we obviously invested in our core business. Already $110 million -- I think $110 million through June. Now historically, we've timed our share buybacks with cash generation. And as you know, that comes more in the second half of the year. And given where our shares are currently, you can see what's happening recently and where they're currently trading. We firmly believe our stock is undervalued and that buybacks represent a compelling opportunity, as you can imagine, to create permanent value for our shareholders. However, with the general volatility that you see in the marketplace, and the potential implications of used car market, et cetera, I think we -- as we've always said, it's prudent to be patient allocators of our capital, especially in these uncertain times. So as always, we will deploy our cash flow where we believe it will make the most impact for the company and our stakeholders.

Thanks so much. It’s helpful

Our final -- our next question is from Stephanie Moore with Jefferies. Please proceed.

Hi, good morning. Thank you. I wanted -- I think that the narrative around potential recessionary fears has clearly changed in the last week or so. So I wanted to maybe touch on that topic. So kind of first part of the question, if you can give maybe any color that you've seen in terms of forward bookings. You made nice color in terms of what you saw during the July 4th holiday, but any visibility that you have into outer months and out of forward bookings would be helpful just to gauge the kind of demand environment, how that compares to prior years? And then the second aspect, again, in light of maybe potential recessionary environment, how are you thinking about the potential impact to used vehicle values. If we were to see a material decline in these values, whether we're measuring it by Mannheim or the like, how can you manage DPU and kind of protect yourself like you've done so far this year? Thank you.

I'll start with that. Yes. We usually on the front end of any type of economic slowdown because we're in the travel business, right? I would say that what we've seen more so than not, especially as we came out of the pandemic, and it's true then and it's true today, is that everything now is based on a more seasonality approach to what we've seen in the past. With the first quarter being somewhat leisure-based and the fact that people travel to normal climates, the second quarter improving upon that, the third quarter being the peak, and the fourth quarter being about full getaways and holidays in the winter. I don't see that changing. As a matter of fact, I mentioned earlier about just general European book of business. We've seen reservation growth above prior year. I think maybe largely due to the fact that it's a little less expensive to travel there. The airlines are reporting that inbound travel is pretty good. We still see that. We see commercial business, actually was pretty strong for us, has been post pandemic. And part of that commercial demand is usually some leisure activity as people travel to conduct business meetings and then go away on the weekends. So I haven't seen anything really that would indicate a general downturn. We wary of what inflationary or recessionary pressures are, of course, there's a national election coming up, we're going to pay particular attention to that, what that looks like as far as travel schemes and plans. But so far, we haven't. Now like it or not, I've dealt with -- during my 10-year, inflationary challenges during the recessions that we had in 2008 and 2009, and I was certainly in the CEO spot during the pandemic. And I think we have a good playbook on what to do as far as how we react to that. And I think we came out of both those areas a stronger company than we were -- when we entered. I think our costs are in line. I think our fleet size is in line. We made the prudent decision to take cars out early. We're buying cars now that at a much reduced price. So while no one likes that level of uncertainty, and no one computed to where it is, I do believe that we are ready and so is our team should anything happen like that. But as it stands right now, I would have to say, I don't see it.

Thank you. So I guess just a follow-up on that. You believe that even in the light of recessionary environment that you could -- you have enough flexibility to kind of protect DPU in a few vehicle values? I guess what would be the general level of deterioration we would see in use values where you still you can react accordingly?

I think there's a couple of things to take into account. Everything that Joe said before, given our experience, but typically, in a recessionary environment, you do end up seeing lower interest rates, which in turn end up being an uptick for -- and become a used car price benefit. So that's what we've seen in the past. And so that's what we would expect on the used car side if we had that recessionary environment. But I think it's, as I mentioned earlier, there's still a substantial cushion within our vehicle programs. There's more than that $1 billion to ride out any short-term shocks to the used car market. I hope that's helpful.

Yes, it is. And then Izzy -- I'm sorry, I think either my phone cut out or you did when you provided the 3Q EBITDA outlook? Did you say $550 million to $600 million, I'm sorry, I just misheard you.

I said $500 million to $600 million.

Okay, yes. Thank you. Appreciate it.

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

Okay, to recap, we reported a strong second quarter with record volume in the Americas. We saw pricing improved sequentially in the quarter in the Americas with the third quarter starting off with a strong 4th of July holiday. We took the necessary steps to adjust our fleet to be in a strong position to drive additional utilization and pricing benefits, as we transition into the summer. Our teams around the world are well positioned and prepared to deliver what we believe is another strong summer, and I want to thank all of our employees for their efforts in helping us achieve the results, and I'm excited to see what we can accomplish in the back half 2024. As always, thank you for your time and interest in our company.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.