Q2 2022 Avis Budget Group Inc Earnings Call
Greetings and welcome to Avis budget group's second quarter 2022 conference calls.
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A question and answer session will follow the formal presentation.
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I would now like to turn the conference over to your host David Calabria.
Treasurer and senior Vice President of corporate Finance. Please go ahead Sir.
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 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 good morning, everyone.
And thank you for joining us today.
Yesterday, we reported our best quarterly result in our company's history, making this our fifth consecutive earnings report, where we delivered record high adjusted EBITDA with that given quarter.
This wouldn't have been possible without the dedication and focus demonstrated by our employees and I want to thank them for driving record results for 15 months in a row now.
Last quarter I referenced the outside travel demand that begin to materialize around Presidents' day and strengthened throughout the remainder of the first quarter.
This demand continue to build globally and we're currently in the busiest summer travel season I've ever seen.
The man has accelerated rate is elevated and advanced bookings are strong.
And while there is uncertainty surrounding the economy at large.
We have not seen it travel.
Travel is robust and our key indicators support this certainly throughout the summer is customers, both leisure and commercial are dedicating their share of wallet to us.
We are doing everything possible to meet that demand and get our customers on the road again.
We don't talk a record first quarter 2022 and generated over $1 2 billion of adjusted EBITDA in the second quarter.
That is a 50% increase over the prior quarter and the earnings increase exceeded normal quarter to quarter seasonal trends.
That puts us at over 2 billion of adjusted EBITDA in the first half of 2022 alone.
It goes without saying that 2022 is shaping up to be an exceptional year for Avis budget group.
But before we get into that let's review, our second quarter results and as usual, let's start with the Americas segment.
The Americas had another outstanding quarter, nearly every business metric cost control RPT rental days lead cost fleet availability, all working together to optimize operations.
The results of that was over 1 billion and adjusted EBITDA in the second quarter for the Americas segment alone of $1 8 billion for the year so far.
As I said earlier demand was accelerating rental days were up 28% versus 2021 and up 9% versus 2019 depicting what we believe a more normalized environment.
With strong surrounding vacation destination and commercial came back as corporate customers cut back on the road.
We have a very group of products with traditional offerings like Avis budget, and Payless, which provide great growth in all the areas like Zipcar ride hail and budget truck helped diversify our mobility offerings.
On our last quarter call, we said that for the quarter volume would have evolved the second quarter of 2019 and R. P. D would be above the second quarter of 2021, and we delivered on that promise if.
If you recall our P. D really started to elevate in the second quarter of 2021 as vaccine distributions grew and virus transmissions declined.
But the overall strength of demand in the second quarter of 2022 allowed us to even surpass those 2021 levels are.
<unk> P. D grew by 2% versus 2021, and 45% versus 2019, we started to see a more normalized trends as it pertains to our P. D <unk>.
Frankly, it's starting to mirror 2019, and then seasonality, but at a much higher level than we saw in 2019.
We saw this trend as a more normalized level in both demand and price, which is carrying through to this current quarter as well.
Speaking of normal market dynamics, we're also seeing a return of normal seasonality month to month and RPT trends.
In 2021 RPT in the Americas increased sequentially every month in the first half of the year.
Man was indiscriminate to normal seasonality.
In the second quarter of 2022, we saw an increase in our PD and April for Easter and spring break.
Slight decline in the shoulder period of May followed by an increase into memorial day with continued throughout June we believe we'll continue to see the seasonal trends throughout the balance of the year.
As employees return to the office and we settle into a new normal environment.
This second quarter sets, a new benchmark for what we define as operational excellence, but it wasn't an easy environment to operate.
In 2021, the industry was so constrained and vehicle supply that nearly every market was on depleted.
What we're now seeing is not just overall strength across the Americas, but also more distinction between hot markets versus average markets in other words more of a return to normal market dynamics, which required positioning fleet across the country.
Fortunately, we pride ourselves in our operating proficiency and our ability to make dynamic fleet decisions to ensure that our fleet is slightly inside of demand throughout the country.
And that's clearly reflected in our P D and rental day metrics in this quarter.
With the continued uncertainty surrounding a greater number of vehicle recalls which impacted about a point of utilization along with uncertain fleet deliveries and flight cancellations. We made the prudent decision to hold onto fleet to ensure we have the capacity to meet demand in the peak summer months. This caused a slight decline in our.
<unk> for the quarter by two six points year over year, but in short our ability to take full advantage of the opportunities presented to us at the end of the quarter and into July and maximize our revenue opportunities.
Excluding recalls we were in line with 2019 utilization levels.
As you recall 2021 was solely about in fleeting we're back to operating in an environment with improved fleet rotation, allowing us to delete older more mileage vehicles, we pride ourselves on our fleet management and proven over the years that we keep fleet size slightly under consumer demand and will ensure that this is the case going forward.
By now most of the fleet moves had been completed for the summer and we believe our utilization metrics will return to normalized levels in the third quarter.
I'll be getting into details around fleet later in this call, but I do want to point out that in the Americas, we dispose of more fleet than we initially anticipated at the start of the quarter.
We were able to do this thanks to our OEM partners, who helped us grow our fleet in advance of the summer season, enabling us to dispose of targeted high mindless fleet at attractive gains.
Given macroeconomic uncertainties, we believe it's prudent to trim vehicles in order to ensure a proper return on invested capital on a fleet asset base.
Therefore, similar to the first quarter with sales gains, resulting in monthly per unit fleet costs in the Americas to be significantly lower than our straight line depreciation in the second quarter moving on to the income statement results of these metrics in the Americas revenue increased by roughly $590 million year over year Americas.
Adjusted EBITDA during this period increased by roughly $410 million for an incremental margin of 69%.
If you compare our most recent results to the first quarter of 2019.
<unk> revenue increased by roughly 940 million, while adjusted EBITDA increased by $890 million for an incremental margin of 95%.
James on disposed vehicles contributed to these results, but less so than in the first quarter of 2022.
That's not the secret of our success here, it's all consistent and relentless focus on cost control, which allows us to maximize the revenue and depreciation benefits that dropped to the bottom line.
So I'll close our second quarter results of the Americas. The way I began the man exceeded 2019 levels and our P. D improved over 2021.
That along with operational excellence and favorable market dynamics, resulting in Americas, adjusted EBITDA of over $1 billion.
Wanted to repeat that one last time now it's in a rearview mirror, we're onto the third quarter with the Americas team looks to continue the incredible momentum we built since the pandemic.
With that let's move over to our international segment, which posted record results as well for the past few quarters, you've been saying, how the stringent cost control and our international segment sets us up for outsized EBITDA recovery when topline recovers the second quarter results for international reflect the magnitude of.
This transformation.
What we're currently seeing in EMEA is similar to what we saw in the Americas in the early stages of the recovery, which is significant travel demand across all regions combined with vehicle supply shortages.
This led to sequential RPT and rental day growth throughout the quarter and adjusted EBITDA of $183 million.
Let's put that number in perspective compared to the second quarter of 2019 International revenue has gone from $710 million to 677 million a decline of 33 million. However.
However, adjusted EBITDA has grown from 40 million to over $180 million in the same period, despite that lower revenue base.
They've been able to accomplish this without the benefit of significant monthly depreciation gains due to the structural nature of program cars in EMEA.
Which means that in the first half of 2020 to our international segment has already recorded more adjusted EBITDA than the full year of 2019, despite headwinds from foreign currency.
With the return of inbound travelers from the U S. As Covid restrictions were removed we see trends strengthening in the peak of the summer.
It's been a long and difficult struggle for international team since the pandemic began.
But despite the prolonged downturn in that region.
Employees continue to remain confident that the work we put in would bear fruit.
We are hopeful this marks the beginning of an extended period of recovery for our international segment.
Moving onto fleet were consistent with last quarter will focus more on the Americas segment.
The Americas, our average fleet size in the quarter was sequentially higher at 500000 vehicles.
This average is a combination of management decision to whole fleet due to fleet delivery uncertainty in April and the decision to dispose of age fleet in May and June as deliveries arrived.
The first quarter of 2022, our average fleet size was 12% higher than the first quarter of 2019.
This quarter, our average fleet size was 10% higher than the second quarter of 2019, a sequential decline in growth rate versus 2019.
As I mentioned earlier as we continue to receive new deliveries from our OEM partners. We will continue to dispose of aging fleet to a more normalized rotation and strike the appropriate balance between industry demand and supply.
The disposal of these older units, resulting in outside weak gains again this quarter.
<unk> monthly depreciation cost per vehicle in the second quarter of 2022 was $117. That's sequentially up from the 62, we posted in the first quarter of 2022, but substantially lower than the 260 monthly depreciation cost we saw in the full year of 2019.
We had 194 million of gains from dispositions in the quarter and we expect that number to moderate as the quarters progress.
And we deplete our older model vehicles.
If you adjust for fleet gains you'll see that our straight line depreciation is still set at over $210 per month per vehicle, which we believe accurately reflects the current state of the market and our vehicle asset base.
We are working with our OEM partners on our model year 202023 by and while it's early all indications are that industry supply challenges will continue to exist and demand for used car will remains strong.
Next I want to give an update from where I last spoke about our electrical vehicle integration.
We've been hard at work to meet our ESG goals of reducing our carbon footprint by 30% over the next 10 years and we're focused on meeting both our corporate and leisure customers desire to rent movies.
We've been growing our <unk> fleet with a number of Oems and we are deploying level to E b charges across select airports and local market stores, we know that our average customer length of rental is more than four days and we want to scale. Our E. B fleet to match the infrastructure built to provide comfort and confidence to our customers traveling and not familiar.
Cities.
We are doing this at a fast pace already but expect it to grow significantly in the back half of the year as usual, we're working on maximum utilization, whereas a prerequisite for demand. We're also diversifying our vehicles through our OEM partners in order to provide options to our customers and more certainty surrounding vehicle parts.
And repairs. We're excited for this growth we see in this area and we will continue to talk about it in the quarters to come.
Moving on to technology due to strong consumer feedback and efficiencies. We seen are all workflow we've been dedicating additional resources to expand our Avis quick pass offering.
For those unfamiliar with this product enables our customers to select from a choice of vehicles on their phone received directly to their car and then utilize a unique QR code to exit Bureau, automated express exit for a completely contactless experience.
These industry, leading capabilities completely puts our customers in control of their rental. Additionally.
Additionally, upon vehicle return customers, who close out their rental themselves enabled by our connected car technology for an expedited and automated completion of their rental.
We've been deploying quick pass in all the major airports and have seen in over 10 point increase in net promoter scores, but those customers utilizing the service.
In addition to this service and revenue generating offering we continue to use technology to power additional capabilities.
As you know we've been optimizing the use of vehicle telematics in our cars for some time now.
Gas collections at an all time high helping to neutralize the higher gas prices. We've seen them late in addition, we've seen many other benefits as it pertains to asset controls surrounding use of all vehicles.
Also productivity enhancing systems are being utilized to help reduce both labor and wage pressures and we will continue to roll these out across our operating network.
D. S. P. A proprietary demand fleet pricing system enables us to place vehicles in the most optimal locations and price them in a way that provides maximize contribution margins were consistently iterating. This process to enhance our revenue generation and the results can be seen in our earnings.
Mileage optimization optimization rolled out in the latter part of 2019 provides a more even distribution of mileage throughout the fleet, making sure. The best available vehicle has served up to our customers that fit their customer use criteria.
Our system identifies based on our customers' rental patterns, which vehicles best utilized for that need.
This allows us to lengthen the life of the vehicle will not lengthening the mileage accretion.
We will continue to see us develop the use of technology to drive additional services revenue and cost control next let me comment on Avis commitment to safety and our latest views around industry disruptions caused by COVID-19.
Our Eva safety pledge and budget worry free promise remain in full effect and provides both our customers and our employees industry, leading protocols to keep everyone safe.
While there has been an increase in cases over the past few months, you've not seen any impact to our booking demand and remain ready for any future variance and their potential impact on our travel industry.
Let me wrap up my prepared remarks by saying how proud I am of our team and the results we've delivered thus far in 2022.
But we're not done yet we have the back half of 2022 to go and our organization is ready for what I believe will be the busiest travel season in recent memory with demand strong and significantly higher RPT than 2019, even as travel patterns continue to normalize with that I'll turn it over to Brian to discuss our liquidity.
Our 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 our press release.
I'd like to start off by addressing capital allocation as Youll recall, we aggressively repurchase shares in the first quarter of 2022, deploying roughly $1 3 billion in buybacks in.
In the second quarter, our pace of repurchases slowed to $450 million with the vast majority of that amount being deployed under our prior <unk> five plan in April .
While we believe our stock is undervalued and that buybacks represented an extremely compelling opportunity to create permanent value for our shareholders. We thought it prudent to take a more restrained approach over the past three months.
Given rising interest rates and general macroeconomic uncertainties, we believe that deployment of our free cash flow will be more balanced in the coming quarters as we consider other areas such as corporate debt pay down or fleet equity contribution in addition to share repurchases.
We're patient allocators of capital at Avis and today, we're evaluating our options thoroughly before deploying substantial resources, we will as always opportunistically allocate capital to those areas that benefit all stakeholders of Avis budget.
We continue to be in the strongest financial standing in the history of our company.
One year ago, our LTM adjusted EBITDA was $965 million in <unk> 'twenty one.
They were three $8 billion and LTM adjusted EBITDA.
Our net leverage ratio remains the lowest in our company's history at less than 1.1 times. Despite historically targeting a leverage range of three to four times.
As of June 30, we had available liquidity of $850 million with additional borrowing capacity of $1 $9 billion in our ABS facilities.
Our corporate debt is well lathered with nearly 90% of our corporate debt, having maturities in 2026 or beyond and we are in compliance with all of our secured financing facilities around the world with significant headroom on our maintenance covenant tests as of the end of June .
Let's move on to outlook.
As you know we've made the decision as a management team to forego, giving formal annual guidance to allow ourselves the flexibility to make agile decisions.
Ironman changes.
But I do want to provide a bit of color on what we're currently seeing for the third quarter.
As Joe mentioned earlier on the call the underlying demand environment is currently strong for both our Americas and international segments.
International will continue to see recovery in both mental days and our P D.
In the Americas rental day growth will continue relative to <unk> 21, and <unk> 19, but with growth moderating from the levels. We saw in the second quarter.
We believe third quarter R. P D in the Americas will be lower than what we saw in the third quarter of 2021.
However, we believe that the benefit we're seeing in rental days depreciation and most importantly cost savings will more than offset an RPT decline.
The net result of all this is that at this point, we believe that will generate higher adjusted EBITDA in the third quarter of 2022 than we did in the third quarter of 2021, putting us on track to deliver the highest full year adjusted EBITDA in our company's history in 2022 with that let's open it up for questions.
Thank you.
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Our first question comes from John Healy with Northcoast Research. Please go ahead.
Thank you.
Jim and Bryan I was hoping we could talk a little bit maybe about an area that doesn't get a lot of attention on the call typically at least from our side of things.
The cost savings side of things would love to dive into.
What you what you've done in more detail and what you can still do I guess when I look at the results I'm, just really impressed with the Opex and SG&A.
Rivaling 2019 levels. So we're just kind of love to dive into more what you've done you know how much is <unk>.
Meeting that come back in and how much comes back in different ways and maybe what's left to do so just love to spend some time on the cost savings side to get more of an appreciation there.
Yeah, Hi, John This is Joe I'll start and then Brian can add color.
We learned an awful lot during the pandemic.
The effects on our business and we took a real hard look at our cost basis, both fixed and variable I mean, we attacked fixed really hard we looked at our infrastructure and profitable ways to run our business and you know a lot of that cost will never come back, but we're very careful to monitor that and that doesn't say, we don't look at our initiatives and our.
Strategic environment to say, where we need to spend money, but we're pretty comfortable at our operating levels, where it stands now with our growth in rental days that we had compared to 2019 and a fixed cost basis on a more variable side, we're dealing with the effects of inflation like anybody else and we've spent a lot of time and energy.
Are you trying to develop strategies that will minimize these effects on us for example, and I mentioned in our prepared remarks, you know a lot of productivity environment has improved greatly since 2019 onwards, we're getting more production out of the current pace of all of our employees and probably I'd have to say that's probably.
And the double digit range as it stands right now through technology innovations on you know on peer group rankings on how people clean cars and how many cars people rent per per day and hour et cetera things like that you know we've been very heavily involved in vehicle telematics over the years those have helped us develop.
<unk> got ourselves against gas and the rising cost of gasoline. So that certainly has a has helped minimize that that disruption to the point, where we are having a record cash collection months in the previous last couple of months, we thought we had.
The ability to.
Augment and price our vehicles and place them in the best possible places, which has helped our overall revenue and also our fleet and make sure they get utilized in the right spots. So we'll continue to look at both fixed and variable we have a number of initiatives that we are examining every day, it's part of our strategic.
On how we want to operate and I'm very comfortable with the fact that we were able to see oversized revenue, having more meaningful drop through to the bottom line.
Great and just wanted to ask a question about.
And our fleet plan for the remainder of the year.
Last week hurts made some comments about managing.
Managing its fleet to start at 2022 level by the end of the year was just hoping to get some perspective from you guys on.
Something that you are.
Drinking yoghurt.
It's something that might be required for you guys or maybe how how are you.
Viewing kind of end of the year fleet go or is it more of a you know where.
We're going to watch it closely and respond to I just wanted to get some perspective there.
Yeah, but you know look at from where we sit we've always been maniacal about our fleet size and how we manage it compared to warrant demand. If you look historically back over the years you could see that very clearly even during the pandemic I think that we executed in a very quick and efficient fashion to get our fleet size.
More in line with the demand and that was that was certainly a challenge, but we were able to do that.
Okay.
If you think about last year, John last year 2021 was all about vehicle acquisition of vehicle growth Alright, we the industry started off at very low levels of cars due to the 'twenty 'twenty pandemic and the demand started to increase and we all had to figure out how to get cars.
Not many car sales I think when you look at it going forward. When you talk about elements of fleet. How you buy cars, how you sell cars one of the most important that's not readily talked about is how do you utilize the fleet and different than 2021, we are now into rotating our fleet on a more normalized basis.
What does that mean that means we exit out of cars that are aged and mileage and replace them with newer cars and looking at the seasonality trends as I mentioned in my preferred remarks.
Prepared remarks, we're seeing more seasonality does that's like into 2019, and if you think about our year at large in general July has the most rental days of any of the months in the calendar year, followed closely by August but then the next five including the early parts of the year start to go down our fleet has to be in la.
But that seasonality trend. So you will see us manage that fleet line very much in line with the with the rental day dynamic so I'm going to tell you what that means as far as opening fleets and things of that nature, but as our demand naturally seasonality starts of decline whether it be in September or November or December which is <unk>.
Traditionally about holidays in January and February the rent the winter months, our fleet will definitely be in line with that.
Hope that helps Jon I think we're just we're not going to comment on that or just two reasons. One is we're not giving forward guidance that far out is one <unk>.
And two it's like Joe said, that's just not how we manage our business we manage our business to fleet are slightly below demand in.
And that changes as you know on a day to day basis.
Understood. Thank you.
Yep.
Thank you.
Our next question comes from I am I imagining with Jefferies. Please go ahead.
Hi, This is Hans Hoffman filling in for Hamzah. Thanks for taking my question and congrats on the quarter. So could you just remind us what your assumption is for residual values and how youre thinking about the sensitivity to your cash flows and earnings from changes in used car pricing and then what offsets you may have through.
Better selling channels or any other items.
Yeah, I'll start off and Brian if you want at Colorado.
Certainly can join it you know.
When you look at the used car industry and I referred to it earlier, it's it's very robust and I think when you examine the used car business right now you'd have to think about what's going on in new cars. So new cars supply is very challenged the Sars comings out keeps going down in the amount of cars that are being sold.
Facing challenges with supply challenges with.
The war in Ukraine challenges semiconductors challenges with logistics the imports are facing challenges at the port in L. A so supply is very much constrained and what happens when new car supply is constrained.
This potential need for used cars, which we have seen and we continue to see if you think about it with less new cars being being purchased there's less trade ins the what used to affect this industry. A lot was the was the was the off lease vehicles. If you recall a lot of us talking about that has been limited over the past number of years.
New cars are being sold without incentives.
Which makes it a newly use product quite attractive for us for the current consumer so it seems the way it goes what way. It seems right now is the used car benefit that we have in our fleet as.
It's going to go on from from now through the foreseeable future. That's why I'm confident in our scanner rotating the fleet and getting our fleet sizes.
Line, So that's kind of the way I see it right now and Oh it.
It seems like that to me is sort.
Going to extend into the into this year and next year. So just to add to that if you look at our 10-Q, you'll see that if you take away the gain of sale on vehicles in the quarter, we're still depreciating our vehicles at a at a little over $210 per month.
That's roughly 20% below where we were in the same period in 2019, and that's due to two major factors. One our vehicles are older which means we're at a flatter part of the depreciation curve.
And two we're getting more efficient around both disposition disposition timing and channels.
The gain on sale this quarter was $194 million, which is significant but that's down from $303 million, we saw in the first quarter.
You'll see depreciation levels normalize closer to where we are straight lining as the year progresses and continue to increase as we take on more model year 'twenty three vehicles.
Okay.
Got it that's helpful. Thanks, and then could you just remind us how much of your international business is Europe , and specifically, what you're seeing there in terms of revenue trends and then also just competitively you know any impact from you know you're a car change in ownership.
Well.
We're actually very proud of the European business.
We started on a European journey back in 2019, and just to give you a little bit of color. We examined all of our countries and locations and looked at the revenues the cost and the infrastructure that we were dealing with and frankly, we concentrated on those countries and areas that matter the most and.
And then we will Niall about our cost discipline, there whether it be fixed.
On variable and I have to say that we.
We started to see and we hinted at that in the last quarter, some green shoots of opportunity as.
Demand in revenue started to sequentially come back into that business towards the end of last year. We saw places that were struggling from an EBITDA standpoint start to turn profitable with very little revenue.
And that gave us confidence that should the opportunity exists that demand starts to increase we would be able to want to enjoy a lot of that and then do you have the fact that during this past quarter mass restrictions were removed from from flights certainly traveling on eight hours people and have to wear a mask coming over to Europe from the United States.
And then the Covid restrictions were eliminated as far as entry back into the U S. I think those things.
Material materially affected our activity and plus the strength of the dollar. So now you have you know you have this convergence of a lot of scenarios cost removal concentrating on the places that matter. The most and then the ability to get fleet and I talked about fleet in the United States on an early question a fleeting in Europe is significantly.
More challenged and the team was able to secure fleet and what you have now is you have a high amount of demand with incredible drop throughs. So I think we're in the early innings here.
The team out in Europe is operating now on all cylinders and we're certainly very proud of the of the EBITDA performance.
And how it helps our company.
Yeah.
Got it thanks.
Thank you.
Next question comes from Chris <unk> with Deutsche Bank. Please go ahead.
Hey, good morning, guys and congratulations on the quarter.
Thanks for the comments about the <unk> X.
Our expectations in the U S. I guess, maybe trying to triangulate that a little bit is that you think purely a function of kind of normalization of.
Both demand levels and also mix because last year.
Tom you did get a $4 bump sequentially and now I think you're saying, it's not going to.
Do that way. So just can you give us some of the factors that are that are going into that.
Yeah sure, let me start and Joe can add his.
His thoughts.
So I think Youre right mix has something to do with it but as we said in our prepared remarks. The summer season is robust, but RPT is leveling off.
July our P. D. In the Americas is roughly flat with June and that should remain the case for August However, as Joe mentioned, we are seeing a return to normal seasonality. So September we'll see a pullback in RPT as leisure travel slows and corporate travel picks up.
It's tough to say at this point and how much of an RPT impact, we'll see but for purposes of modeling given that mix shift that you talked about Chris I would say that <unk> 22 pricing being sequentially flat with two Q 'twenty two would probably be that the ceiling for RPT, Jeff Yeah, and let me just.
And I'll highlight on what we see on demand side point Chris.
When you think about what's going on now, but last quarter I said, but we had more cars on rent than we did at any time during 'twenty to summer of 2021, you know in the month of March I think it was with spring break in.
In the month of June we eclipsed that record we had more cars rented never in the history of our company and I have to tell you in the month of July we eclipsed that prior June number so the demand is incredibly robust.
Given the fact that TSA volumes are down in the 10 to 12 range. We have seen just this this increase in the level of activity.
We haven't we have seen both leisure and commercial growth in this quarter and if you think about it we had commercial commercial growing.
I think it was as a percent of our business close to 40% this quarter, we still at price in the $82 range. So we've seen our commercial business, whether it be large commercial middle small had price elevation as well and certainly driving a pretty significant amount and certainly are driving pretty second amount of days. When you look back at 'twenty, one what makes these comps kind of.
Interesting is the fact in 2021 people just started to get fully vaccinated by spring and then stuck in their homes. There was a tremendous amount of travel piece.
People were working remotely and kids were up from school and things of that nature, and the and the fleet sizes with very constrained. So you had this abnormality that I would call you know in the third quarter last year, what we're seeing now is and I think its good news as more of a seasonality of what things were and how we can operate.
And that level of an environment and so well yeah, well, Brian mentioned about what is what we believe price to be we still think demand will be high we still think that our cost controls will be great. We still think there's used car market will be strong and that should affect our earnings in the third quarter.
Great.
Thanks, Joe and then a follow up.
It might be a little bit of a premature question given how early you are on the AR in the EV adoption evolution, but as you begin to bring more of those cars into the fleet.
I guess one question is Oh.
You know what when would the first ones potentially exit what we're trying to do right is to get a sense for how this changes your depreciation kind of curve going forward, but maybe the question would just be you know.
At what point do you think it significant enough that we see a change in the in the absolute depreciation number for.
From the Evs.
Yeah. As you know we were we would probably take a cautious look at at how we model depreciation because residual values on those on those cars right now over a prolonged period of time is a little bit unknown right. Now you can buy buy an EV and probably sell it in a couple of weeks, maybe at a higher price because of the demand.
<unk>, but as you know we wouldn't be able to do that with the fleet that we buy from the Oems as far as how we are managing this going forward, we have <unk> in our fleet currently today.
We will have more evs and our fleet as we go forward, we had liked to to take a look at our at our vehicle mix.
With the intent on having a varied range of vehicles, we deal with call. It 16, 18, Oems and hundreds of thousands of vehicle types. We believe this is important because it creates this this customer demand.
Tend to want to rent cars that they kind of own. So we think that that's also that's important for us it insulates us a little bit from what we saw this quarter about recalls maybe parts issues and supplier challenges.
The Oems right now we're talking to them as I mentioned about 2023 by a lot of them are talking to us and we're talking to them about about Evs I think it's important when you understand that the Oems dynamics. They all have strategic initiatives and we all have strategic initiatives.
And then you have to figure out how your bulk line I mean, we have some OEM, saying that a greater portion of their cars are gonna be visa over the next 10 years, we have other OEM, saying that they're going to be totally be by 2035 understanding what they're looking at and what we're looking at and how that applies to our business is increasingly important and I'll. Just lastly, say this we are worth.
Looking on the electrification or facilities.
The turnaround time on a current gas cars minutes and you know these are gonna be ours, and we have to get used to renting more of those at the airport because the RPT on those that we have at the airport. Currently today is much much higher than it is in the in the off airport environment. So I don't know if it gets to your answer that.
We're cautiously looking at our depreciation rates are what they could be at time of at time of.
Sale, and we're starting to get more and more of these into our business as we speak today and Chris just to add to that.
When you look at the three components of depreciation that's which is the cost of which you purchase the vehicle the price at which you dispose of the vehicle divided by how long do you hold the vehicle to Joe's point, we don't know yet what the cost of disposition or the price of disposition will be that's an unknown to us and we're starting to test that out and we always.
Take a cautious approach Davis.
We also know that the price of a like for like EV, the cost at which we buy it from the Oems is higher than a traditional ice vehicle.
Unfortunately on the denominator side of things you can hold in EV for much longer and it's still a very healthy vehicle then you could.
And ice vehicles. So you will be depreciating that asset over a longer time being able to take advantage of the flatter part of depreciation curve. We've also noticed that the maintenance cost of these vehicles are lower as well I think one of our competitors gave some very thoughtful comments around EV.
And we're seeing similar things, we are adding new evs as an opportunity on the depreciation side of things.
Great. Thanks, Scott.
Thank you.
Next question comes from Ryan Brinkman with Jpmorgan. Please go ahead hi.
Hi, Thanks for taking my questions you know how should we think about the trend in gains on sale tracking going forward relative to the I think $194 million realized in <unk> are you able to maybe help us with say what number or percentage of your vehicles might now be fully depreciated, which I know is not unusual phenomena.
Relative to say at the start of the quarter or what's the right way to think about this.
Sure.
As I mentioned earlier on the call. This is going to normalize the gains on sale in the first quarter just round numbers was $300 million.
This quarter it was a little under $200 million.
Youll continue to see that normalize and decrease as the quarters go on I can't give you an exact number because as we said throughout this call. We're very nimble in terms of how we manage our fleet and where and when we dispose of our vehicles. So we can't pinpoint a number but I can tell you that the gains on sale will decrease in.
In the back half of the year and.
And we will get closer and closer to where we are straight lining.
Straight lining the cars right now Joe.
Yeah, I mean, Brian someone visit the mathematics behind that I will tell you. We hear are very sensitive to vehicle rotation and it was kind of minimize last year and we are going to make sure that a.
But our vehicles are vehicles on a mileage vehicles that are that are in service right now will get eliminated its going to hit the variable cost.
With more.
<unk> and our maintenance our maintenance operations and I think it's more pleasing to our customer base. So yes.
Yes, we're going to we're going to continue to look at our ability to get back to a more normalized fleet rotation like we saw in 2019.
Okay, great, Thanks, and that kind of feeds into my follow up question relative to sourcing in an age of fleet.
Are you able to source you know.
Although all the vehicles from automakers that you need I'm curious like what percentage of vehicles that you. Currently purchase are sourced from the used vehicle market you know how that might be tracking relative to history and and what you think the trend might be going forward do you see this as a.
Greater reliance on the used market is more or less temporary dynamic sort of like coping mechanism for the tightness of new vehicle supply or could the industry, maybe operate with a bit older fleet than it had historically, including as you rent into the TNC market, which might be less sensitive to the age of the vehicle I imagine that could be a healthy thing from a fleet cost per.
Active but curious to get your perspective.
Yeah, all very very good points.
Let me, let me start off by just giving you some some of the dynamics of the new Dawn.
You know the industry purchases. If you think about from this public. So if you look at from January through June the industry purchase call. It 350000 cars.
In 2021 that number was over 700000 cars in 2019, which was in the wall, which was a big year was about $1 million. So it's apparent that the supply chain challenges are there and the fact that new cars are retail of new cars is that it's at the highest.
I don't see that changing so much alright, and even going into into next year. So I do think that we're going to have to figure out and be nimble on how we manage both our fleet by as well as our fleets out does that mean slightly old older vehicles and on the average it might be but you're right. We do have a very growing.
Robust ride hail business had double than its fleet size year over year and we.
We continue to think that's an opportunity for us we are a value brand called Payless, which which we which we could take which we have taken and rotated older vehicles into into that into that group. So we have we believe we have the sourcing you know too.
To enable us to utilize that.
The fleet in various different segments of our company.
As far as used vehicles, we learned an awful lot about used vehicles, because we really for the first time in many many years, we bought some you know as you know.
This year and our strategy on those.
Relatively young used vehicles that we can get more than one season, Adam and and have the mileage. So that when it comes around to next summer that is still able to be in our fleet and I think you'll continue to see us utilize those in the past we utilize spot buys manufacturer would say you know what I've got 10000 cars and I can't sell them.
On the retail up maybe if you guys want to buy them.
I think spot buys will be apparent maybe later in the cycles, but if that doesn't happen. We will certainly look in the used criteria as well.
Very helped us to add to that though I think I'm, sorry, just to add to that one last thing Ryan.
They use.
Purchases in our fleet was always a very small amount.
We were very.
Discriminate in terms of those vehicles that fit our criteria and there just aren't that many of them. We were forced to do a slightly more in the used market. This year than normal just given the supply chain dynamics, we don't view this as a and Ah permanent.
Source, a significant source going forward our primary.
Source of vehicles, there's always through our OEM partners new vehicles through early on partners right.
Thank you.
Thank you.
Ladies and gentlemen.
At the end of the question and answer session and I would like to turn the call back to Joe <unk> for closing remarks.
Yes. Thank you so to recap we reported our best quarter earnings in our company's history. Our team delivered in every business metric, including enhanced revenue generation diligent fleet management and stringent cost control. These efforts will highlighted by the Americas reporting over $1 billion adjusted EBITDA in a quarter in international achieving the highest.
Second quarter adjusted EBITDA of up more importantly, I want to acknowledge and thank all the employees for their continued tireless efforts in helping us achieve these results and we're not done yet we continue to be on track to deliver the highest full year adjusted EBITDA in our company's history I don't want to thank all of you for your time and interest in our company.
Thank you.
This concludes today's conference you may disconnect your lines at this time.
Thank you for your participation.
Yeah.
Okay.
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