Q3 2019 Earnings Call
Greetings and welcome to the Avis budget Group third quarter 2019 conference call. At this time, all participants are any of us there'll be mode.
Sure that's recession will follow the formal presentation.
If I do want require operator assistance during the conference. Please press Star Zero Wonder telephone keypad.
As a reminder, this conference is being recorded.
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'll be discussing forward looking information that involves risks uncertainties assumptions that could cause actual results to.
Really such forward looking statements and information.
Such risks assumptions and uncertainties and other factors are identified in our earnings release and other periodic filings with the FCC as well as the Investor Relations section of our website, we undertake no obligation to update or revise our forward looking statements or comments today will focus on our adjusted results. We believed that our financial performance is better demonstrate it use.
These non-GAAP find <unk> financial measures, which are reconciled to GAAP numbers and our press release and that 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, and 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 some rental days and a 20 basis point increase in vehicle utilization year over year.
Our Americas 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 and 11 quarters. They average length of our rentals increased 1% from last year barring the frequency of vehicle cleaning and preparation, resulting in more profitable rentals and optimizing our fleet mix impairing the right customer with the right car has.
Also showed a positive impact on customers rental experience as seen through our record high net promoter scores throughout the world.
We have now eclipse more than 260000 vehicles interconnected sleep and we remain on track to connect more than 200000 by the year end.
We continue to launch locations for our mileage optimization initiative and have 14 cities acted with further locations targeted by the ended 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 on the core business, where simultaneously investing and mobility initiatives unlocking incremental profit opportunities and enriching the eva's value proposition on.
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 and 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 where we saw online transactions up more than 3% and the quarter. The 20.
Eight consecutive month with an improvement.
Our local market strategy drove longer length, the rental and increased revenue per transaction and provided solid returns growing by 5% and 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 the provides higher utilization.
Vehicles in off peak times with low mileage accretion at an 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 proper.
The ability.
Over the third quarter fewer extreme weather events recalls vehicular accidents created excess fleet levels would stroke pressure on pricing in the quarter. However in September both industrywide accelerated fleet dispositions and significantly fewer new vehicle purchases have helped to rightsize supply.
Hi.
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 and 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 dispose of 85% of the fleet, we expect to sell in 2019 with a record high of more than 70% and alternative disposition channels.
By leveraging our fleet connectivity, we can better managed vehicle usage, such as ensuring miles are distributed more evenly throughout the fleet.
We also extend this technology to manage our ride helsley vehicle mileage and reduce usage of vehicles that are accumulating miles to quickly to protect residual values as a direct result, we're able to reduce fleet costs and deploy our REIT 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 as 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 teams results considering the uncertainty surrounding Brexit the weakness an entry European travel and higher fleet costs due to the enactment of stricter vehicle regulations, such as W. LTP.
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 11 quarters. Despite seven European Airlines halting operations and the recent bankruptcy and the travel and leisure market.
International team was able to mitigate lost 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 day showed positive year over year growth with mid market in 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'd 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 partnership so powerfully, formerly known as I'd systems Continental and our Oems, including our most recent announcement that will be leveraging Ford's connected services across Europe .
We're making progress every day with more than 160000 vehicles currently connected and a line of sight over 200000 connected vehicles by the end of the year.
We continue to see benefits from our connected fleet, including well over one dollar an incremental fuel recovery on each connected car rental which more than pace 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 case.
It is powered by self service capabilities and enhances our fleet management capability supporting our new fleet models with right held companies.
It has been a multiyear journey for us to mature this concept to 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 his capabilities to allow customers to control their end to end rental experience.
Initiatives like specialized lost damage waiver pricing pilot of Itotal unlimited and the expansion of our new ancillary incentive plan continues to drive growth in revenue and customer experience. We have established new customer ancillary touch points provide product and service offerings tailored to customer preferences, allowing us the selby.
On the counter we continue to grow the number of transactions on our mobile app and preferred customers, who use the App report significantly higher net promoter scores and those who do not.
The third quarter results to our first quarter offerings split my Bill are split bill capability, and we're already seeing an increase of products being taken with our new functionality like Sirius XM or curbside delivery with the introduction of split my Bill our business travelers can go beyond the normal corporate rental to experience upgrade.
It's an 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 and the area and we're thrilled to offer a feature that'll help them make the reconciliation of travel expenses cleaner and easier our mobile app experience gives customers.
As more customization and more personalization.
Their trip than any other brand.
Previously we discussed our partnership with left in the last quarter, we announced a partnership with Uber as well. Since then we expanded our operations to new locations are now in 13 major cities. The fleet has grown approximately 60% in the quarter. We continue to expect growth through the remainder of the year.
We believe there are several benefits of the partnership that can improve our overall economic performance such as extending the age of a portion of our fleet and de risking their fleet sales the value. We generate from these partnerships continues to show how car rental and write Hell can operate in unison by providing mobility solutions to a wide array of intersecting customer.
Ours.
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 autonomous 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 are.
At par 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 are 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 in our multiyear mobility investments for 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 in 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 all.
Turning to disposition channels will be key to unlocking continued incremental benefits in the international region, we're continuing to take steps to mitigate the effects of uncertainty in the market, but we are 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.
The increase dot 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 costs, what I'll refer to changes excluding exchange rate effects. My comments also focused on our adjusted results are reconciled from our GAAP numbers in both our press release and Investor presentation.
I'd like to start with an overview of the third quarter for the total company as Larry mentioned, we had a strong quarter. The 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 dollar 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 moving through the first nine months adjusted EBITDA was 668.
In 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, 3% hired a 321 million.
Revenues, excluding exchange rate effects improved 1% and rental days improved by more than 3%. Despite the 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 the increase in or is it car 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 at the item or over 90 basis points and.
Total.
As Larry mentioned, the ancillary revenue increase was 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 helped drive revenue per day, showing that our customers prefer optionality and personalization.
And to complete their rental experience the etwo product that we've been testing in Texas seem favorable responses since launch and we look forward to rolling the product out to new markets for 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 48000 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'll continue to benefit from the significant opportunity to improve fleet costs through further success in this initiative.
Each vehicle, we disposed through alternative channels says is hundreds of dollars and disposal costs and each vehicle, we sell direct to consumer can generate more than $1000 of additional benefit.
We believe our strategy to accelerate the de fleeting process beat our competitors to market and helped us to take advantage of stable residual values over the summer as a result, we've disposed of approximately 85% of the vehicles, we plan to sell in 2019.
As we anticipated vehicle interest continues to be a headwind increasing due to raise by 5 million in the quarter, although floating rates have come down we expect eco interest to continue to be a headwind to the remainder of the or do you are significant portion of fixed rate debt.
In our international business, we continue to focus on revenue per day, which increased five cents from prior year, excluding exchange rate effects. Our first positive increase in 11 quarters currency continues through the largest impact on reported revenue with 42 million in the quarter. However, excluding experiences exchange rate effects revenue is down less than 1%.
And 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 UK and the apex fleet refresh in Australia, New Zealand traditionally the European market has had a higher program fleet mix that we have begun to shift toward a heavier risk base fleet as we take advantage of select international markets, a stronger used car demand.
Third quarter EBITDA of 178 million was consistent with prior year in constant currency expanding margin to more than 19% 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 in flow through September thirtyth compared to a $289 million info 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 caused vehicle programs to be approximately $139 million outflow.
So compared to a $3 million outflow in the prior year, we still anticipate cash flow to be within our guidance at year end.
Financial position remains strong with approximately 3.9 billion of available liquidity.
That's comprised ending the quarter was $615 million the cash having 853 million of unused capacity in a revolving credit facility plus an additional 2.4 billion of availability under our vehicle programs.
The remain committed to keeping our corporate net leverage ratio in the range of three to four times the preference over time for being in the lower half of that range. In October we redeemed 75 million of the 275 million notes outstanding 2023, as we continued to execute our capital allocation plan Accordingly.
Ultimately our net corporate leverage was 3.6 times or remains within our targeted range. It is also approximately two tenths lower than the 3.8 times that was both at the same time last year and last quarter.
During the quarter, we also repurchased $59 million a 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 onetime net tax effect from the sale of equity investment in our Chinese operation.
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 their appeal of like kind exchange until cumulative accelerated depreciation deductions matched.
The ongoing level of fleet additions.
As we enter the fourth quarter, we have narrowed and change the ranges of our 2019 guidance based on our expectations for the remainder of the year. They expect to generate between nine and $9.2 billion of revenue, which has been impacted by 175 million dollar currency exchange headwind and for our adjusted EBITDA to be between 750, an 800 million.
Including $14 million, an unanticipated currency headwinds please see our earnings release for definitions and the full list of assumptions.
As we look to the future even 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 are ambitious track record as is focused on the future state of the company industry and the numerous opportunities we have in front of us to continue our rich history isn't 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 will now be conducting a question answer session.
It was actually placing the question Q. Please press star one of the telephone keypad a confirmation total would indicate your line is in the question Q you May press star to connect to remove a question from the Q for participants using speaker equipment, it would be necessary to pick up or headset before pressing the star key once you get that istar ones be placed.
The question Q1 moment, please what we pull for questions.
Our first question say is coming from John Healy from Northcoast Research Your line is allies.
Wanted to ask you guys just diving a little bit more into the expectations for the Americas on as it relates to fourth quarter pricing I. Just I know you guys are still sands zero to 1% for the year.
Given some of the items that you called out with the.
The mobility and and the truck business should we expect those types of headwinds to.
Persists I'm sure. It's good business, but should we expect those headwinds to kind of way RPD down for the next few quarters and.
If thats. The case is the massive kind of low to mid single digits kind of traditional RPD, what you're expecting for the fourth quarter to kind of get to that range. I. Just was hoping just to kind of see if that mass framework seemed reasonable.
So John Good morning. This is Larry so what I would say is that yes, as we continue to grow the package delivery business as we continue to grow our zipcar commuter business as well as obviously, we're going to be growing our car how business all very profitable businesses their utilization accrete.
Is there the right decision to make but they will have a drag on going.
On on rate per day.
I would say as we as we turn the corner in the fourth quarter without getting specific some you know exact numbers.
We're pretty pleased with how we're 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 than we saw that change in the back half of October 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 worked through the balance of those but your point that we will have a drag on RPD on these products that we are working.
I'm very hard to expands at once again for the right decisions for the right profitability decisions.
Understood. It makes sense and then just a follow up question.
I was hoping to see if there was any sort of on qualitative update you guys could give us about the CEO succession planning and kind of where you guys are at with says that this sets that opportunity.
Yes sure.
What I'd say is the board is performing a very diligent deliver a 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 have a very strong strategy in place. Unfortunately, we have a very strong a great management team that's out there executing every single day and none of that will change. So we'll update everyone. As soon as a decisions have been made but the process just continues on.
Thank you.
Yes.
Thank you. Our next question is coming from Brian Johnson from Barclays. Your line is I live.
Yes, good morning, and how hopefully we'll have you on a call for at least a couple more Larry but if not higher pleasure to have worked with you.
I want to drill down on the two key financial drivers in the Americas, and maybe try to get from.
Waterfall like color on each fleet costs as well as pricing I. So in fleet costs could you maybe separate out the positive impact in terms of dollars per month from the retail and alternative to.
Postal channel from what appeared to be some negative headwinds in the auction lanes.
Good morning, how you doing good good and by the way. This is my last call. So.
There will be more calls for me after this.
But let me just talk a little bit about fleet costs.
Obviously, we we've had a number of initiatives.
In this area. So if you put just residual value strength. The cypress I can just take a look at the initiatives that we've had in place we've been working a number of initiatives that really first start with data analytics, and we have enhanced and strengthen a data analytics team.
We've got a lot of data scientists, who are really using data. It's I really understand how we're buying fleet make some models trim levels colors, where we end fleet, where we run the vehicles very de fleet, what time of the year, we'd be fleet them, how many miles we de fleeting them with not every cars the same as the as the next and so through that data analytics.
Ability and we're looking at tons of data, both internal trends as well external data to really get a good handle over or how we acquire and how we disposed of fleet. Then you couple that with the fact that we're growing our alternative channels here to all alternate channels are up eight points are up to 70% now that are sold through the alternative channels. So just in that.
Area alone, we still have a lot of had 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 our direct to consumer is up quite a bit in the quarter.
But we have a long runway to go I think were up 136% and 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 Rick and continue to improve Raul <unk> Ultimate test drive, which is our online platform selling cars.
And.
We were going to continue to grow that channel. So when you. When you look at you know what you get for the car, it's hard to kind of dice out well, how how much of the gain on sale. For example was due to this versus the us, but the residual value market through the summer continued 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 and and pricing that we didnt really see the last couple of years couple of years go we had the hurricanes last year, we had I.
I think you know is 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 and then what you would normally anticipate I think this year, we're kinda back to normal downtick, but nothing 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 you know these last few years is a great deal of science and 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 market you care excuse me.
$30, you can't really break it out of $10 of optimization $10 of channel power is.
And our even tracking that internally just to judge how your efforts are doing and take out the noise of the mark outside market.
Yeah. We're you know we're 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 I just walked you through we are kind of tracking those metrics as close as we possibly can but once again, we're really pretty excited in this area and we just think that there's more opportunity there than what we've been able.
The harvest so far okay, and second place to try to get color on as within the.
America's RPD is there any way you could breakout the.
Impact for example, you are beginning to grow with protein see fleets.
Shifts in mix and channel from just pricing pressures due to what sounded like a due to lack of recalls fusion recalls or sometimes bad. So it seems like recalls are always bad if they happen there Brad if they don't happen there bad.
But the impact of that on pricing.
Yeah, I think as we said that if you take a look at the three.
The three businesses that we're talking about that we've been growing that impact RPD. So the right Hell 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 on 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 ladies and gentlemen, we ask you. Please ask one question one follow up the return to the Q. Our next question is coming from Adam Jonas from Morgan Stanley . Your line is now live.
Thanks, everybody and I do have one question once one follow up Larry first I wanted to kinda offer.
Thanks, and farewell to given this year last call I think you've done some really very innovative innovative and even some extraordinary things during a challenging straight some challenges your business and I'm just want to say well done and good luck to your next endeavor.
Yes, Adam appreciate that.
Yeah, I know and we've had disagreements and things like thank you. All we've always handle you've always been really really classy and very enlightening. So I want to thank you for that alright. So.
How out of the.
450, I guess you know.
In an average.
Here I guess you have a 450000 cars in the North American sleep give or take.
[laughter], roughly what percentage or maybe you know the individual unit count what percentage are pure electric vehicles.
Yeah, we don't really low and everyone's was low I. Just was curious if you had a number yeah. We don't really run electric vehicles at this point in the U.S., we do internationally.
But in the U.S. fleet now we do not have we have any we basically have some hybrid vehicles, but we do not have any period electric vehicles, okay, and you're not the only once I'm not calling out of that is just curious if I said it was if there's anything my follow up Larry.
It does enterprise to your knowledge rents to can see companies right now.
Yes, Adam I'm, just curious why not because like I I'm not aware if they don't think they do but I think they tried at once and then pulled out and I'm just kind of curious what do you know they don't kind of thing as not to my knowledge you'd have to ask them at their running any to them I mean not to my knowledge. They are but I think the way the way I would answer that question.
One is as we work through the partnership with left to now with Hoover, we've approached it very differently I think that maybe others have in the past number one we rent only by the week.
We rent only connected vehicles. So we manage the fleet, we manage the usage of the fleet, we manage the miles on the fleet and if we see anything in those areas that we don't like than we don't re rent at then huh.
So our biggest exposure to any one driver as one week.
So and what we what I can say is as we know we still have very only about 4000 cars and the fleet at this point, but we're going to probably about 5500 cars by the end of the year and we'll continue to grow that next year, what I can say as we watch the results of the us that theres really been nothing that's been too surprising for us and so far we like what we see.
We are integrated into the lift apps. So the driver experiences good we're getting a good selection of drivers coming through.
So you know 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 this this product.
Thanks, Larry Good luck.
Thanks, Adam.
Thank you. My next question today is coming from Ryan Brinkman from JP Morgan Your line is allies.
Hi, Thanks for taking my question can you just help further unpack the drivers of the 2% lower revenue per day in the Americas segment, you know how much was due to I guess underlying or pure pricing relative to how much was due to no the ancillary revenue or changes in mix due to a budget package delivery or is it.
Car commuter and then as you think of the drivers of the underlying pricing the demand environment industry wide utilization et cetera, how do you see these doctors tracking going forward relative to in Threeq.
Yeah. So yeah. Once again, yeah, we did have some pricing weakness just send the regular business in the quarter, but as I said that we've kind of turned the corner on that now that we're into the fourth quarter volumes looking good and pricing has improved in is looking much stronger and looks like it'll be positive for the quarter. So that's why.
One piece and then the other pieces are that 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 some point will overlap.
A lot of the growth and so the overtime 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 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 I think it was due to the fact that recalls for at least for us for down over 70%. The third quarter. This year versus last year. The number 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 or just down when you take a look year over year. So the number cars that are probably going into the replacement business is down certainly down for us. So I think those are kind of the key movements have are happening in the second quarter and then as you turn into the third quarter a lot of that's a lot of that has kind of gone.
Away as fleets have tightened down and we're starting to see kind of more than normal length of rental restrictions by that 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 would be great. If you could tried to separate the tailwind to 2019, earning from maybe the lower normal course, a prospective rate of depreciation that should continue.
Can you at this level of car prices versus a you know separately the sort of more one time gains you could have recorded from unexpectedly higher disposal prices.
Yeah, I won't really comment on 2025.
Fleet costs at this point, because we're not really ready to yet as a from perspective of the by but I will point out. The fact that what we what we will continue to see is the is the further development of our alternative channels, So where 70% now that will continue to grow next year.
Our direct to consumer where we see our largest benefit will continue to grow as as our as the locations that were selling cars through continue to mature and as we open new locations next year. So we have a lot of runway 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.
Which for selling 'em, we are still we have a lot of maturity left to go and those areas and so I look 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. You know, we're still looking at the data and a lot of data hasn't really come out yet about expectations.
External data for around expectations for 2020, we're obviously modeling our own trends of how we have been performing and we continue to perform very very well in this area. So we'll balance all those as we get closer to the ended the year and as we put our budget to bed, but overall, it's probably just a bit too soon to talk about overall fleet cost for next year.
Okay. That's helpful. Thank you.
Thanks to our next question is coming from Michael Millman from Millman Research Associates. Your line is alive.
Thank you I don't think you've talked pretty much about as a corporate markets. So.
What are you seeing in the corporate market what did you see in the corporate market in the third quarter, what's your expectation.
He also though what tax rate should be which should we be assuming for next year and sort of related to that is.
Well, we the street.
Simply way off on the third quarter to stock with.
Huh.
And that was exacerbated by the weakness thank you.
Sure Michael I'll take the first one then John can take the second question. So.
Good news on corporate market is that we're now back into a volume growth.
Hearing your time here. So we've had no a number of months, where we've been able to improve volume on our corporate business.
In the U.S. into corporate volume and and enemy in EMEA has been extremely strong was up 10 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 had continues to be under pressure.
The small business kind of moves along with the leisure rates, so as fleets tightened up and we get lesion rate improvements will see improvements in small business rate per day. The midmarket enlarge 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 but the.
Good news is that we're seeing commercial volumes strengthen and we're seeing volume improvements kind of month after month down both regions.
Hey, Michael This is John good morning, as it pertains to taxes.
I think without getting too esoteric on the call.
You know the short answer is there's often fluctuation from quarter to quarter.
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 Percentish rate you saw in the third quarter and that should help you in terms that we think the full year is gonna look like which is basically unchanged. We mentioned in the repaired section that you know we're gonna take some actions in the fourth quarter.
To that we think are going to they're going to result in a lower tax rate in that quarter and help take the you're kind of down into the range. We expect in terms of 2020, you know I think you can expect something similar you know at this point based on what you're seeing for the full year 19, and we'll 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 the or visibility there.
Thank you. Our next question is coming from Chris Woronka from Deutsche Bank. Your line is not alive.
Hey, good morning, guys, Larry Congratulations on a really good run it at the company in.
You know best of luck in the future.
First question was just on the on the truck rentals I know that was an area that I think lot of years ago was kind of left were dead and now there is new delivery opportunity does that 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.
Yeah, we we Chris. Thank you. We this is Larry we went through a kind of a rightsizing initiative with budget truck and really kind of changed the areas that we're focusing on.
So we brought down some some.
Since that weren't just as profitable as we'd hope them to be we reduced our truck fleet to accommodate for that and we really started focusing on a more of a.
Round trip model or more around local rentals and a lot more around package delivery and we've been growing the fleets 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 as package delivery business as that segment continues to grow so weve spend a few years kind of just really digging deep into budget truck in 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 will grow the fleet in the type of fleet accordingly, with it and those are longer length rentals and so they may impact the rate per day, but there are a much more profitable rentals. So I think the decisions that the truck team has taken to really.
Right size that business has been the right ones to do and pretty proud of how they've really reengineered that business. So we'll continue down that path and grow appropriately to make sure. We keep the utilization of our fleet up and that we buy the right next to fleet and then we go after the right mix of the of the segments of that business.
Okay, very good and a follow up is it.
It kind of thinking about all the numerous investments in technology is made it.
Over the years, then I know some of them are more tangible and visible than others, but is we look out and without asking for a specific number but is there a point where kind of that deal. We line inflection you actually get this becomes a less labor intensive business and you actually get savings there.
There are kind of irrespective of whatever volume and pricing might be.
Yeah, what I, what I would say as you know over the over these last few years, we've been we've been investing in modernizing all of our core systems in the business. So we had to start there. So if you if you want to really be able to offer new use cases, and connect and a seamless way with partners in the future mobility, we really had to modernize all of our core systems. So we did that we modernize our rent.
I'll reservation systems, our revenue management systems are fleet systems, our web sites, our mobile apps.
Our HR systems, and now mobile and that were modernizing our accounting systems.
And then then we started investing in other technologies around you know Replatforming Zipcar and also connected car fleet now we're building our next generation platform to be able to managed mobility in a different way and be able to manage connective fleet data in a different way.
So when you get into connected car and you start looking at the benefit some we've been seeing these in Kansas City as we've been running them ability lab you start to see the benefits of data and how data can instruct you to manage the fleet in a different way a 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're seeing the benefits come through on gas collection as we continue to increase the penetration of gas that's being recorded gas profits are being recorded as it relates to conduct a car transaction.
And just how you manage your fleet a and how your employees worked with the fleet through data is very different than what we've been able to do without connective fleet.
And then as you take a look at new use cases, where connected car can allow a more seamless and traction 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 the 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 concept customer at all and 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 live from consumer Edge Research. Your line is I 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 those their tier players.
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Sure It Eric Good morning, this is Larry [noise].
I would say on international is that we've 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 complete really competitive it's under a lot of economic pressures. The Brexit delay continues to weigh heavily on the region.
So what we've really been working on is how do we can how do we turn the corner on this rate per day issue that we've been having a lot 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 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 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 and balance a little bit better imbalanced.
And what we had been in the past. So you know investments in D.S.P. and other things like that help us look at that differently to help us find those opportunities and based on how you know reservations are looking so far.
For this quarter.
I'm pretty pleased with what we're seeing so far on on the rate side for the international team, but the competitive set is difficult theres still 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 I think we've got very good partnership relationships long long standing partnerships with our airlines.
And very good relationships with our corporate accounts. So we continue to work that business and continued to grow that business. So we just have to keep really focus on striking that right balance and not getting too far out ahead of volume and and it'll end up losing it out on price that's not what we're therefore, we really want to grow the price side of the business I have the right balance going forward.
Okay got it that's that's helpful and and the scrip I think you mentioned shifting to a higher risk basically in certain international markets. Our Oems less willing to do program vehicles that are you trying to be more opportunistic with respect to use values just any additional comments there would be helpful.
You know just as we've as we've learned how to manage a greater risks fleet I think that we have opportunities internationally like we have in North America now will be ever be a risk fleet size and international that we are in North America I don't think so because the Oems the balance of what they sell as not does 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 remarket the cars.
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 risks fleet for 2020 over 2019, we grew 19 over 18. So each year, we will just kind of methodically keep working our way up but we want to make sure that we've got the rights Cape.
Ability and the bandwidth the right methods to to remarket. Our vehicles. 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 risk cars to the industry.
Okay. Thank you and Larry I 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.
I just wanted to ask.
Follow up question regarding just the calendar for the holidays this year.
This is if you like I said.
Ladies Thanksgiving and I think Christmas falling in the middle of the Weve does that typically helped the business. There does that hurt the business just any color there and then again.
Pleasure working with you the last few years and I wish you all the best Sir.
Thanks, John Yeah, it's interesting to calendar the holidays that it's amazing how.
What it really changes is the booking patterns. So you know Christmas is just one day later this year is kinda 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 a you know an opportunity for hopefully I kind of a Christmas Eve.
End of a week before Christmas Eve, leading over through Christmas than you hope that Theres. The Christmas Eve at least leads over new years, I think though when you take a look at it shifting a day that you'll see more of it more than vacations move to the back half of December then to the week prior to Christmas, which will put some of that rental activity into January is that.
Checks and versus checking in December .
And so so that you have to really watch so what we do when these days schuff like this as we go back to the saying we go back to the year, whether they felt the same day of the weak and then we kind of model how those booking trends occurred coming into it and then how the activity actually occurred through the holiday as you go from Christmas into new years in them.
And then we try to apply those trends than any other changes that we think may have happened since since the holiday fell in that period of time. So theres a lot of kind of science that goes into and training models that go into it but one day shift can actually changed very significantly the booking patterns of how people book their holidays over and over the Christmas period. So we're watching that very closely and as we.
Our international as well.
Yeah.
Okay.
So.
Thank you we reached about question answer session, let's turn the floor back over to Larry for any further closing comments.
Thank you very much so just to summarize we had is pretty strong third quarter with record earnings in the Americas and positive pricing International region.
Year to date, we've generated 645 million in adjusted EBITDA of 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 on 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 next year.
So for those of you that I don't talk to between now and into Europe still fairytale. We ended the year that if I don't catch up with you. Thank you very much has 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 lines at this time and have a wonderful day, we thank you for your participation today.