Q2 2021 Avis Budget Group Inc Earnings Call
[music].
Greetings and welcome to Avis budget group second quarter 2021conference call at this time, all participants are in a listen only mode.
The question and answer session will follow the formal presentation.
And should require operator assistance started conference. Please press star zero on your telephone keypad as the reminder of this conference is being recorded it is now my pleasure to introduce your host David Calabria, Treasurer, and senior Vice President of corporate Finance.
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 Brian Choy, 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 are subject to risks.
Ts 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 and our earnings release and other periodic filings with the SEC as well as the Investor relations sections of our website.
Accordingly forward looking statements should not be relied upon as the 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.
Undertakes 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 Jeff.
Thank you David.
Morning, everyone and thank you for joining us today.
Let me start this call by stating the obvious what a difference of <unk> 12 months ago I had the unenviable job of coming on this call and reporting that our revenues were down 67% compared to 2019 and that and the second quarter of 2020, we unfortunately posted a largest adjusted EBITDA loss ever.
Sure.
Today and get to tell you then and the second quarter of 2021, we delivered the best revenue the best adjusted EBITDA and the best margin of our company's 75 year history.
Since the pandemic began we have been consistent with our message that Avis budget group would come out of this disruption of transformed company that of.
Our focus on cost discipline, and operational efficiencies would position us to take maximum advantage of our rebound and travel.
The results we posted yesterday proved that this just wasn't empty rhetoric, despite being in the early innings of the travel recovery. We are already demonstrating the operating leverage that of post pandemic business is capable of.
And I will go over the results of the historic quarter and why this is just the introduction to a new chapter and the Avis budget Group story.
Let's start with the Americas segment.
You'll recall last quarter, we said the demand for travel and the U S started to materialize and late February and in March we started to see the convergence of pent up demand high fleets and stronger pricing.
This positive momentum continued throughout the second quarter with each month, showing sequential improvement and rental days pricing and revenue with June being the strongest as the lead up to the July 4th holiday and the busy summer travel season.
We saw demand patterns change from previously mostly close in bookings to a more balanced display of both close in and further out reservations.
The demand increase that the traditional seasonal locations surrounding beach mountains golf and all of the outdoor venues during the quarter restrictions were lifted and the west coast locations, such as California, and Hawaii, which helped volume and fleet utilization.
Our team was ready using both the reservation data of propriety demand fleet pricing system combined with the years of on the ground experience to drive this opportunity.
And although we are still down roughly 15% and rental days versus 2019 of fleet utilization is actually higher than it was and the second quarter of 2019.
This reflects a shortage and vehicles relative to demand that was prevalent across the entire rental car industry.
As Brian laid out on our last call. The simple laws of economics state that the supply demand imbalance will invariably lead to change and price.
We saw this reflected and our revenue per day this quarter and.
R. P D was up 32% sequentially and 42% versus the second quarter of 2019.
And I'm sure RPT will be the focus of many questions given the magnitude of this change, but I'd like to shift gears and talk about something that hasn't changed which is our focus on cost control.
Throughout the pandemic, we had the benefit of focusing 100 per cent of our efforts on becoming the best version of ourselves operationally.
We're able to rethink how we do things and implement new processes that allowed us to do more with less.
During the downturn the results of these efforts were reflected in our resiliency, we were able to withstand never before seen and demand shocks.
However, this quarter when demand was on an upswing. The results of these efforts were reflected in our operating leverage and.
And the Americas revenue increased by $1.4 billion year over year.
Americas adjusted EBITDA during the same period increased by approximately $870 million for an incremental margin of 62%.
On the 2 year basis, if you compare and most recent results to the second quarter of 2019.
<unk> revenue increased by roughly 350 million, while adjusted EBITDA increased by $490 million.
Our maniacal cost discipline is of what's gets us through the environment is tough and enables us to maximize profitability when the environment is in our favor.
It's an easy concept to understand but very difficult to execute.
The Americas team has demonstrated that they can deliver on this quarter after quarter. Both during the challenging times. This pandemic presented and now as demand levels increased.
With that let's move over to our international segment.
Well, we've reached an inflection point and the Americas, the macroeconomic environment remains largely unchanged from the last quarter internationally.
On a percentage basis rental days for the last 4 quarters have been down and the mid forty's versus the comparable quarters in 2019.
However, because of the fleet and cost rationalization that the international team has executed on adjusted EBITDA has gone from $140 million of loss and quarter, 2.2022 and $8 million gain and the most recent quarter.
That's nearly a $150 million improvement and adjusted EBITDA on $200 million of of revenue gains.
Perhaps the more impressed the way to look at is comparing for the second quarter of 2019.
Despite revenue being over 300 million lower the international segment was able to mitigate adjusted EBITDA declined to roughly $30 million.
We're able to deliver these results without the benefit of substantial RPG games or vehicle depreciation and tailwind versus 2019.
What changed was the structural cost base of intestinal operations.
Which gives me the confidence to say whenever travel restrictions are lifted and EMEA. Our international segment will see a similar step change and profitability that we're seeing and the Americas.
Through shopping trends and forward bookings, we can say that the underlying travel demand and Europe is improving and there was a clear customer and tend to travel whenever it is possible.
Our battle tested and international team is eagerly awaiting the chance to service that demand.
Moving onto fleet, we will focus more and the Americas segment due to the relatively stable dynamics of the international segment.
Let me direct you to the sequential growth and average fleet size for the Americas.
During the first quarter of 2021, we had an average fleet size of 295000 vehicles.
And the second quarter, we had an average fleet size of 378000 vehicles that.
That reflects and 83000 increase and vehicles on an absolute basis and of 28% increase on a percentage basis from quarter, 1.2021 average fleet size.
By comparison, the sequential period of quarter, 1.2019, the quota to of 2019, we only had a 58000 increase and vehicles on an absolute basis and of 15% increase on a percentage basis.
Fleet size increased sequentially every month with June being the highest as new fleet arrived for our locations.
So how do we add more vehicles this quarter. Despite the ongoing semiconductor shortage 2 main factors.
1 we worked hand in hand, with our OEM partners to make sure. We received the deliveries that was slated for the ramp up for the summer period.
This requires flexibility and creative solutions from both of our side and from the manufacturers.
The deep relationships, we have allowed us to mitigate potential cancellations of capitalized and unforeseen production opportunities and I want to thank our OEM partners for their efforts and reiterate our commitment to doing everything we can to be the partner of choice.
Separately, we continue to do the self help required to maximize our existing fleet.
Despite record breaking the used car values, we sold fewer vehicles and the first quarter the help serve of the spike and consumer demand.
We also invested heavily and reconditioning of vehicles and with diligent and our preventive maintenance.
This allowed us to increase the amount of usable fleet due to less out of service cars as compared to 2019 and improved our overall fleet utilization.
We were able to have fleet available in those cities that had the most demand to capitalize on both rate and volume.
I've always said the fleet management is at the heart of what we do the touches every part of our organization operations supply chain and shared services corporate everyone working together I'm proud of how our team delivered on maximizing the availability of fleet this quarter and expect us to continue this area of excellence going forward.
I'd like to wrap up the section by commenting briefly on the model 2022 year buys and.
And a normal year, we'd be almost complete with all of our annual fleet purchased by now.
However, we're not in the normal year and this is still a fluid situation.
We believe the conversations will continue late into the third quarter as the manufacturers get more clarity on the production forecast for.
Finally, I'd like to close with Avis is commitment to safety and our latest views around the delta of area. We.
We've been closely tracking the reported Covid cases on a local market base and since this pandemic began.
And what we're following is no different from what you've been reading and increase and Covid cases and certain geographies.
However at this time, we are seeing no impact from the Delta variant to our current bookings bookings for the third quarter of continued the positive momentum we saw throughout the second quarter with the summer looking strong.
While this may change and the future currently of upward demand trajectory remains stable.
And the travel industry has been normalizing over the past few months, but our company has been adjusted vigilant around our Avis safety pledge and a budget worry free promise, we will continue to offer best in class safety measures, providing peace of mind to our customers and our workforce.
So let me wrap this up where I began.
What a difference of <unk>, we've gone from losing nearly $400 million and adjusted EBITDA and.
And the second quarter of 2020, it's making over $600 million and adjusted EBITDA and the second quarter of 2021.
That's the $1 billion turnaround and just 1 year.
This wouldn't have been possible without the tireless effort of our entire team and I want to take this moment to thank all of our employees for delivering a record quarter.
With that I'll turn it over to Brian to discuss our leverage and liquidity.
Thank you Joe and good morning, everyone I will now discuss our leverage and liquidity my.
And my comments today will focus on our adjusted results, which are reconciled from our GAAP numbers and both of our press release and earnings call presentation.
I'd like to start off by addressing the same topic I kicked off with last call domestic revenue per day.
As I made clear the last quarter, we had avis do not set rental car prices, we discussed price as determined by consumer demand and the availability of supply and the industry.
There was increasing demand and tight supply dynamics, we discussed on the last call clearly continued throughout the second quarter.
The result, being that Americans are P D strengthened again sequentially.
Our PD clearly had a significant impact and the turnaround of our profitability and the second quarter as Joe mentioned it was $1 billion swing for my $382 million of loss in second quarter of 2020.2 of $624 million gain and the second quarter of 2021.
But another way to look at it is that our combined second quarter adjusted EBITDA over the past 2 years is only $250 million.
Compare that to the average 2 year stack of second quarter adjusted EBITDA between the years of 2011, and 2019 of roughly $385 million.
We went through and near death experience last year, we received no federal bailout and we were able to honor our obligations to our business and financial Counterparties I withstanding substantial losses.
I don't know how sustainable this elevated level of RPT is but I view of what's happening now is simply a catch up and profitability.
Given the value of the asset we deliver and the mission critical nature of the service, we provide the travelers and my opinion and customers are receiving and great value proposition.
The demand we're seeing even at these elevated our P D levels substantiates the SKU.
Yeah.
Let's move on to liquidity and financings.
As of June 30, we had available liquidity of $1.8 billion comprised of approximately $1.3 billion and cash and cash equivalents and approximately $530 million and availability on our revolving credit facility.
Additionally, we had cash and available borrowing capacity of $3.4 billion and our ABS facilities.
We took advantage of favorable debt markets, and we're proactive with the refinancing and optimizing our capital structure.
And me, we issued $800 million of asset backed notes with the maturity of 5 years at a blended interest rate of $1.73 per cent and is the best interest rate on any multitude of asset backed note, we had had done and our company's history.
In June we issued approximately $300 million of D tranche asset backed notes, adding onto our 2018 dash to 2019 dash <unk> and 2020 Dash, 1 series, bringing our advanced rate on those notes to approximately 90 per cent.
Additionally, we also extended the maturity date of our asos and variable funding notes until March of 2023, continuing to demonstrate our strong relationships with our banks to efficiently fund our summer peaks.
Finally in July we renewed our credit facility with the maturity date of 2026 and and eliminated our relief period.
As a result, our corporate debt is well lathered with no meaningful corporate debt maturities until 2024 and no need to refinance any of our ABS conscious of this year.
We are in compliance with all of our secured financing facilities around the world with significant headroom on our maintenance covenant tests as of the end of June.
And.
I've been following avis closely for well over a decade and in my opinion, our capital structure is and the strongest position I've ever seen it.
This balance sheet strength combined with our robust earnings trajectory leave us and the privileged position of considering how best to deploy our free cash flow.
As always when considering the optimal use of free cash flow, it's important to address and benefit all stakeholders of the Avis budget group.
Yesterday, we announced the intention to retire the outstanding 5.5% senior notes due 2025 with cash on hand in order to address the incremental debt we took on during the pandemic.
We also announced a new share by share buyback authorization of $1 billion there'll be used opportunistically to return value to shareholders.
Finally, we will also be investing and ourselves.
Our employees have been asked to do more with less during the pandemic as we rebuild our business, we must provide our workforce the systems and tools necessary to keep driving productivity enhancing operational efficiencies and delivering a better rental experience.
We believe the use of free cash flow in these key areas will benefit our debt investors, our equity investors, our employee base and our customers.
During the pandemic, we stated that when revenues normalized back to 2019 levels. Our structurally leaner cost base would also would deliver over $1 billion and adjusted EBITDA.
Revenues have come back, but I wouldnt call of this environment normal and we are not building. Our go forward model with this level of RPT.
As I mentioned earlier, though this increased pricing combined with our continued cost discipline is allowing for a catch up and profitability.
Which is why at this time, Joe is pushing our entire organization to deliver $1.5 billion and adjusted EBITDA, which would be close to 2 times, what we achieved in 2019.
With that let's open it up for questions.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session. If you'd like to ask a question you May press star 1 on your telephone keypad, a confirmation tone will indicate your long and is there any question queue. You May press star 2 and if you would like to remove your question from the queue or partners of and heating.
Speaker limit and maybe necessary and pick up your handset before pressing the sake.
The interest of time, if you could please limit yourself to 1 question and 1 follow ups and we may get to everyone's questions.
Our first question comes from the line of Chris Walker with Deutsche Bank. Please proceed with your question.
Yeah.
Hey, good morning, guys and congratulations on the on some fantastic results.
Wanted to maybe talk a little bit about fleet going forward and kind of look and the question is around.
How you are underwriting fleet acquisitions heading into next year, but also just your world view of used car market.
Understanding and the second quarter, you didn't have the benefit of jeans, you didn't sell any cars, but as you bring more fleet in the back half and into next year. Obviously, you have to make an assumption. So maybe just the world view of.
Of what fleet costs could directionally trend towards over the next year or 2.
Okay, Yeah. Good morning, Chris and thank you. This is Joe. So you know this quarter was it was a bit unusual for us as far as our fleet planning, we had mentioned that on the previous call that it was the very fluid situation and it turned out to be.
And the thing that I like most about it is that we were able to work with our OEM partners and come up with the strategy. We were getting insight probably late February of what our fleet deliveries would look like and you guys heard publicly about as they close plants down and for.
Unfortunately, we were all affected.
But we managed and 1 of the core competencies that we have and this organization is to be able to align fleet with demand and that didn't change and this quarter, even at the elevated levels of demand that we saw.
As we go forward right now were still getting new models, new cars in for model year, 'twenty ones and right now so you could see that the delay and the manufacturing because we already at this point and time on a normal year would be starting to talk about early model 'twenty twos and as.
As I said in my prepared remarks, we're still having conversations with the Oems as they look at their production schedules and that's going to continue on and the coming weeks and the coming months as far as you know our ability to sell cars. As you know we sold off of a whole lot of them last year and.
We made a choice this quarter and not to do that to deal with the spike in demand that we saw early on.
You know.
And my my opinion on the used car market and if you look at it now new cars or inventories of kind of light <unk> cars of kind of getting back to where they werent and 'twenty, but it wasn't a normal year and are still below the of the levels They were and 19.
We are the.
The predominant supplier of 1 year old.
Vehicles, and seeing as the industry and 22020 and again in 'twenty, 1 did not get the full complement of vehicles that we had normally receive those over the years I still think the used car market has legs.
If you look at the prices and the market, although it's gone down and the last couple of weeks, it's still running quite a bit higher than it was in 'twenty and and 19 and I think that continues how long that goes on and I totally sure but.
But I do think that there is some of some tailwind on that.
Okay very helpful. Thanks, Joe and then the follow up is.
As we think about our PD and I agree with you that this industry has historically under price relative to value.
But is there any way you guys come through all of the data you get to maybe triangulate some of them.
Sort out some of the unusual transactions some of the highest price things that are beyond your wildest dreams and kind of say if that goes away.
Now we're back of the here and if fleet is here and and obviously that involves predicting industry fleet levels, which I know you can't do it with perfection, but just any weighted since 1 of the new normal RPT is if it's if it is 79 and that would be great and the 70 or something else.
Just any thoughts on that thanks.
Yeah, Hey, Chris It's Brian here, and let me take the first crack at this and Joe is going to and I was going to jump in.
And I know this is going to sound repetitive, but I'm going to state. It again, we at Avis do not set rental car prices, we discover price as determined by consumer demand and the availability of supply and the industry right. So with that disclaimer out of the way and let's just break down those 2 components first is consumer demand and and within consumer demand, let's just start with leisure.
And.
So the domestically like people have been cooped up for a year savings or high international travel is largely unavailable. So it's natural that in the Americas, we're seeing outsized consumer demand from the leisure segment now.
Is that going to remain elevated in perpetuity of course not.
But could it last for some time.
I think so.
So we see I think continued strength and the consumer and the consumer segment and.
Currently the Conversely, commercial demand right now is pretty depressed so why while we will be seeing increases in that segment. The commercial especially large commercial comes with lower rates. So that normalization of business mix is going to cause some downward pressure on our PD.
And switching to the supply side, just like you said like from our perspective, we're working with our OEM partners to secure fleet, we're doing it in a very disciplined manner, but we're just 1 player and I can't comment on what our competitors do we will do so it's tough to say what will happen to the industry supply.
And because that's an unknown like we had avis youre going to keep doing what we've been doing for the last 18 months, we're going to minimize cost we're going to maximize operational efficiency, we're just going to be a structurally leaner and more bulletproof business.
So going back to your question what does that all mean for the sustainability of RPT.
Tough to say right now, Chris, but we're not going to be building our business models, assuming this level of our PD sustains.
Yeah, I think Brian and as Joe I think Brian hit it on the head.
If you look at this quarter.
It was an explosion of leisure demand and it happens early on and it happened and and April and in May and then and June was kind of more of like the summer, which my opinion started earlier.
Because people were out of school and and the weather was more of certain but.
If you look at it we'd say the.
There's a business mix opportunity here a lot more leisure demand and I think when you look at rate.
We have that we have a lot of demand fleet pricing system that allows us to look of contribution of vehicles and the best positioned to place those vehicles to drive at that opportunity and you know this is like a third and fourth year in and we've gotten really good at it and see.
So we were well aware of where the price points, where in certain geographies and how to position our fleet and that area is to maximize the benefit and then you have to and the fact that we haven't talked about and tough since the spin predominantly of leisure driven a quarter here and there was a lot of ancillary opportunity and that kind of when you unpack the the RPE D. That's the.
And probably a large component of it as well.
Okay very helpful. Thanks, guys and congratulations again.
Thanks, Larry.
Yeah.
Our next question comes from a lot of John Healy with Northcoast Research. Please proceed with your question.
Thank you congrats the that'd be 1 of the day, that's truly a remarkable turnaround and 12 months.
Wanted to ask a little bit about the cost side of things and Bryan I was hoping maybe we could get a little bit deeper on where are you really seeing the costs kind of revisit it and the business and maybe some examples of where the reduction is actually taking place and clearly we can see it and that the P&L, but just operationally what's different and.
And I think going forward, we don't 1 of the questions. We've been getting frequently is.
Just a view of the Opex and the percentage that is kind of fixed the percentage of it's kind of variable and it is transaction based come back what sort of.
Relationship for sure.
And the Opex have what transaction days in terms of growth.
Sure.
So John that's exactly how we look at the business right now in terms of what is fixed and what is variable but for competitive reasons, we're not going to give guidance on what that will be going forward.
As we look at like the cost base of our business and the biggest buckets are people and vehicle right and what we're seeing right now in terms of labor shortage.
It's prevalent across across our business. So there is some savings on the people side, but there's a flip side for that well I don't think that we're anywhere near of running at full operating efficiency, they're like yes, we've been running more productively, but given the fact that we can't hire the optimal mix like our like part time versus full time.
<unk> is off and we've been relying more on third parties for shuttling and things like that so I think that there's still room to the benefit there.
On the vehicle side of things, we've also been investing a lot in resources and.
Having a lot more visibility into where we spend our dollars there and given the fact that like maintaining our vehicles is probably our single biggest cost outside of people and that's an area that we've been focusing a lot on and I think there's still a lot of potential operating leverage there.
Great and and just 1 big picture question for you guys.
Obviously theres been a fair amount of news recently and Europe regarding the EW and Europe car would just love to get your reaction to how that how you feel about that combination kind of impacting the competitive structure internationally and the do you view it as the.
And a game changer in terms of kind of the kind of how that business kind of reemergence.
No.
I think it's early to say and I wasn't involved of the business back when the Oems of all owned.
The rental car companies.
And I've had a chance to it and to go through kind of what your car has said and I think what theyre, saying and makes a lot of sense given the platform that Europe car offers them and.
But it's still an open ended question in terms of of how that plays out and we're controlling the things within our control and as you've seen the numbers like our international team has delivered spectacular results in terms of the cost.
Take out the day that they've done. So you know I think that whatever does happen will be and are positioned to compete effectively yes listen and I'll jump in here. This is Joe.
And you know I confirm the Brian.
You know I think we spend our time worrying about what we do.
And over the years, we've we've looked at our European business, and we looked at ways to operationalize and improve our overall margins there and I think we're well on that path I was incredibly pleased with the overall effort that.
The team has displayed this last quarter when you think about it the Americas came out business came back and it was about you know, while we ready and can we handle it and can we keep the cost out and keep the fleet of line and Europe. Its still the grind of 40% down and business. Yes. There is there are some countries that were able to overachieve as far as.
As far as EBITDA compared to compared to 2019. So I think you know like I say, when we have and we've talked about competitors and if we get our act together and we do the things that we do really well.
And we manage costs drive the sequential improvement in revenue that we see every day I think that takes care of itself and the and that's how we will position our business going forward.
And you can thank you guys.
Thanks Chuck.
Our next question comes from the line of Jason Butler with Barclays. Please proceed with your question.
Hi team. Thank you for taking the question just just first off I was hoping we could get a little more specific on what we're seeing into Q3.
You mentioned that July and I guess, the cadence into Q3 is still pretty strong right now, we're seeing and continuation of the volume recovery and the Americas and I think you said Europe is improving a little bit.
Maybe just on pricing too what are you guys seeing and July both internationally and in the U S. I think it would be helpful. Thanks.
Okay, Hi, this is Joe.
Well as I mentioned earlier.
June was started and started what I thought the summer season, a bit earlier than it normally does.
As I said, largely because of certainty of whether and maybe kids out of school, but.
And at the end of June was really when we started to see our July 4th holiday bookings right. It was.
July 4th was kind of like a Monday, I think or so this year of Sunday holiday, but Monday of and the week before it was actually pretty prevalent and July 4th is a precursor to and my opinion to the summer season, and it was strong and what I would say about what we're seeing as far as demand and price is that.
It's a continuation of what we saw we exited the exited June with which was the best.
The rental days.
The best price that we had in the quarter.
And you know, we haven't seen any signs of that slowing down.
Okay helpful. Thank you for the color Joe and then just following up on the target Brian that you mentioned around you know when you return of 2019 levels I think I heard correctly youre now thinking its going to EBIT and EBIT could be more and the $1.5 billion range.
And when volumes return to 2019 levels can you just sort of clarify what sort of you know.
Are there any changes to our P D or fleet car.
Cost assumption and that number or is it really just the business potentially operating and like the mid to high teens margins.
Sorry, I should've been a little more clear on that 1 Jason that the target the Joe is pushing us for and that $1.5 billion debt for this year. So we think that given the pricing dynamics that we're seeing combined with our cost discipline for this year and we're going to be at this.
The 1.5 billion level.
And in 2021.
Im not getting kind of updated guidance on like the outer years, just given that there's still a lot of a lot of macro unknowns and and also internal things that we're working to working through in terms of operational efficiencies. So that $1.5 billion has to do with them the 'twenty 'twenty 1.
Okay, and then we shouldn't.
Think about any changes right now the kind of your longer term billion dollar target.
Yeah, I think the $1 billion target was predicated on kind of.
Our first pass at what the business could look like at 2019 volume and and our PD.
We're still working through that what I will say is that as we've gotten more granular in terms of the cost takeouts for just finding more opportunities. So I wouldn't anchor to that at this point.
And also some of the macro uncertainties on kind of what happens with industry supply of what happens with pricing like where do we shake out and that.
Still a little bit of unknown. So we're not commenting on that going forward, but you know hopefully that color was helpful.
Understood. Thank you.
Okay.
Our next question comes from the lot of Bill <unk> with Morgan Stanley. Please proceed with your question.
Thank you great quarter here, the simple question and it's where to from here. So not next month and not next quarter, but more of the medium term.
Flagged the $1.5 billion, adjusted EBITDA, and 21, which I mean definitely it's possible almost the double that of 2019, but if I think about the tailwind of it looks like volumes customer and to go and pricing will become an incremental headwind just off the record high and the U S and fleet costs will rise, but international it looks like it can improve the rural so.
Just want to make sure. It does this match up with the way you guys are thinking about it internally and just your views around how the business can be a bit less cyclical of medium to long of time. Thanks guys.
Sure.
And I don't.
I don't blame you for asking but we're not going to get into the kind of next year of guidance. Our midterm guidance. At this time is just still of lot of unknowns of a few of them, which you.
Which you pointed out we don't know exactly what the Covid impact will be its effect on travel demand. We still have this ongoing chip shortage that Joe mentioned on the fleet side that cloud the vehicle availability and the outlook on the used car market I think what I will say is that our game plan for next year and go forward is not going to change from what we laid out for this year.
So we're going to take the cost first approach to our business that way will be resilient in a weak demand environment and we will have very high drop through and a strong demand environment.
Okay.
Got it thanks.
Our next question comes from the line of Michael Millman with no Big Research Associates. Please proceed with your question.
Thank you so.
I guess I'm just.
Standpoint, obviously.
The analyst.
To some extent next year might be and term.
The numbers are a car.
Shoot but.
Is it has to start with the 1.53 and ace and kind of.
Uh huh.
Some.
The numbers around that or would you suggest some of the.
Approach for us to do that and my second question is on March.
Hi, how are you thinking of.
And that.
Hertz.
Kind of like an effort.
Now to get back.
A lot of its lost the business.
Much to you and.
And theyre going to the stabilize.
For the strong pricing.
Yeah, Let me start with with your first question and then Joe will answer the second but Michael I agree 100 per cent with you it's not a it's not.
Not an easy year the forecast for the for the analyst community.
And for 2022.
And if.
If it helps at all it's not Super easy for the Cfos of the world either so I feel your pain and we're working through that ourselves, but I think when you laid out in terms of starting with the 1.5 and go and from there I mean that seems like it makes sense.
Joe you want answer the yeah.
I'll give you a little color on <unk>.
From the competitors.
I had been and this business for a long time, now and I've learned not to take any competitor for granted and I.
We won't do that going forward.
It's very early to tell about you know.
And what happens with the company as they reorganize and come out of bankruptcy I prefer always and.
And I tell this to our team has to worry about ourselves.
I think we run of really rational business here.
And we've never really inflated our fleet to go after.
And the marginal cost business, we always run of our fleet to be slightly below demand, which as you know.
Something we've been doing for a long time now so we believe we will have a rational approach to our tour toward demand side of the business as Bryan talked about I think we've really got it got good at looking at how we manage costs.
We all talk the same language. So you can talk to and operator in Italy, or and operator, and Orlando Airport and then we'll talk to you about what theyre doing to manage the cost base of that business and those guys are on the ground and that's really where it matters. So I think youll see.
And the maniacal approach to cost removal you don't go through 2000, and and 20 of the way. We did and then say you know everything is back to normal we won't allow that I won't allow that.
We have Oh, a great way of looking at our overall performance so wait in line.
Cost and line and then it comes to you know, how we manage supply and demand and I think we have of proprietary demand fleet pricing system as I said before that gives us tremendous insight on how to price our cars down to the location level for.
And for various different length of rentals and.
And the different contribution rates, so I think that gave us the big.
Provided the huge opportunity here this past quarter, because not all of places where non won't vehicles. Sabra are the same. So I think we concentrated on that that will take care of herself.
Okay.
Our next question comes from the line of Hamzah, The Missouri with Jefferies. Please proceed with your question.
Hi, This is Mary of part of Laci filling in for Hamzah.
I guess my and my first question could you just comment on what Youre seeing on airport.
And you touched a little on business, obviously, that's not coming back, but maybe you can just speak specifically about.
And what kind of the man you are seeing there and then what youre seeing on the pricing side and then any comment on just what your conversations are like with your customer base on expectations for people getting back on on the road.
Okay. So let me start off with this is Joe let me start off of what we're seeing on the airport.
You guys we track the.
TSA volume and Thats been on is about 2 million passengers, a day or thereabouts and thats been kind of steady it's down around and I think 19% compared to 2019, but I have to tell you of the airplanes are are are pretty full.
The fear of the airlines scheduled increase destinations to whether it be mountain of a beach resorts and we've seen increases in that environment or are on the airport business has been more robust and it has been in the past and you heard me last year, maybe talking about how a local market business was.
Providing the support that we needed during the pandemic seems like air travel has come back I heard 1 of the airline Ceos. The other day, saying that this past weekend and.
Planned capacity was at 90%, we're seeing that at our locations.
And the key is while we're ready for it and we think we were.
And the places that mattered and that mattered. The most so our on airport business has been has been pretty solid and net and that continues and I'll give you anecdotally I've been on the road because of the pandemic and I've been around a fair amount of late and you know the the airports are very busy and the airlines of.
Crowded and our businesses as busy as well.
The second part of your question Mario was was on.
Please can you kind of go back kind of yeah.
And it was just I guess related to an airport I guess traditionally the business travel has been really and into more of the on airport and we're just looking for something of an update there obviously it hasn't come back, but what you're hearing from customers.
On timing and then any update on kind of the price there.
Sure.
We have seen and this past quarter of <unk>.
Sequential improvement and a commercial demand and if that's what you were referring to.
It's not back to where it was in 2019 of course and I think when you look at the TSA stats. The good portion of the decline that you see versus 19 as is.
As commercial and.
Probably inbound alright, so those of the 2 areas. So it hasn't come back yet and when we talk to our commercial accounts.
This mix you know they've got to get back to the office first and they've got to be able to get on the road and see people and I was talking to of trade.
<unk> and and I think that's going to occur maybe of the latter part of this year, maybe towards the end of the third quarter beginning of the for what we have seen is that there are certain groups that are traveling commercially.
The logistic companies defense contracting.
Entertainment Health care, we've seen some some of that and so where we participate with those companies we've seen the and maybe a little bit technology, we've seen some growth.
But I think that.
That has.
As to be more predicated on when they get back to the offices and wholeheartedly and.
When they are allowed to travel.
Got it and then if I could just sneak 1 in on fleet utilization expectations. I guess, what are you guys looking at and the second half of 'twenty 1.
I think the Americas was like 72% and Q2 net.
Should we expect a further increase and the back half or are these levels.
More or less stable.
Yeah, you know I think when you look at our utilization say 72 of your really tight.
We look at ours on the 20 per hour day of few conferred that Toyota is look its and the nineties. Our fleet utilization has been strong and the reason why it's been strong for 2 reasons..1 is the cars are and the right place and 2 we have we had tremendous.
And Oh.
Out of service control, we invest and are all fleet going back to February of seeing this coming and that is giving us more usable fleet to provide utilization benefits. So as I said the summer is the summer and utilization will be very solid there and then we'll you know the rest of the year, it's about what's for travel like the innerwear of seasonal business.
So you come out of the summer you're going to you're going to have you know a situation where you're going to go into the September October for travel and then it's about holidays. So we think as long as we continue doing what we do and use of technology that we have keeping the fleet fresh and we'll be able to maintain some level of improve utilization.
And.
Our next question comes from the line of Ryan and brake made of with J P. Morgan. Please proceed with your question.
Oh, Hey, good morning.
The results.
This is Raj Gupta on for Ryan Brinkman.
Just any kind of question did the $1.5 billion and you know presumably that would imply somewhere you know close to 800 of maybe 900 millions of free cash flow.
So with that kind of a run rate of free cash flow.
Going forward.
Could you give us a sense of you know how and you know the capital allocation priorities I'm going to look like or change going forward you know.
You know versus M&A or buyback versus you know the capex at the sector and like and any color on that would be really helpful. Thanks.
Yes sure.
Let me actually clarify 1 thing when you said that that would be of run rate going forward and like I think it's tough to say that that's the run rate at this point right. The 1.5 and we've talked about this is a a catch up and profitability right and so we think that that's what can happen. This year, but like I said it would be irresponsible of us to assume this level of RPT increases going for.
So what that run rate is going to be like we're still working through that but I think like the 1.5 and if I could go for it and the drop of 2 of the doing them and be like premature at this point to say that that's what's a sustainable so let me start with that but.
You're right. This year, there will be a substantial amount of free cash flow generated and you can see what what's happened with free cash flow generation and the second quarter.
There's just not a lot of M&A to be had out there at this point.
So as things come up we're going to be looking at that and there are certain tuck in acquisitions and we do and those are highly accretive. So we'll continue to keep our eye out for that with and after that and I think kind of what we laid out in the press release before and our last night I should say is we're going to take care of our debt investors. We took on some incremental.
Our leverage during the pandemic to get through and we're gonna be addressing that opportunistically.
We're going to be investing in ourselves like I said theres a lot of.
Capital expenditures that we have out of that.
And maybe we didn't get to in.
2020.
And additional things that we're gonna be investing and to make sure of that our.
Cost base stays at this time and the structurally lower level. So there's that and then the buyback as well like we've always been consistent debt.
In terms of returning value to shareholders that way.
And at this point might we still view that that's a very.
It's a great place to kind of deploy the capital as well so we're going to take a holistic approach to how we how we deploy our free cash flow.
But those of us.
And those are the main areas.
Got it got it that's helpful color and just you know and the pricing stuff you know just the drop through of debt pricing to the EBITDA.
And historically like the rule of thumb.
You know of employers like more like 90% of drop through of that incremental price and revenue.
Does that like in any way change going forward.
Just in terms of like how you're incentivizing. The staff you know would that extra pricing and just with the changes you've made July and the cost structure and the business.
Is that still like a good rule of thumb to to use the just you know just for the forward models.
Sure Let me, let me take that part and then I'll and I'll.
And it over to Joe for the the the incentives, but I think the 90% of is actually high and it depends on what channel. It goes through right. Both for an airport like the the rough I think you get to 90 per cent because you know the at the airport fees of roughly 10%, but it depends on where we acquired that customer we have partnerships.
And <unk>.
Commissions from that and credit card fees and things like that and 90% is high.
And if you take a look at like that incremental margin in the Americas This quarter and given that it was like you know given.
Sequentially and I got a lot by price that might be.
Good place to start.
And 90% seems high for that just given the there's leakage and.
And other areas.
And Joe on the Yeah. It was a.
And just to add.
You know price.
When you unpack price, there's a lot of variables that have to do with that.
And.
And whether it's the Airporter off airport length of rental.
The ancillary revenue, which had very accretive which has high drop throughs.
Type of vehicle rented et cetera, and those are those are more or less aligned with business mix and we've seen a lot of that this quarter.
As far as incentives and how we and how we do our most of our incentive based.
Compensation for the team is is about what they what they sell and.
And we have on our employee basis is very responsive to that range.
Okay.
Our next question comes from a lot of Aileen Smith with Bank of America. Please proceed with your question.
Hey, good morning, everyone.
We have and Raj and cash flow question, but maybe thinking about it and a different way and if we assume that the production environment and it's going to remain constrained through year end dealer inventory is probably not going to be restocked until next year, then I think inc.
Significant level of fleet deliveries for you guys and also the Miami at 2020, and Sheila that but that kind of set up for a pretty significant investment requirement for you guys of not only refreshing the fleet the increasing the size of substantially at the same time and it may be divesting older vehicles with more mileage net here just based on the way you had to use that and this year.
So how do you think about that part of all imbalance between cash outflow of ours and inflow on and operating basis with vehicle programs into next year and just as a clarification for Paul is there any corporate cash that you thought and what you think you might need to allocate towards bleed into next year that you may hold on to this year or.
And your equity and the ABS structures and advance rates sufficient to really do everything you think you need to do.
Sure. Let me, let me take that 1 I think you're thinking about it exactly the right way Eileen, but we obsess over the this as well and.
And given the amount of equity that we put back into our ABS structures.
In.
The first quarter and and the fourth quarter of last year combined with all the work that we've been doing around kind of the day tranche and and to really optimize the advance rate I think that were pretty good in terms of the.
The amount of equity that we need and that structure so of.
At least for the foreseeable future I think we're in a good position.
Okay. So well yeah, when we think about the the significant excess cash that is going to the generate generated the figure for you guys are going to do north of the belt can happen and EBITDA and or somewhere around there is there beyond the M&A is there any thought process internally on how to capitalize on the near term strength and allocate.
The cash to the accretive business finished the doesn't mean, it's the the only outright share repurchases or are there. Some other areas from which you guys to get more aggressive.
And whether it's part of the rolling out a touch and I'll start rental or or other things.
And we're absolutely actually Joe why don't you take that and then.
Yeah listen I think that's of great. That's a great concept and that's what we're looking at there were many things that we were and the process of completing in 2020 that we didn't get a really of our hands around and a big way.
And we're going to do that this year, we rolled out last year the ability to.
To bypass the counter.
Pick of car that you want on a wrap.
Change it if you'd like or even and leave the gate without having to too.
<unk> talked to and individual just use your phone to and a QR code that exits the gate admittedly, we rolled that out and.
We couldn't support it because we were uncertain about what was going to come there are many of those solutions that we're working on right now and I think if you think about how we would deploy some of that cash and the environment. The 2 things that come to mind for me is how do we create a more efficient business given the given the leaders the tools necessary to make on the ground.
The decisions and differentiate themselves from what we've done in the past and the second would be how do we and enhance the experience and those are the things that we're working on and we'll have more to come and talk about that on future calls, but I think technology and our ability to understand how we can get the customer through our process quicker.
And more efficiently is really where you're going to see us.
Operationally some of the capital.
Yeah, and actually just to add to that it's actually in 2 segments rate debt that Joe mentioned, so definitely investing and how do we just make this a better customer experience and believe some of the pressure that we've had and I'm kind of on our on our employee base delivering vehicles to customers. So that's 1 day to area and in the second Big area is internally.
Do we become a more data driven organization, how do we hold ourselves more accountable how do we.
Make sure that debt that we're operating as efficiently and at the lowest cost structure of possible that is going to require investment. So a significant amount of capital is going to go towards that as well.
Okay, Great that's helpful commentary and and 1 follow up if I may and touching based on some of the the fleet activity and the corner and to follow up on 1 of Joe's prepared remarks last quarter I think I asked the question on several parts of the rental car companies of our staffing up purchases and the used vehicle market and and a pretty significant way when we look at the and I think at the Ada.
<unk> thousand and vehicle increase and fleet size and the Americans and the corner is it possible for you guys. The bracket percentage wise, where those vehicles are coming from meaning new vehicles and the automaker programs and the Mercedes used vehicles from other channel and perhaps you know where do you think that normalizes to over the course of the year.
Yes, Okay I'll take the I would say the large majority of those of new vehicles.
And that doesn't mean that we don't support our.
Our specific cities or locations with used vehicles, we are opportunistic when when it when it comes to that I think the underlying decisions.
The decisions that we make about fleet.
Involved 3 things and I continue and we'll talk to the team about it 1 is how you buy the car. So we we make sure we run our car by through our modeling that would suggest just the right car to buy and number 1 to get the rental rates that we need to.
And <unk> to hold the residual values. So why don't you sell them. The second is how you go ahead and use the car.
What's your mileage accretion like where are you going to use and how long youre going to hold the car and third is how you delete the vehicle and we spent a lot of time and the past number of years talking about our car exiting strategy concentrating more and direct to consumer as long as the vehicles that we purchased fit into that model. We're open to.
2 anything right, so, but I have to say and this quarter. It was.
Lots of majority was new that doesn't mean, we haven't bought used because we have.
And just like Joe said, we're not opposed to the used car, but as you know how strong the used car market is been we've run every buy that we have.
On and what is the return on invested capital for us and at sometimes it doesn't make sense and we need to stay rational in terms of our our fleet purchases.
Yeah.
That concludes our question and answer session and I'd like to hand, it back to you and Mr. Ferraro for closing remarks, yes. Thank you so to recap the momentum we saw at the end of the first quarter continued into the second quarter. The Americas delivered record breaking adjusted EBITDA and international was cost discipline, resulting in second quarter results being at historic levels for Avis budget group.
And I personally want to thank all our employees for all the hard work they've put in over this past year with their dedication and believing the Avis budget group way, we're able to achieve these results of the team and as always thank you for your interest and our company.
Okay.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.