Q3 2021 Avis Budget Group Inc Earnings Call
[music].
Greetings and welcome to the Avis budget Group third quarter 2021 conference call. At this time, all participants are in a listen only mode.
And the answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host David Calabria, Treasurer, and SVP of corporate finance.
Okay.
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 uncertainties and assumptions that could cause actual results to differ materially from such forward looking statements and information such risks and assumptions uncertainties and other factors are identified in our earnings.
Release, and other periodic filings with the SEC as well as the Investor Relations section of our website.
Accordingly forward looking statements should not be relied upon as a prediction of actual results in any or all of our forward looking statements may prove to be inaccurate and we can make no guarantees about our future performance, we undertake no obligation to update or revise our forward looking statements.
On this call we will discuss certain non-GAAP financial measures. Please refer to our earnings press release, which is available on our website for how we define these measures and reconciliations to the closest comparable GAAP measures with that I'd like to turn the call over to Jeff.
Thank you David.
Joining everyone and thank you for joining us today.
On our last call I had the pleasure of reporting that in the second quarter of 2021.
We delivered the best revenue adjusted EBITDA and margin in our company's 75 year history.
Today, I get to say that in our third quarter of 2021 surpass those historic results by achieving over $1 billion in adjusted EBITDA and set a new bar for how we define success at Avis budget group.
We've been working towards the $1 billion adjusted EBITDA milestone since 2014, when it was presented for the first time at our Investor Day.
Now we will acknowledge certain tailwind as have been in our favor to finally deliver on that promise in a single quarter. After the worst crisis. Our company has ever faced is honestly a bit pathetic.
So I just want to take a moment to thank all of our employees for doing their part to collectively get us here.
They handle peak period activity and we're determined not to let throughput or supply chain challenges getting that way.
We've been through a journey here at Avis when the pandemic began we realized that we had transformed as a company if we wanted to survive <unk>.
During the pandemic, we laid the groundwork for cost discipline and operational efficiencies that will enable us to emerge as a structurally improved business.
Now as we approach a more normalized demand environment. We are just beginning to show what we're capable of but while we should celebrate our achievements I also want to make it clear that this journey is far from over.
We've only just begun to implement the systems and processes necessary to operate at full efficiency.
And while there is still work to do seeing the early results of our efforts is energized. This team in a way that I have not seen in my 40 years here with Avis.
We clearly realized that one sell a quarter does not a transformed company make.
We take it upon ourselves to continuously improve and demonstrate quarter after quarter that we are indeed, a different avis and before.
At one quarter at a time.
Today I'll go over the third quarter results and as usual, let's start with the Americas segment.
Yes.
As Youll recall last quarter, we said that demand for travel in the U S showed positive momentum throughout the second quarter.
That strength in demand continued into the third quarter. So that's the first time since this pandemic, we are down single digits in rental days versus 2019 with September being the best month yet.
As with the case in the second quarter industry fleets were tight and demand outpaced supply again in the third quarter, resulting in strong revenue per day.
However, two things to note in this front.
The sequential growth in <unk> in the third quarter of 2021 was 5% versus the second quarter of 2021.
Now this is down significantly from the 32% sequential growth we saw in RPT from the second quarter of 'twenty, one versus the first quarter of 'twenty one.
Great in the marketplace appears to be stabilizing and two while the absolute rates are elevated from historic levels. We are now starting to see a return to normal seasonality on a relative basis month to month.
Rate is clearly one of those tailwind so as I mentioned in our introduction, but allow me to highlight a headwind that's not clearly evident in our numbers utilization.
Utilization for the quarter in the Americas was 72% roughly flat with both the prior quarter and the third quarter of 2019.
But the fact that our teams were able to maintain this level of utilization is truly impressive when you consider both labor and parts with challenging to come by and commercial business, while improving is not yet back to pre pandemic levels.
It's a testament to how we can operate through tough environments keep our available fleet high and keep it balance this business segments change in.
In the Americas revenue increased by $1 3 billion year over year Americas adjusted EBITDA. During the same period increased by nearly $750 million for an incremental margin of 58%.
On a two year basis, if you compare our most recent results to the third quarter of 2019 Americas revenue increased by $535 million, while adjusted EBITDA increased by $631 million.
Favorable residual values at pertains to used cars and a strong rate environment clearly assisted by our proprietary demand fleet pricing system helped achieve these remarkable incremental margins, but our focus on cost discipline enabled these benefits to fall to the bottom line.
It's the same story as previous quarter and it will be the same story in quarters to come with focused around investing in and implementing the resources necessary to continuously lower our cost base. So that we maximize our contribution margin as rental base rebound.
And speaking of a rebound in rental days, while not getting into specific guidance on this call I will tell you that the Americas booking patterns for the fourth quarter and holiday seasons appear robust and are currently outpacing 2019 levels. It's a narrow window and we saw last year how quickly the wins can change depending on the state of Covid transfer.
Emissions, but as of today demand for Thanksgiving and Christmas appear as strong as in 2019.
Throughout the course of the year Americas quarterly rental days compared to 2019 has gone from being down 27% in quarter, one to down 15% in quarter, two now down 8% in quarter three with September being in low single digits, representing the best volume performance versus 2019 to date, we believe <unk>.
Because rental days will continue this trend of improvement and finished down low single digits in quarter four compared to 2019. However, the fact that the holiday season appears strong allows us to be cautiously optimistic about how we enter 2022.
With that let's move over to our international segment was a tale of two regions. This quarter for international while we do not breakout specific figures for EMEA versus APAC I wanted to provide some color given the disparity in the macroeconomic environment between the two regions.
APAC, which saw improving demand trends in the first half of the year was hit with very strict lockdowns from the third quarter due to rising virus transmissions in Australia, and New Zealand.
As a result rental days in that region have gone back to levels similar to what we saw in the height of the pandemic in 2020.
Yet despite this headwind the region was able to deliver positive adjusted EBITDA in the quarter due to stringent cost control and nimble fleet management.
This fill in for a fight, but our APAC team is already gearing up to take full advantage of the loosening of restrictions.
EMEA on the other hand started to see the green shoots in demand this quarter.
I don't want to get carried away here Europe has not come close to reaching the inflection point that we've seen in the Americas. The context rental days in EMEA on a percentage basis were down in the high forty's compared to 2019 in the second quarter and the third quarter. This improved to being down in the very high <unk> not a big change.
But does that trickle of demand resulted in dramatically improved results due to the cost discipline and granted the international team.
On a total international basis, adjusted EBITDA has gone from a $6 million in quarter, three 2000 $20 million to $128 million in the most recent quarter.
As over $120 million of improvement in adjusted EBITDA on $170 million of revenue gain representing a contribution margin of 70%.
When compared to the third quarter of 2019, the international segment was able to mitigate nearly $290 million and lower revenue to just $41 million of negative adjusted EBITDA impact.
We believe that as restrictions ease international see latent consumer travel demand materialize and strengthening rental days when that happens the international team will execute the same strategy. We deployed the Americas are holding firm on cost to capture the full adjusted EBITDA benefit of strengthening revenue.
Moving onto fleet.
We are consistent with last quarter will focus more on the Americas segment.
Let's again look at the sequential growth in average fleet size for the Americas. During the second quarter of 2021, we had an average fleet size of 378000 vehicles in the third quarter. We had an average fleet size of over 434000 vehicles that reflects a 56000 increase in.
Vehicles on an absolute basis, and a 15% increase on a percentage basis from the second quarter of 2021 average fleet size <unk>.
By comparison in the sequential period second COVID-19 to third COVID-19, we had 15000 increase in vehicles on an absolute basis, and a 3% increase on a percentage basis.
We knew there was strengthening travel demands we employed the same game plan that we did in the second quarter, we worked through supply chain issues with our OEM partners and kept the fleet at the most optimum levels to help service peak period consumer demand.
As I mentioned during our Americas section, we also work to keep utilization high by investing in reconditioning of our vehicles and being proactive with preventive maintenance in short we did everything in our power to maximize diesel fleet it.
It was not easy, but through the efforts of our supply chain teams and services, we're able to actually post a higher customer satisfaction score this quarter than the second quarter of 2021.
I would like to take a minute and address the model year 2022 buys.
Last quarter I stated that negotiations with our OEM partners, we continue late into the third quarter.
Unfortunately, given chip shortages and choke points throughout the global supply chain. Many Oems are still working through that 2022 planning and we are working with them on solutions.
The relationships, we've developed with our OEM partners Covid decades allow us to iterate quickly with the glow of mutually optimizing 2022 fleet delivery.
We are continuing our strategy of growing our relationships with key OEM partners, while maintaining a discipline, we buy relative to consumer demand.
Next I would like to discuss the continued improvements with our technology and customer experience.
We continued to expand our use of technology, including connected cars to deliver superior mobility experiences and we have been a pioneer for years across our brands.
Enabled by our winning Avis App and through our aim is quick pass offering our avis preferred customers. Upon arrival can select from a choice of vehicles on that phone, even while sitting on the plane. When they land proceed directly to their car and then utilize our unique QR code to exit via our automated Davis Express exit for a complete.
Contactless experience.
Additionally.
Upon vehicle return customers can closeout their rental themselves enabled by our connected car technology for an expedited and automated completion of their rental.
These industry, leading capabilities completely puts our customers in control of their rental and while we've seen cost efficiencies from these added technologies more importantly customer feedback has been overwhelmingly positive with customers using avis clicks pass.
This ability will lay in all major endpoints by the end of the year.
All our Avis and budget customers can also take advantage of our digital checking on our websites reducing their transaction time at our counters to quickly and safely get on the road give.
Given the differentiated experience we provide we're not surprised that many of those currently traveling are choosing our vehicles over other mobility options.
Finally, I'd like to close with Avis commitment to safety are our latest views around the industry disruptions caused by COVID-19.
<unk> been focused around the safety of our customers and our employees since the beginning of this pandemic.
The <unk> safety pledge and budget worry free promise, we established and are still in full effect today.
The travel industry is still recovering from the effects of this pandemic. We are encouraged by recent trends as I said before we are seeing normal seasonality and the start of the fourth quarter with forward looking demand looking strong towards the end of November and into December.
We're also particularly encouraged by the recent decisions to allow vaccinated travelers from Europe entered the U S. Beginning November right.
Cohort clearly still remains a headwind we are cautiously optimistic that the worst is behind us.
Let me wrap up despite taking a step back is taken avis 75 years across the $1 billion annual adjusted EBITDA threshold and in 2021, we generated over $1 7 billion and adjusted EBITDA just the first nine months.
Clearly certain macroeconomic factors have gone our way to help facilitate this but on the flip side of things. We're also many unforeseen challenges that we had to overcome we have had to adapt quickly find new solutions to old problems and most importantly come together as one global team in order to get here <unk>.
I want to verbalize, something thats not guidance, but more of a mindset that shared by every member of the organization.
Which is now that we've broken the $1 billion annual adjusted EBITDA area. We're never going back we will continue to challenge ourselves to be a leaner and more efficient organization, we work with purpose and urgency.
That was required over the past 18 months, even when this pandemic is behind US we will manage every factor within our control to mitigate challenging macroeconomic environments and capitalize on favorable once we're setting a new foundation to target higher goals and taking full advantage of this positive momentum to create a transformed avis budget group.
It's an exciting time to be here.
Look forward to demonstrating as quarters progress with this team energized and unified by this mindset will be able to achieve with that I will turn the corner over to Brian to discuss our liquidity and outlook.
Thank you Joe and good morning, everyone I will now discuss our liquidity and near term outlook.
Comments today will focus on our adjusted results, which are reconciled from our GAAP numbers in both our press release and earnings call presentation.
I'd like to start off by talking about capital allocation.
On the last call I stated that it is important to address and benefit all stakeholders of Avis budget group when considering capital allocation.
That includes our debt investors or equity investors and the overall company.
With regards to our debt investors, obviously, we've deleveraged substantially given our growth in adjusted EBITDA.
Currently our net debt to LTM adjusted EBITDA is below two times substantially lower than the three to four times, we've targeted historically.
Despite this we took the opportunity this quarter to retire the $235 million that was outstanding on our 525% senior notes due 2025 with cash on hand.
With regards to our equity investors, we took advantage of a period, where we believed our stock was undervalued and deployed $994 million.
To retire 11 6 million shares at an average price of $86.
This represented a 16% reduction in our outstanding share count and just the third quarter alone.
With regards to our company reinvested $180 million of cash back into our vehicle programs.
As you recall, we released equity from our fleet in order to bolster our balance sheet during the peak of the pandemic.
However, with this most recent contribution into vehicle programs. This quarter, the net inflow and outflow of cash in our vehicle programs as relatively flat across the period, beginning <unk> 20, and <unk> 21.
That reinvestment of cash into vehicle programs combined with proactive measures taken by our treasury team over the past few quarters gives me confidence that we have the proceeds available to reinvest and replenish our fleet responsibly going forward.
The total cash used this quarter our cost of capital allocation areas previously outlined was $1 4 billion.
And yet as of September 30, we were holding cash and cash equivalents of nearly $900 million.
<unk> roughly $300 million higher than the average cash we held throughout 2019.
I've said it on our last call, but it's worth saying again.
I've been following avis closely for well over a decade and in my opinion, our capital structure is in the strongest position I've ever seen it.
This balance sheet strength combined with our robust earnings trajectory leave us in a privileged position of considering how best to deploy our free cash flow.
Our capital allocation strategy going forward, we will continue to benefit all stakeholders to maximize value creation.
Let's let's move on to liquidity and financings.
As of September 30, we had available liquidity of $1 3 billion comprised of $900 million in cash and cash equivalents I mentioned previously.
$400 million and availability on our revolving credit facility.
Additionally, we had cash and available borrowing capacity of $2 7 billion in our ABS facilities.
In July we renewed our credit facility with a maturity date of 2026 and eliminated a relief period.
Our corporate debt is well lathered with no meaningful corporate debt maturities until 2024, and no need to refinance any of our ABS term debt this year.
We are in compliance with all of our secured financing facilities around the world with significant headroom on our maintenance Covenant test as of the end of September.
Lastly, this morning, we announced a new share repurchase authorization of $1 billion that will be used opportunistically to return value to shareholders.
Moving on to outlook consistent with the recent prior quarters, we did not offer former up formal outlook on our press release.
However, I do want to provide some thoughts on what we're currently seeing in the fourth quarter.
In the Americas as Joe mentioned, the holiday booking demand is looking strong.
We're expecting normal RPT seasonality, so our PD in the fourth quarter will be lower than the third quarter of 2021, but obviously higher on an absolute basis year over year as industry fleets continue to be tight.
In international we're seeing strengthening demand trends in Europe and stabilization in APAC.
And as an overall company, we will continue to demonstrate the cost discipline, we've shown quarter after quarter.
Given these trends we currently expect to deliver over $2 billion in EBITDA for the full year 2021.
Now going forward, we will continue to provide our views and color around the near term state of our business.
So we've made the decision as a management team to forego, giving formal annual guidance, even after the pandemic is behind us.
We have been entrusted as stewards of this franchise and every decision we make should be with the goal of maximizing long term shareholder value.
I never want to be in a position, where we are compelled to compromise what's best for the business for the sake of making good on near term forecasts.
Of course, we built our plans annually, but I ask our investors to give us the cost and flexibility to make agile decisions as the business environment changes.
That being said I hope you take comfort in Joe's comments earlier, while we have much more to do this is a new chapter at Avis, where an annual plan for $1 billion and EBITDA is no longer acceptable with that let's open it up for questions.
Thank you.
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Please while we poll for questions.
Our first question is from Ivan Smith with Bank of America. Please proceed.
Good morning, everyone. Thanks for taking the question I wanted to ask the first one as the fall as a follow up to the one that I posed last quarter, specifically it was really encouraging to see Americas fleet size increased from 30, 338000 434000 in the quarter and I want to confirm that similar to the second quarter.
Increase in fleet size was attributable primarily to new vehicles.
And I referenced that then.
Brian our dialogue that automakers are prioritizing retail sales of our fleet sales, but based on your results you still clearly have a strong relationship with your automaker. So as we think about production pressures persisting well into next year and the fact that automakers may or may not prioritize certain segments over others. How do you think about your ability to.
Increase your fleet buys into next year.
Yes. Good morning, this is Joe.
Yes, we were able to grow our fleet size substantially in the third quarter. I mean, we had seen based on what we were coming out of the second quarter really peak period consumer demand.
Much greater than that.
And then probably saw in the early part of the second and we had to get prepared for that and we were talking with our OEM partners. As you know we have 16 or so Oems that we have relationships with and we called on all of them frankly to to help us with our production and for the most part as I.
<unk> said in previous quarters. The majority of cars that we have gone and where all new yes.
Yes to answer the question Thats a behind the scenes, we do buy used cars and they have.
A part of our overall fleet strategy, but.
The predominant amount of cars, we got in the quarter was certainly no as a matter of fact, I think we spent about $8 billion.
And.
New cars this year.
Hi.
I thought we made great progress on our 2022 model year buy during this past quarter I thought in the past that we want to get them done in the third quarter, but.
As I said previously it's a very fluid situation.
Whether it be semiconductors, or COVID-19 related challenges on supply chain or vehicle parts or as you mentioned the heavy demand.
For four new cars in a retail environment with inventories quite frankly.
Dealerships.
The historic low, but that being said, we have decades worth of experience with our with our OEM partners and I have to say it is a partnership and they respect the flexibility that we were able to.
Offer them during this last quarter and I suspect that's going to go on for the better part of 2022 as well so not totally there on our new car by it but getting close.
Quite frankly, I'm very pleased with our process so far.
Thank you.
Our next question is from Hamzah <unk> with Jefferies. Please proceed.
Hey, good morning, its actually Ryan getting filling in for Hamzah.
I guess I know you touched on technology, a little bit, but maybe could you talk about what inning you're in on that journey, specifically are you seeing margin benefits or incremental growth from those initiatives.
Yes, Hi, this is Joe.
We spent a lot of time over the past number of years developing our technology solutions platform.
If you think about.
What I mentioned in our prepared remarks about EBIT quick pass I mean, thats a seamlessly.
Contactless transaction Custer.
Customer reserves a car.
We get the car already put it on already supplying systems and then the customer can choose it or make a choice on their cell phone, even while on an airplane come to allot and leap versus a automatic exit gate I mean, when you do that.
Less labor intensive certainly reduces the overall manpower and it actually provides a pretty seamless transaction, one which our customers have have evaluated us very strongly so from a customer service standpoint, we're kind of engaged in that you'll see in the future us develop similar type of processes based on technology from an efficiency.
<unk> standpoint.
We have our proprietary demand fleet pricing system, which enables us to look at and input many thousands and thousands of rate changes that got done automatically without the use of the use of <unk>.
To manpower and get us the opportunity to understand better supply and demand, which has helped us tremendously as we manage the day to day process of our fleet when I think about mileage accretion and mileage. We came out with we have technology, both mileage optimization, which evenly distributes mileage throughout our fleet and especially in a period like this it.
Very very important thus, reducing those outliers that cause fleet on fleet cost issues. So that was another aspect I mentioned connected car I think connected car has a two pronged benefit long service of course.
Customers get gas and mileage that they are accurate. So the billing is correct. So theres no calls to our call center or questioning us about but accuracy of bills, which helps reduce the overall <unk>.
Manpower issues.
We have the ability to two.
To find the car and the IRS situation that help service, but on an efficiency standpoint.
It helps us with inventories and inventory knowledge, which better utilize our available fleet and gives us better utilization on a day to day basis, and a majority of our stores.
We get gas readings to the 10th of a gallon, which helps us on our with our with our gas recovery efforts and lastly, we can recover cars at a much quicker rate than we ever had in the past if they go unaccounted for.
And the last thing I would say is.
Selling cars.
Especially in the future when the residual values may not be as robust as they are today is going to be highly dependent on our ability to sell cars direct to consumer and we worked tirelessly on getting a <unk>.
Platform that enables to do that.
Much more integrated fashion. So those are some of the things that we've looked at from a technology basis, and we'll be developing more overtime.
Great. Thank you and then for my follow up could we could you just walk us through how youre thinking about.
Vehicle strategy for your fleet and if Thats the focus.
Why or why haven't you moved there earlier.
Yes sure.
Brian It's Brian here, and I'll start and Joe can add color.
So we had avis realize that the electrification of vehicles is where not just our industry, but the entire mobility ecosystem is eventually headed.
And I think the bold move made by one of our competitors.
In that announcement is good for the overall rental car industry.
It pushes pace and draws attention to what needs to be done to absorb electric vehicles at scale.
I don't think its fair to characterize that we havent moved on this like we've spent a lot of time over the past 12 months with both our OEM partners to optimize our product line for electric vehicles and also our infrastructure partners to tackle logistical hurdles about like I said absorbing these vehicles at scale. So we are definitely moving forward on this front, but the.
Reason you haven't heard from US publicly on this is because of competitive reasons, we'd like to execute on our strategy before announcing it.
Joe anything you want to add.
Yes.
Look we've said, we've said publicly with our ESG submissions that we're looking to reduce greenhouse gas effects by over 30% over the next 10 years.
Having hybrids and.
In electric vehicles is a large part of that and we've had electric vehicles in our fleet in the past and we will have more of them in our fleet going forward.
We've been in conversations with all of our OEM partners and I would say that because one of the things that we would want to see with electric vehicles, especially early on in their build cycle is the vast diversity of fleet. It helps us in consumer demand and also insulates us from maybe parks challenges or even.
Recall, so youll see us getting more and more involved in that as time goes on.
If you look now 2% or their balance of oil caused manufactured in the U S are electric.
That number will go to about 10% in 2025, and maybe north of 30% in 2030 and will play a big role in that.
In our manufactured at our OEM partners are very interested in talking to us about that as time goes on I would just say this generally about how we evaluate fleet. So we all are kind of grounded I think the principles of how we buy gas and electric cars remain kind of the same but first is is there consumer demand in other words.
Their demand and up across all our segments to provide.
Our ability to get these cars on rent and at the price points that we want so we look at that is their asset utilization.
Where can we rent them what segments are they available throughout the throughout our business and lastly, what are the per unit economics, right what do they cost due to buy how much does it cost you to hold and maintenance and things of that nature and what's the opportunity for SaaS.
Electric vehicles and gas vehicles would fall into those into those categories and youll see us going forward be much more active in the electric scenarios as as a.
<unk> develops over time.
Thank you. Our next question is from Bill <unk> with Morgan.
Morgan Stanley. Please proceed.
Hi team exceptional result here in the third quarter.
So you increase your share repurchase program by $1 billion I was looking to get an update on your capital management strategy going forward and wanted to get your take on whether buying back your stock still remains the most prudent use of capital given the appreciation in the stock are there other plans to reinvest in the business in terms of technology and Capex build out.
But a position about taken flight management. Thanks.
Hey, Bill I'll take this one.
So as we said in our prepared remarks, we want to take a balanced approach to our capital allocation.
At our debt investors or equity investors in our company I think some of the things you mentioned in terms of investing in technology, and the new systems and processes, we need to operate as a more efficient company that is absolutely something that's high on our priority.
But you will see on the cover of our 10-Q when that gets filed our shares outstanding as of October 29th was $56 5 million.
Our shares outstanding as of the second quarter was $78 6 million. So we've retired 20% of our float in the past four months, we've been really busy on that front and and also given the share price as it closed yesterday.
This is the <unk> of our shares retired this.
This represents over $1 billion of value created for shareholders.
Two things I wanted to mention on that front, one we were in the market yesterday. So even at today's prices. We believe our shares represent a compelling investment opportunity given our future trajectory.
And two I.
I think the quantum and pace of buyback we've demonstrated this quarter shows we're not shy about asking aggressively when we see an opening.
We're going to be nimble about this this will not be a set it and forget it like kind of formulaic buyback retiring shares is a great use of free cash flow today, but as you mentioned, Billy we have other areas, where we can deploy capital to maximize long term shareholder value.
May choose to prioritize those alternatives, if we see fit we could go a year or two not buying shares and then deplete the entire $1 billion authorization, we had in the quarter. If thats. The best use it will be a management decision and like I said, we'll be nimble will be opportunistic with regards to share buyback going forward.
Got it I appreciate that thank you.
Thank you. Our next question is from Brian Johnson with Barclays. Please proceed.
Yes.
Just wanted to talk about kind of model year 'twenty two.
You've touched upon the here and there, but it's just kind of want to kind of wrap it up can you give us some sense of what.
It's going to go on with the capital cost of acquiring those units how youre going to think about depreciation schedules as you put those in the fleet.
Because if youre going to sell the next fall the used car market may not be where they are that just to put on the table. I think appear investors have is that rental car companies will need to pay up for model year 'twenty two because supply is still tight and then when they turn to push them out of the fleet. He used car markets could normalize.
So if you could maybe comment on model year, 'twenty, two and how it's likely to flow through in terms of depreciation per vehicle per month.
Yes, sure Bryan I'll start and Joel Joel add his thoughts.
Listen I think the way that Youre, describing it right now is thats, absolutely what were seeing.
On an absolute basis, the price that we pay for these cars will be higher than will be paid in 2020 or 2021 model years, but that's not the way that we view depreciation when we look at is kind of the price at which we buy the car like minus the price at which we can eventually sell the card divided by how long we hold the cars. So there are different variables at play over here.
And when we think about what Cushing, we have in terms of being able to make these decisions and how we optimize our fleet will be actually look at is not just like the price that we're buying the car at but where that price fits relative to where the transaction prices and this is clearing price of the retail customer because that's essentially what we're going to be competing with so it's something that we monitor very closely.
And as we build our fleets and as we partner with our OEM partners like that constantly on our mind and we're building kind of the unit economics of each making model.
In that same rigorous fashion.
We always have.
We're not getting into specific guidance around what we think depreciation can be.
But youll see in our 10-Q when it gets filed.
We're still getting our cars at a at a.
In the mid two hundreds right.
I think we had a gain of $150 million from the sale of vehicles, this quarter and thats versus $109 million gain in the third quarter. So if you back that out we're still getting our fleet at roughly $2 40 per month, and we only realized gains when these vehicles are sold.
Going forward.
We understand like how are you.
How the unit economics of a business working how sensitive it is to depreciation so we're still using the same kind of.
Rigorous kind of make model.
Buildup when it comes to our fleet purchases for 'twenty two.
Yes.
Okay, So I'm sorry.
Yes, I'd just add.
And so we have a pretty established process to evaluate depreciation and depreciation rates that goes back a number of years.
That entails our own data and outside data, what we think will be a selling cars out.
In the months and years to come I will just say this about the near term.
Yes.
In model year 2020 in 2021, the industry, our rental car industry sports certainly a lot less cars that means that go forward, there's going to be.
There is not going to be enough supply to deal with the enhanced demand that we see on a go forward basis now granted over time things will change and I comments about how we sell cars directly to consumers, which we talked about maybe last year before the pandemic is going to be increasing.
<unk> important and that really is how how you would be able to set your depreciation rates and we're confident in our processes that will allow us to look at this what we would call alternative channels selling that can enhance our ROE our fleet cost.
Which as my follow on question. So as you kind of think about.
Next fall.
Are there remarketing channels that you can lean more on are there.
Whereby the competitor did with a well known online our sales app.
Just what how do you think re marketing is going to evolve over the next year.
Yes.
As I kind of just alluded to.
Thing that we do ourselves.
As a benefit right because you while while we will continue to sell cars at various different channels, if you take ownership or control of that selling process.
Then have you don't have the costs associated with sending them to <unk>.
<unk> auction, a fortune fees for that matter, but if you sell to yourselves so it yourselves.
Direct to dealer customer youre, not only enjoying less fees, but you also enjoy the backend benefits.
<unk>.
Whether it would be financing.
Are any of the other backend.
Products that you could sell consumers, which on average can be somewhere in the area like 15 to $2000 per unit.
Thank you.
Our next question is from Ryan Brinkman with Jpmorgan. Please proceed.
Alright, thanks for taking my questions.
Thinking about the potential impact to either transaction days or revenue per day by the removal in the fourth quarter of restrictions on travelers into the U S from certain overseas countries. I'm curious what insight you are booking system might provide relative to travel into the U S. From Asia for example, or from Europe and are you able to quantify how important this.
<unk> inbound business was historically as a percentage of your transaction days prior to the pandemic or how.
The pricing had historically different with these bookings versus more traditional domestic bookings.
Yes sure.
Since the announcement, we've definitely seen an increase in our booking patterns for those international businesses International country, sorry, coming in to do business here in the U S.
As a matter of fact.
Booking patterns are above 2019 levels.
We see the same thing that the airlines reported.
During their time of week or so ago, but there is this this demand I would say, it's more from Europe and APAC.
Brian said in his opening remarks, and as I said earlier, there's been restrictions.
Australia, and New Zealand and especially.
Coming in from far East. So I think the majority of what we've seen coming in from Europe, and frankly, Canada on on what we consider our inbound business and especially prevalent around the holidays. As you know it opens up November eight so we're not going to see an immediate because people who have come in from from elsewhere.
Elsewhere.
Have a little bit of a further booking curve than those domestically, but we will see that the inbound business just to give you. Some some thoughts around it I keep the car for a longer period of time.
And and.
<unk>.
And they buy quite a few ancillary which enhances our revenue per day. So we think that'll be a value add.
Is it the biggest book of business that we have the answer to that is no, but it's certainly something that's margin accretive.
Great, Yes, just add to that.
We don't comment on kind of the different customer segments.
And we at Avis Love all of our customers, but if you think about it from a margin perspective that international inbound is going to be our highest margin business.
Very helpful. Thank you and then just my last question is what Youre seeing in terms of the mix between business and leisure and how youre thinking about the eventual recovery in business travel impacting results going forward I think it's fairly widely acknowledged that leisure tends to be more profitable.
But just thinking and how your mix has changed since the start of the pandemic I'm curious if as bookings as business bookings get layered back in.
If they might carry a stronger than typical contribution margin because either because it improves your utilization, which I imagine is probably.
Higher on the weekends and lower during the week relative to prior to the pandemic or are perhaps because fleets are just so tight right now that maybe volume purchase discounts that big accounts typically got might track lastly, how are you thinking about that.
Yes. Thank you.
You're pretty much spot on in some of your commentary we have seen sequential growth in our commercial business coming back is it back to.
Our 2019 levels the answer to that is no. What we have seen from our commercial segment is that keeping the cars longer which helps as you mentioned that utilization curve that you.
That we see in that during the course of a week or so on average the commercial customer in 2019.
The cars.
A certain amount of time, and we're seeing about a 30% or so percent increase in the amount of time that keeping the cars, which does help even out utilization across a week. So you start off.
It's very hard to maintain.
Growth.
Utilization over a over a peak period of the peak is just the weekend right. What we love in this business as a double peak, which you're going to get the car used on a Wednesday and then you get the car used on a Saturday it's very much.
Profitable that wave and it would be to have a slow Monday Tuesday, so we've seen that and we've seen some sequential growth I will also tell you that there is.
Some of the growth that we've seen is in our mid market and small business they seem to get a little quicker and those come with a higher rate per day factor. So.
Listen I.
I fully expect commercial business two to start moving back as restrictions ease and people go back to their to their offices.
Actually.
The ability to travel and see someone that someone's going to accept them into their into their locations. We haven't seen it to the degree that we had in 2019, but as I said before it helps it helps scaled tremendously.
Thank you. Our next question is from Chris <unk> with.
Deutsche Bank. Please proceed.
Hey, guys good morning, and congratulations on the quarter.
Wanted to ask about kind of the negotiations you have with some of your commercial accounts not typically but higher level.
What kind of pricing expectations, youre, setting or attempting to negotiate with them.
For 2022, given where we are on kind of spot pricing.
Yes.
I'm not going to get into the Chris I'm sorry.
How we negotiate and settle our our contracts I will say this we have a really high retention rate amongst our corporate accounts and that has not changed.
Pre pandemic or post pandemic I think we quoted somewhere in there of <unk> 98 or 99%.
We believe all aspects of our business are important especially.
That midweek commercial segment.
It adds scale that allows us to hold onto cars for four transactions that we might have had if we didn't have that so.
Like I said, we see rising.
Rates right now in the mix being mid and small business and I think we'll continue to see that going forward.
One thing one thing to add to that Chris.
As we've had conversations with our kind of our large commercial accounts, what we've noticed right now is it's not all about rate.
People are talking about like what differentiates you as a company and I think kind of our App and <unk>.
All the flexibility that provides this whole idea of having a more seamless customer experience that's been at the forefront and now we're actually we're seeing a lot of questions around Hey, do you have fleet availability and what is the condition of your fleet and because people alright large corporate accounts that everyone wants to put there.
Employees in a car, that's well maintained and safe obviously, so I think a lot of.
A lot of discussions around that it's not just about right and I think we feel very good about the health of our fleet relative to the overall industry.
Okay very helpful and then Brian kind of a follow up for you on that.
Depreciation stepped down from Q2 to Q3 in the Americas is that mostly a function of you extended the life of certain cars you might have had last year. They didn't accumulate myeloid I'm just trying to get a sense going forward for you I think you mentioned the $2 40 number for depreciation.
I think what I think you're referring to was the stuff you.
Are you, bringing in that kind of the run rate depreciation per month.
With the 143, you obviously had probably some zeroes mixed in there just trying to get a sense for how that might pace going forward.
Yes, sure. The 240 is actually not what we're bringing in new cars that the $2 40 is a blend of our third quarter depreciation rate like what were straight lining the cars that so the way that it works is you make an assumption in terms of you know what you bought the cars that you make an assumption on what you sell the cars out and when you make an assumption on like how long you hold the cars and then you have a straight line.
Depreciation.
Throughout as you sell cars you realize whatever gain is above.
The net book value that you were straight line and getting that car at or in the event that you sell it for less the loss.
What youll see in the Q as we had a gain of $150 million ish from.
From vehicles this quarter, if you back that out.
What were straight line and getting our cars is still the $2 40 number is that helpful.
Yes, yes.
That's helpful. I guess I was really trying to get a sense for what percentage of the fleet. You have today was also in the fleet kind of pre pre COVID-19, that's probably going to roll off in the next.
Early next year.
Oh, yes.
I appreciate where you're getting that what's happened, we're just not giving color kind of on a.
On a model year basis.
Okay I had to try thanks.
Thanks Scott.
I respect that.
Yes.
Okay.
Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session I would like to turn the call back to Joe Ferraro for any closing remarks.
Yes. Thank you so to recap the momentum we saw during the second quarter continued into the third quarter as we surpassed our annual goal of $1 billion in adjusted EBITDA in this quarter alone. The Americas delivered another record breaking quarter in international showed strong improvement along with continued cost discipline. This quarter performance puts us on track to reach.
Over 2 billion and adjusted EBITDA by year end finally, I would like to say thank you to all our employees for the hard work they've put in over this past year their dedication and believing in the Avis budget way that we're able to achieve these results as a team. Thank you all thank you for your interest in our company.
This concludes today's conference you may disconnect. Your lines at this time. Thank you very much for your participation and have a great day.
[music].
[music].
Greetings and welcome to the Avis budget Group third quarter 2021 conference call. At this time, all participants are in a listen only mode.
And answer session will follow the formal presentation, if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host David Calabria, Treasurer, and SVP of corporate finance.
Good morning, everyone and thank you for joining us on the call with me are Joe Ferraro, Our Chief Executive Officer, and Brian <unk>, Our Chief Financial Officer before we begin I would like to remind everyone that we will be discussing forward looking information.
<unk> potential future financial performance, which are subject to risks uncertainties and assumptions that could cause actual results to differ materially from such forward looking statements and information such risks and assumptions uncertainties and other factors are identified in our earnings release and other periodic filings with the SEC as well as the Investor Relations section of our <unk>.
Site.
Accordingly forward looking statements should not be relied upon as a prediction of actual results in any or all of our forward looking statements may prove to be inaccurate and we can make no guarantees about our future performance, we undertake no obligation to update or revise our forward looking statements.
On this call we will discuss certain non-GAAP financial measures. Please refer to our earnings press release, which is available on our website for how we define these measures and reconciliations to the closest comparable GAAP measures with that I'd like to turn the call over to Joe.
Thank you David Good morning, everyone and thank you for joining us today.
On our last call I had the pleasure of reporting that in the second quarter of 2021, we.
We delivered the best revenue adjusted EBITDA and margin in our company's 75 year history.
Today, I get to say that in our third quarter of 2021 surpass those historic results by achieving over $1 billion in adjusted EBITDA and set a new bar for how we define success at Avis budget group.
We've been working towards the $1 billion adjusted EBITDA milestone since 2014, when it was presented for the first time at our Investor Day.
Now I will acknowledge certain tailwind as had been in our favor to finally deliver on that promise in a single quarter. After the worst crisis, our company has ever faced.
Honestly a bit cathartic.
So I just wanted to take a moment to thank all of our employees for doing their part to collectively get us here.
To handle peak period activity, and we're determined not to let throughput or supply chain challenges getting that way.
We've been through a journey here at Avis when the pandemic began we realized that we had transformed as a company if we wanted to survive.
During the pandemic, we laid the groundwork for cost discipline and operational efficiencies that will enable us to emerge as a structurally improved business.
Now as we approach a more normalized demand environment. We are just beginning to show what we're capable of but while we should celebrate our achievements I also want to make it clear that this journey is far from over.
We've only just begun to implement the systems and processes necessary to operate at full efficiency.
And while there is still work to do seeing the early results of our efforts is energised. This team in a way that I have not seen in my 40 years here at Avis.
We clearly realized that one sell a quarter does not a transformed company make.
We take it upon ourselves to continuously improve and demonstrate quarter after quarter that we are indeed, a different avis than before but one quarter at a time today I will go over the third quarter results and as usual, let's start with the Americas segment.
Yes.
As Youll recall last quarter, we said that demand for travel in the U S showed positive momentum throughout the second quarter that strength.
And demand continued into the third quarter, so that for the first time since this pandemic, we are down single digits in rental days versus 2019 with September being the best month yet.
As with the case in the second quarter industry fleets were tight and demand outpaced supply again in the third quarter, resulting in strong revenue per day.
However, two things to note in this front.
The sequential growth in <unk> in the third quarter of 2021 was 5% versus the second quarter of 2021.
Now this is down significantly from the 32% sequential growth we saw in RPT from the second quarter of 'twenty, one versus the first quarter of 'twenty one.
Great in the marketplace appears to be stabilizing and two while the absolute rates are elevated from historic levels. We are now starting to see a return to normal seasonality on a relative basis month to month.
Rate is clearly one of those tailwind so as I mentioned in our introduction, but allow me to highlight a headwind that's not clearly evident in our numbers utilization.
Utilization for the quarter in the Americas was 72% roughly flat with both the prior quarter and the third quarter of 2019.
But the fact that our teams were able to maintain this level of utilization is truly impressive when you consider both labor and parts were challenging to come by and commercial business, while improving is not yet back to pre pandemic levels.
It's a testament to how we can operate through tough environments keep our available fleet high and keep it balance that business segments change in.
In the Americas revenue increased by $1 3 billion year over year Americas adjusted EBITDA. During the same period increased by nearly $750 million for an incremental margin of 58%.
On a two year basis, if you compare our most recent results to the third quarter of 2019 Americas revenue increased by $535 million, while adjusted EBITDA increased by $631 million.
Favorable residual values at pertains to used cars and a strong rate environment clearly assisted by our proprietary demand fleet pricing system helped achieve these remarkable incremental margins, but our focus on cost discipline enabled these benefits to fall to the bottom line.
It's the same story as previous quarter and it will be the same story in quarters to come with focused around investing in and implementing the resources necessary to continuously lower our cost base. So that we maximize our contribution margin is rental based rebound.
And speaking of a rebound in rental days, while not getting into specific guidance on this call I will tell you that the Americas booking patterns for the fourth quarter and holiday seasons appear robust and are currently outpacing 2019 levels. It's a narrow window and we saw last year how quickly the wins can change depending on the state of Covid transfer.
Emissions, but as of today demand for Thanksgiving and Christmas appear as strong as in 2019.
Throughout the course of the year Americas quarterly rental days compared to 2019 has gone from being down 27% in quarter, one to down 15% in quarter, two now down 8% in quarter three with September being in low single digits, representing the best volume performance versus 2019 to date, we believe <unk>.
Because rental days will continue this trend of improvement and finished down low single digits in quarter four compared to 2019. However, the fact that the holiday season appears strong allows us to be cautiously optimistic about how we enter 2022.
With that let's move over to our international segment was a tale of two regions. This quarter for international while we do not breakout specific figures for EMEA versus APAC I wanted to provide some color given the disparity in the macroeconomic environment between the two regions.
APAC, which saw improving demand trends in the first half of the year was hit with very strict lockdowns in the third quarter due to rising virus transmissions in Australia, and New Zealand.
As a result rental days in that region have gone back to levels similar to what we saw in the height of the pandemic in 2020.
Yet despite this headwind the region was able to deliver positive adjusted EBITDA in the quarter due to stringent cost control and nimble fleet management.
There is still in for a fight, but our APAC team is already gearing up to take full advantage of the loosening of restrictions.
EMEA on the other hand started to see the green shoots in demand this quarter.
I don't want to get carried away here Europe has not come close to reaching the inflection point that we've seen in the Americas. The context rental days in EMEA on a percentage basis were down in the high 40 as compared to 2019 in the second quarter and the third quarter. This improved to being down in the very high <unk> not a big change.
Does that trickle of demand resulted in dramatically improved results due to the cost discipline and granted the international team.
On a total international basis, adjusted EBITDA has gone from a $6 million in quarter, three 2000 $20 million to $128 million in the most recent quarter.
As over $120 million of improvement in adjusted EBITDA on $170 million of revenue gain representing a contribution margin of 70%.
When compared to the third quarter of 2019, the international segment was able to mitigate nearly $290 million and lower revenue to just $41 million of negative adjusted EBITDA impact, we believe that as restrictions ease international see latent consumer travel demand materialize and strengthening rental days when that <unk>.
The international team will execute the same strategy, we deployed the Americas are holding firm on cost to capture the full adjusted EBITDA benefit of strengthening revenue.
Moving onto fleet.
Were consistent with last quarter, we will focus more on the Americas segment.
Let's again look at the sequential growth in average fleet size for the Americas.
During the second quarter of 2021, we had an average fleet size of 378000 vehicles in the third quarter. We had an average fleet size of over 434000 vehicles that reflects a 56000 increase in vehicles on an absolute basis, and a 15% increase on a percentage.
<unk> from the second quarter of 2021 average fleet size.
By comparison in the sequential period second COVID-19 to third COVID-19, we had a 15000 increase in vehicles on an absolute basis, and a 3% increase on a percentage basis.
We knew there was strengthening travel demands we employed the same game plan that we did in the second quarter, we worked through supply chain issues with our OEM partners and kept the fleet at the most optimum levels to help service peak periods of consumer demand.
As I mentioned during our Americas section, we also work to keep utilization high by investing in reconditioning of our vehicles and being proactive with preventive maintenance in short we did everything in our power to maximize use of our fleet.
It was not easy, but due to the efforts of our supply chain teams and services, we're able to actually post a higher customer satisfaction score this quarter than the second quarter of 2021.
I would like to take a minute and address the model year 2022 buys.
Last quarter I stated that negotiations with our OEM partners, we continue late into the third quarter.
Unfortunately, given chip shortages and choke points throughout the global global supply chain. Many Oems are still working through that 2022 planning and we are working with them on solutions the.
The relationships, we've developed with our OEM partners over decades allow us to iterate quickly with the glow of mutually optimizing 2022 fleet delivery.
We are continuing our strategy of growing our relationship with key OEM partners, while maintaining a discipline, we buy relative to consumer demand.
Next I would like to discuss the continued improvements with our technology and customer experience.
We continued to expand our use of technology, including connected cars to deliver superior mobility experiences and we have been a pioneer for years across our brands.
Enabled by our winning Avis App and through our Avis quick pass offering our avis preferred customers. Upon arrival can select from a choice of vehicles on their phone, even while sitting on the plane. When they land proceed directly to their car and then utilize our unique QR code to exit via our automated Avis Express exit for a complete.
Contactless experience.
Additionally.
Upon vehicle return customers can closeout that rental themselves enabled by our connected car technology for an expedited and automated completion of their rental.
These industry, leading capabilities completely puts our customers in control of their rental and while we've seen cost efficiencies from these added technologies more importantly customer feedback has been overwhelmingly positive with customers using avis quick pass.
This ability will lay it all major influenced by the end of the year.
All our Avis and budget customers can also take advantage of our digital checking on our web site, reducing their transaction time at our counters to quickly and safely get on the road give.
Given the differentiated experience we provide we're not surprised that many of those currently traveling are choosing our vehicles over other mobility options.
Finally, I'd like to close with Avis commitment to safety are our latest views around the industry disruptions caused by COVID-19.
<unk> been focused around the safety of our customers and our employees since the beginning of this pandemic.
The <unk> safety pledge and budget worry free promise, we established and are still in full effect today.
The travel industry is still recovering from the effects of this pandemic. We are encouraged by recent trends as I said before we are seeing normal seasonality and the start of the fourth quarter with forward looking demand looking strong towards the end of November and into December.
We're also particularly encouraged by the recent decisions to allow vaccinated travelers from Europe entered the U S. Beginning November right.
Cohort clearly still remains a headwind we are cautiously optimistic that the worst is behind us.
Let me wrap up this by taking a step back is taken Avis 75 years to cross the $1 billion annual adjusted EBITDA threshold and in 2021, we generated over $1 7 billion and adjusted EBITDA in just the first nine months.
Clearly certain macroeconomic factors have gone our way to help facilitate this but on the flip side of things. We're also many unforeseen challenges that we had to overcome we have had to adapt quickly by new solutions to old problems and most importantly come together as one global team in order to get here I want to verbalize.
Something that's not guidance, but more of a mindset that shared by every member of the organization.
Which is now that we've broken the $1 billion annual adjusted EBITDA area. We're never going back we will continue to challenge ourselves to be a leaner and more efficient organization, we work with purpose and urgency.
That was required over the past 18 months, even when this pandemic is behind US we will manage every factor within our control to mitigate challenging macroeconomic environments and capitalize on favorable once we're setting a new foundation to target higher goals and taking full advantage of this positive momentum to create a transformed avis budget group.
It's an exciting time to be here.
Look forward to demonstrating as quarters progress what this team energized and unified by this mindset will be able to achieve with that I will turn the corner over to Brian to discuss our liquidity and outlook.
Thank you Joe and good morning, everyone I will now discuss our liquidity and near term outlook. My comments today will focus on our adjusted results, which are reconciled from our GAAP numbers in both our press release and earnings call presentation.
I'd like to start off by talking about capital allocation on.
On the last call I stated that it is important to address and benefit all stakeholders of Avis budget group when considering capital allocation.
That includes our debt investors or equity investors and the overall company.
With regards to our debt investors obviously.
Deleveraged substantially given our growth in adjusted EBITDA.
Currently our net debt to LTM adjusted EBITDA is below two times substantially lower than the three to four times, we've targeted historically.
Despite this we took the opportunity this quarter to retire the $235 million that was outstanding on our 525% senior notes due 2025 with cash on hand.
With regards to our equity investors, we took advantage of a period, where we believed our stock was undervalued and deployed $994 million.
To retire 11 6 million shares at an average price of $86.
This represented a 16% reduction in our outstanding share count adjusted third quarter alone.
With regards to our company, we invested $180 million of cash back into our vehicle programs.
As you recall, we released equity from our fleet in order to bolster our balance sheet during the peak of the pandemic.
However, with this most recent contribution into vehicle programs. This quarter, the net inflow and outflow of cash in our vehicle programs as relatively flat across the period beginning of <unk> 20, and <unk> 21.
That reinvestment of cash into vehicle programs combined with proactive measures taken by our treasury team over the past few quarters gives me confidence that we have the proceeds available to reinvest and replenish our fleet responsibly going forward.
The total cash used this quarter our cost of capital allocation areas previously outlined was one $4 billion.
And yet as of September 30, we were holding cash and cash equivalents of nearly $900 million.
<unk> roughly $300 million higher than the average cash we held throughout 2019.
I said on our last call, but it's worth saying again.
I've been following avis closely for well over a decade and in my opinion, our capital structure is in the strongest position I've ever seen it.
This balance sheet strength combined with our robust earnings trajectory leaves us in a privileged position of considering how best to deploy our free cash flow.
Our capital allocation strategy going forward will continue to benefit all stakeholders to maximize value creation.
Let's move on to liquidity and financings.
As of September 30, we had available liquidity of $1 3 billion comprised of $900 million in cash and cash equivalents I mentioned previously.
$400 million.
And availability on our revolving credit facility.
Additionally, we had cash and available borrowing capacity of $2 7 billion and our ABS facilities.
In July we renewed our credit facility with a maturity date of 2026 and eliminated a relief period our COO.
Corporate debt as well ladder with no meaningful corporate debt maturities until 2024, and no need to refinance any of our ABS term debt 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 September.
Lastly, this morning, we announced a new share repurchase authorization of $1 billion that will be used opportunistically to return value to shareholders.
Moving on to outlook consistent with the recent prior quarters, we did not offer former up formal outlook on our press release.
However, I do want to provide some thoughts on what we're currently seeing in the fourth quarter.
In the Americas as Joe mentioned, the holiday booking demand is looking strong.
We're expecting normal RPT seasonality, so our PD in the fourth quarter will be lower than the third quarter of 2021, but obviously higher on an absolute basis year over year as industry fleets continue to be tight.
In international we are seeing strengthening demand trends in Europe and stabilization in APAC.
And as an overall company, we will continue to demonstrate the cost discipline that we've shown quarter after quarter.
Given these trends we currently expect to deliver over $2 billion in EBITDA for the full year 2021.
Now going forward, we will continue to provide our views and color around the near term state of our business.
So we've made the decision as a management team to forego, giving formal annual guidance, even after the pandemic is behind us.
We have been entrusted as stewards of this franchise and every decision we make should be with the goal of maximizing long term shareholder value.
I never want to be in a position, where we are compelled to compromise what's best for the business for the sake of making good on near term forecasts.
Of course, we built our plans annually, but I ask our investors to give us the trust and flexibility to make agile decisions as the business environment changes.
That being said I hope you take comfort in Joe's comments earlier, while we have much more to do this is a new chapter at Avis, where an annual plan below $1 billion and EBITDA is no longer acceptable with that let's open it up for questions.
Thank you.
We will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
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Moment, please while we poll for questions.
Our first question is from idle Smith with Bank of America. Please proceed.
And good morning, everyone. Thanks for taking the question I wanted to ask the first one as the fall as a follow up to the one that I posed last quarter, specifically it was really encouraging to see Americas fleet size increased from 30, 338000 434000 in the quarter and I want to confirm that similar to the second quarter. This increase.
And fleet size was attributable primarily to new vehicles.
And I referenced that then.
Brian our dialogues that automakers are prioritizing retail sales of our fleet sales, but based on your results you still clearly have a strong relationship with your automaker. So as we think about production pressures persisting well into next year and the fact that automakers there.
Prioritize certain segments over others, how do you think about your ability to increase your fleet buys into next year.
Yes. Good morning, this is Joe.
Yes, we were able to grow our fleet size substantially in the third quarter.
We had seen based on what we were coming out of the second quarter really peak period consumer demand.
Much greater than.
And then probably saw in the early part of the second and we got to get prepared for that and we were talking with our OEM partners. As you know we have 16 or so Oems that we have relationships with and we called on all of them frankly to to help us with our production and for the most part.
As I said in previous quarters. The majority of cars that we have gone and where all new.
Yes to answer the question Thats a behind the scenes, we do buy used cars and they have.
A part of our overall fleet strategy, but.
The predominant amount of cars, we got in the quarter was certainly no as a matter of fact, I think we spent about $8 billion.
And our new.
New cars this year.
<unk>.
I thought we made great progress on our 2022 model year buy during this past quarter.
I thought in the past that maybe might be getting done in the third quarter, but.
As I said previously it's a very fluid situation.
Whether it be semiconductors, or COVID-19 related challenges on supply chain or vehicle parts or as you mentioned the heavy demand.
For four new cars in a retail environment with inventories quite frankly.
Dealerships.
Historic low, but that being said, we have decades worth of experience with our with our OEM partners and I have to say it is a partnership.
They respect the flexibility that we were able to.
Offer them during this last quarter and I suspect that's going to go on for the better part of 2022 as well so not totally there on our new car by yet but getting close.
Quite frankly, I'm very pleased with our process so far.
Thank you.
Our next question is from Hamzah <unk> with Jefferies. Please proceed.
Hey, good morning, its actually Ryan getting filling in for Hamzah.
I guess I know you touched on technology, a little bit, but maybe could you talk about what inning, you're in on that journey and specifically are you seeing margin benefits or incremental growth from those initiatives.
Yes, Hi, this is Joe.
We spent a lot of time over the past number of years developing our technology solutions platform.
If you think about.
What I mentioned in our prepared remarks about EBIT quick pass I mean, thats a seamlessly.
Contact list transaction Custer.
Customer reserves a car.
We get the car already put it on already supplying systems and then the customer can choose it or make a choice on their cell phone, even while on an airplane come to allot and leap versus a automatic exit gate I mean, when you do that.
Less labor intensive certainly reduces the overall manpower and it actually provides a pretty seamless transaction, one which our customers have have evaluated us very strongly so from a customer service standpoint, we're kind of engaged in that you'll see in the future us develop similar type of processes based on technology from an efficiency.
<unk> standpoint.
We have our proprietary demand fleet pricing system, which enables us to to look at and input many thousands and thousands of rate changes that got done automatically without the use of the use of <unk>.
To manpower and get us the opportunity to understand better supply and demand, which has helped us tremendously as we manage the day to day process of our fleet.
About mileage accretion and mileage we came out with we have technology, both mileage optimization, which evenly distributes mileage throughout our fleet and especially in a period like this it becomes very very important thus, reducing those outliers that cause.
<unk> fleet cost issues. So that was another aspect I mentioned connected car I think connected car has a two pronged benefit one service of course.
Customers get gas and mileage that they are accurate. So the billing is correct. So theres no calls to our call center or questioning us about but accuracy of bills, which helps reduce the overall <unk>.
Manpower issues.
We have the ability to two.
To find a car in the IRS situation that help service, but on an efficiency standpoint.
It helps us with inventories and inventory knowledge, which better utilize our available fleet and gives us better utilization on a day to day basis, and a majority of our stores.
We get gas readings to the 10th of a gallon, which helps us on our with our with our gas recovery efforts and lastly, we can recover cars at a much quicker rate than we ever had in the past if they go unaccounted for.
And the last thing I would say is.
Selling cars.
Especially in the future when the residual values may not be as robust as they are today is going to be highly dependent on our ability to sell cars direct to consumer and we work tirelessly on getting a <unk>.
Platform that enables to do that.
Much more integrated fashion. So those are some of the things that we've looked at from a technology basis, and we'll be developing more overtime.
Great. Thank you and then for my follow up could we could you just walk us through how youre thinking about.
Vehicle strategy for your fleet and if Thats a focus.
Why are why haven't you moved there earlier.
Yes sure.
Brian It's Brian here, and I'll start and Joe can add color.
So we had avis realize that the electrification of vehicles is we're not just our industry, but the entire mobility ecosystem is eventually headed.
And I think the bold move made by one of our competitors.
In that announcement is good for the overall rental car industry.
It pushes pace and draws attention to what needs to be done to absorb electric vehicles at scale.
I don't think its fair to characterize that we havent moved on this like we've spent a lot of time over the past 12 months with both our OEM partners to optimize our product line for electric vehicles and also our infrastructure partners to tackle logistical hurdles about like I said absorbing these vehicles at scale. So we are definitely moving forward on this front, but the.
Reason you haven't heard from US publicly on this is because of competitive reasons, we'd like to execute on our strategy before announcing it.
Joe anything you want to add.
Yes.
Look we've said, we've said publicly with our ESG submissions that we are looking to reduce greenhouse gas effects by over 30% over the next 10 years.
Having hybrids and.
In electric vehicles is a large part of that and we've had electric vehicles in our fleet in the past and we will have more of them in our fleet going forward.
We've been in conversations with all of our OEM partners and I would say that because one of the things that we would want to see with electric vehicles, especially early on in their build cycle is the vast diversity of fleet. It helps us in consumer demand and also insulates us from maybe parks challenges or even.
Ah recall, so youll see us getting more and more involved in that as time goes on.
If you look now 2% or their balance of oil caused manufactured in the U S are electric.
That number will go to about 10% in 2025, and maybe north of 30% in 2030 and will play a big role in that.
In our manufactured at our OEM partners are very interested in talking to us about that as time goes on I would just say this generally about how we evaluate fleet. So we all are kind of grounded I think the principles of how we buy gas and electric cars remain kind of the same. The first is is there consumer demand in other words.
Their demand and up across all our segments to provide.
Our ability to get these cars on rent and at the price points that we want so we look at that is their asset utilization.
Where can we rent them what segments are they available throughout the throughout.
Our business and lastly, what are the per unit economics, right, what do they cost due to buy how much cost you to hold and maintenance and things of that nature and what's the opportunity for SaaS.
Electric vehicles and gas vehicles, we'll fall into those into those categories.
Youll see us going forward be much more active in the electric scenarios as as the situation develops over time.
Thank you. Our next question is from Bill <unk> with.
Morgan Stanley. Please proceed.
Hi team exceptional result here in the third quarter.
As you increase your share repurchase program by $1 billion I was looking to get an update on your capital management strategy going forward and wanted to get your take on where the buying back your stock still remains it was prudent use of capital given the appreciation in the stock.
Are there other plans to reinvest in the business in terms of technology and Capex Buildout.
Better position <unk> taken flight management. Thanks.
Hey, Bill I'll take this one.
So as we said in our prepared remarks, we want to take a balanced approach to our capital allocation.
Looking at our debt investors or equity investors in our company I think some of the things you mentioned in terms of investing in technology, and new systems and processes, we need to operate as a more efficient company and that is absolutely something that's high on our priority.
But youll see on the cover of our 10-Q.
When that gets filed our shares outstanding as of October 29th was $56 5 million.
Our shares outstanding as of the second quarter was $78 6 million. So we've retired 20% of our quote in the past four months, we've been really busy on that front and.
And also given the share price as of close yesterday.
Versus the <unk> of our shares retired.
This represents over $1 billion of value created for shareholders.
Two things I want to mention on that front one when we were in the market yesterday. So even at today's prices. We believe our shares represent a compelling investment opportunity given our future trajectory.
And two I think the quantum and pace of buyback we have demonstrated this quarter shows we're not shy about acting aggressively when we see an opening.
We're going to be nimble about this this will not be a set it and forget it like kind of formulaic buyback retiring shares is a great use of free cash flow today, but as you mentioned, Billy we have other areas, where we can deploy capital to maximize long term shareholder value.
We may choose to prioritize those alternatives if we see fit we could go a year or two not buying shares and then complete the entire 1 billion authorization, we have in a quarter. If thats. The best use it will be a management decision and like I said, we'll be nimble will be opportunistic with regards to share buyback going forward.
Got it I appreciate that thank you.
Thank you. Our next question is from Brian Johnson with Barclays. Please proceed.
Yes.
Wanted to talk about kind of model year <unk>.
<unk> two.
You touched upon it here and there, but it's just kind of want to kind of wrap it up can you give us some sense of.
<unk> got to go on with the capital cost of acquiring those units how youre going to think about depreciation schedules as you put those in the fleet.
Because if youre going to sell the next fall the used car market may not be where there are that just to put on the table. I think appear investors have is that rental car companies will need to pay up for model year 'twenty two because supply is still tight.
Then when they turn to push them out of the fleet he used car markets could normalize.
Could you maybe comment on model year, 'twenty, two and how it's likely to flow through in terms of depreciation per vehicle per month.
Yes, sure Bryan I'll start and Joel Joel add his thoughts.
Listen I think.
The way that Youre, describing it right now is thats, absolutely what were seeing.
On an absolute basis, the price that we pay for these cars will be higher than will be paid in 2020 or 2021 model years, but that's not the way that we view depreciation when we look at is kind of the price at which we buy the car like minus the price at which we can eventually sell the card divided by how long we hold the car. So there are different variables at play over here.
And when we think about what Cushing, we have in terms of being able to make these decisions and how we optimize our fleet will be actually look at is not just like the price that we're buying the car at but where that price fits relative to where the transaction prices and this is clearing price of the retail customer because that's essentially what we're going to be competing with so it's something that we monitor very closely.
And as we build our fleets and as we partner with our OEM partners like that constantly on our mind and we're building kind of the unit economics of each making model.
In that same rigorous fashion.
We always have.
We're not getting into specific guidance around what we think depreciation could be.
But youll see in our 10-Q when it gets filed.
We're still getting our cars at a at a in that in the mid two hundreds right.
I think we had a gain of 150 ish million dollars from the sale of vehicles, this quarter and thats versus $109 million of gain in the third quarter. So if you back that out we're still getting our fleet at roughly $2 40 per month, and we only realized gains when these vehicles are sold.
Going forward Mike.
We understand like how are.
How the unit economics of our business working how sensitivity depreciation so we're still using the same kind of.
Rigorous kind of make model.
When it comes to our fleet purchases for 'twenty two.
Yes.
Yes.
Okay, So I'm sorry.
Yes.
And so we have a pretty established process to evaluate depreciation and depreciation rates that goes back a number of years.
That entails our own data and outside data, what we think will be a selling cars out.
In the months and years to come.
Say this about the near term.
In model year 2020 in 2021, the industry, our rental car industry sports certainly a lot less cars that means that go forward, there's going to be.
There is not going to be enough supply to deal with the enhanced demand that we see on a go forward basis now granted over time things will change and I comments about how we sell cars directly to consumers, which we talked about maybe last year before the pandemic is going to be increasingly important.
And that really is how how you would be able to set you had depreciation rates and we're confident in our processes that will allow us to look at this what we would call alternative channels selling that can enhance our ROE our fleet cost.
Which as my follow on question. So as you kind of think about.
Next fall or their remarketing channels that you can lean more on our they're certainly aware of what our competitor did with a well known online our sales app.
Just what how do you think remarketing is going to evolve over the next year.
Yes.
As I kind of just alluded to anything that we do ourselves.
As a benefit right because you all while we will continue to sell cars at various different channels. If you take ownership or control of that selling process. You. Then have you don't have the costs associated with sending them to <unk>.
Standard auction are fortunate fees for that matter, but if you sell to yourselves solid yourselves to a direct to dealer customer you are not only enjoying less fees, but you also enjoy the backend benefits.
Yes.
Whether it be financing.
Or any of the other backend.
Products that you could sell consumers, which on average can be somewhere in the area like 15 to $2000 per unit.
Thank you.
Our next question is from Ryan Brinkman with Jpmorgan. Please proceed hi, thanks for taking my questions.
Thinking about the potential impact to either transaction days or revenue per day by the removal in the fourth quarter of restrictions on travelers into the U S from certain overseas countries. I'm curious what insight you are booking system might provide relative to travel into the U S. From Asia for example, or from Europe and are you able to quantify how important this.
National inbound business was historically as a percentage of your transaction days prior to the pandemic or.
How the pricing had historically different with these bookings versus more traditional domestic bookings.
Yes sure.
Since the announcement, we've definitely seen an increase in our booking patterns for those international businesses International country, sorry, coming in to do business here in the U S.
As a matter of fact.
Booking patterns are above 2019 levels. So we see the same thing that the airlines reported.
During their time of week or so ago, but there is this demand I would say, it's more from Europe and APAC.
Brian said in his opening remarks, and as I said earlier, there's been restrictions and in Australia, and New Zealand and especially.
Coming in from far East. So I think the majority of what we've seen coming in from Europe, and frankly, Canada on a what we would consider our inbound business and especially prevalent around the holidays. As you know it opens up November eight so you're not going to see an immediate because people who who come in from from elsewhere.
Elsewhere.
Have a little bit of a further booking curve than those domestically, but we will see that.
The inbound business just to give you some some thoughts around it if they keep the car for a longer period of time.
And.
<unk>.
And they buy quite a few ancillary which enhances our revenue per day. So we think that'll be a value add.
Is it the biggest book of business that we have the answer to that is no, but it's certainly something that's margin accretive.
Yes.
Add to that.
Comments on kind of the different customer segments.
And we at Avis Love all of our customers, but if you think about it from a margin perspective that international inbound is going to be our highest margin business.
Very helpful. Thank you and then just my last question is what Youre seeing in terms of the mix between business and leisure and how youre thinking about the eventual recovery in business travel impacting results going forward I think it's fairly widely acknowledged that leisure tends to be more profitable.
But just thinking and how your mix has changed since the start of the pandemic I'm curious if as bookings as business bookings get layered back in.
If they might carry a stronger than typical contribution margin because either because it improves your utilization, which I imagine is probably.
Higher on the weekends and lower during the week relative to prior to the pandemic or are perhaps because fleets are just so tight right now that maybe volume purchase discounts that big accounts typically got might track lastly, how are you thinking about that.
Yes, well I think youre.
You're pretty much spot on in some of your commentary we have seen sequential growth in our commercial business coming back because it back too.
Our 2019 levels the answer to that is no. What we have seen from our commercial segment is that keeping the cars longer which helps as you mentioned that utilization curve that you.
That we see in that during the course of a week or so on average the commercial customer in 2019.
The cars.
A certain amount of time, we are seeing about a 30% or so percent increase in the amount of time that keeping the cars, which does help even out utilization across a week. So you start off.
It's very hard to maintain.
Growth.
Utilization over a over a peak period of the peak is just the weekend right. What we love in this business as a double peak, which you got to get the car used on a Wednesday and then you get the car used on a Saturday it's very much.
Profitable that way then it would be to have a slow Monday Tuesday, so we've seen that and we've seen some sequential growth I will also tell you that there is.
Some of the growth that we've seen is in our mid market and small business. They seem to have gotten a little quicker and those come with a higher rate per day factor. So.
Listen I.
I fully expect commercial business two to start moving back as restrictions ease and people go back to their to their offices and this actually.
The ability to travel and see someone that someone's going to accept them into their into their locations. We haven't seen it to the degree that we had in 2019, but as I said before it helps that helps scale tremendously.
Thank you. Our next question is from Chris <unk> with.
Deutsche Bank. Please proceed.
Okay.
Hey, guys good morning, and congratulations on the quarter.
Wanted to ask about kind of negotiations you have with some of your commercial account.
But higher level.
What kind of pricing expectations youre setting.
We're attempting to negotiate with them.
For 2022, given where we are on spot pricing.
Yes.
I'm not going to get into the Chris I'm sorry.
How we negotiate and settle our our contracts I will say this.
It really high retention rate amongst our corporate accounts and that has not changed pre pandemic or post pandemic I think we can.
Loaded somewhere in there of <unk> 98 or 99%.
We believe all aspects of our business are important especially.
That midweek commercial segment.
It adds scale that allows us to hold onto cars for.
Four.
Transactions that we might have had.
We didn't have that so.
Like I said, we see rising.
Rates right now.
The mix being mid and small business and I think we'll continue to see that going forward and just one thing.
One thing to add to that Chris.
As we've had conversations with our kind of our large commercial accounts, what we've noticed right now is it's not all about rate.
People are talking about like what differentiates you as a company and I think kind of our App and all.
All the flexibility that provides this whole idea of having a more seamless customer experience that's been at the forefront and now we're actually we're seeing a lot of questions around Hey, do you have fleet availability and what is the condition of your fleet and because people. It's a large corporate account everyone wants to put there.
Employees in a car, that's well maintained and safe obviously, so I think a lot of.
A lot of discussions around that it's not just about right and I think we feel very good about the health of our fleet relative to the overall industry.
Okay very helpful.
Ryan kind of a follow up for you on that.
Depreciation step down from Q2 Q2 to Q3 in the Americas is that mostly a function of you.
You extended the life of certain cars you might have had last year.
You didn't accumulate mileage and just trying to get a sense going forward for I think you mentioned the $2 40 number for depreciation I think what I think you're referring to was the stuff you are bringing in and Thats kind of the run rate depreciation per month.
The 143, you obviously had probably some zeroes mixed in there just trying to get a sense for how that might.
Going forward.
Yes, sure. The 240 is actually not what we're bringing in new cars that the 240 is a blend of our third quarter depreciation rate at what were straight lining.
Our cars that so the way that it works is.
You make an assumption in terms of you know what you bought the cars that you make an assumption on what you sell the cars that you can make an assumption on like how long you hold the cars and then you have a straight line depreciation.
Throughout as you sell cars.
Realize whatever gain.
Above.
The net book value that you were straight lining getting that car at or in the event that you sell it for less the loss.
What youll see in the Q as we had a gain of $150 million ish from.
From vehicles this quarter, if you back that out.
What we are straight lining depth, our cars is still the $2 40 number or is that helpful.
Yeah, Yeah that's.
That's helpful. I guess I was really trying to get a sense for what percentage of the fleet. You have today was also in the fleet kind of pre pre COVID-19, that's probably going to roll off in the next.
Early next year.
Oh, yes.
I appreciate where you're getting that what's happened, we're just not giving color kind of on a.
On a model basis.
Okay I had to try.
Thanks Scott.
I respect that.
Okay.
Thank you ladies.
Ladies and gentlemen, we have reached the end of the question and answer session I would like to turn the call back to Joe Ferraro for any closing remarks.
Yes. Thank you so to recap the momentum we saw during the second quarter continued into the third quarter as we surpassed our annual goal of $1 billion in adjusted EBITDA in this quarter alone. The Americas delivered another record breaking quarter in international showed strong improvement along with continued cost discipline. This quarter performance puts us on track to reach you.
Over $2 billion in adjusted EBITDA by year end finally, I would like to say thank you to all our employees for the hard work they've put in over this past year their dedication and believing in the Avis budget way that we're able to achieve these results as a team. Thank you all thank you for your interest in our company.
This concludes today's conference you may disconnect. Your lines at this time. Thank you very much for your participation and have a great day.