Q2 2024 Avis Budget Group Inc Earnings Call

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Operator: Greetings. Welcome to Avis Budget Group's second quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A question 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. Please note this conference is being recorded. I will now turn the conference over to David Calabria, Treasurer and Senior Vice President of Corporate Finance. Thank you. You may begin.

Speaker Change: Greetings. Welcome to Avis Budget Group's second quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.

David Calabria: Good morning, everyone, and thank you for joining us. On the call with me are Joe Ferraro, our Chief Executive Officer, and Izzy Martins, our Chief Financial Officer. Before we begin, I would like to remind everyone that we will be discussing forward-looking information, including potential future financial performance, which is subject to risks, uncertainties, and assumptions that could cause actual results to differ materially from such forward-looking statements and information. Such risks and assumptions, uncertainties, and other factors are identified in our earnings release and other periodic filings with the SEC, as well as in the Investor Relations section of our website.

David Calabria: Accordingly, forward-looking statements should not be relied upon as a prediction of actual results, and any or all of our forward-looking statements may prove to be inaccurate, and we can make no guarantees about our future performance. We undertake no obligation to update or revise our forward-looking statements. On this call, we will discuss certain non-GAAP financial measures. Please refer to our earnings press release, which is available on our website, for how we define these measures and reconciliations to the closest comparable gap measure.

David Calabria: We are unable to reconcile forward-looking adjusted EBITDA to net income without unreasonable effort given uncertainty in calculating necessary adjustments, including the after-tax effect of such adjustments, which could be significant. With that, I'd like to turn the call over to Joe.

Joseph Ferraro: Good morning, everyone, and thank you for joining us today.

Joseph Ferraro: Yesterday, we reported our second quarter results, which delivered quarterly revenue of more than $3 billion and adjusted EBITDA of $214 million. As we discussed on our last call, to accurately portray the business in this quarter and beyond, we need to bifurcate the impacts of non-reoccurring fleet gains, higher vehicle interest, and decisions made to right-size our fleet. In fact, we have taken the necessary steps to adjust our fleet in the first half of the year by selling a record amount of vehicles, which allowed us to achieve utilization in the month of June in the Americas more than a point above the prior year, setting us up to be in a strong position to drive additional utilization and pricing benefits through our transition into the summer peak.

Joseph Ferraro: With the improved utilization, we focused on what we could control to strengthen pricing and reduce our overall holding costs. And while the quarter shows our fleet size to be up 2%, we started July with our fleet down over the prior year. The Americas generated nearly $2.4 billion of revenue in the second quarter, with $186 million of adjusted EBITDA. Pricing was down 3% compared to the second quarter of 2023, but it was still significantly higher compared to the second quarter of 2019.

Speaker Change: Pricing improved sequentially in May and June from April with June exiting down 2% year over year, but still up significantly compared to 2019 with the Americas showing positive signs for summer pricing.

Speaker Change: Before I before I dive into the results in greater detail I'd like to thank our employees for all their efforts will.

Speaker Change: While we have accomplished over the last six months, especially as it pertains to fleet logistics has set us up to take advantage of the strong summer and beyond.

Speaker Change: More importantly through their hard work and efforts, we continue to generate record net promoter scores and pertains to customer acceptance of our products and services with that lets begin as we normally do with detail surrounding our Americas segment.

Speaker Change: The Americas generated nearly $2 4 billion of revenue in the second quarter with $186 million of adjusted EBITDA.

Speaker Change: Rental days in the Americas were up 1% compared to the second quarter of 2023, a second quarter record.

Speaker Change: As we continue to grow our company, there's a balance between pricing and demand as we typically do we took the measured approach to volume and focus on pricing. We are well aware that improvement to our pricing has a greater margin benefit that improvement to our rental days keeping this in mind, we will continue to monitor our industry and make calculated decision.

Speaker Change: <unk> prioritized price over volume when it makes sense utilizing our proprietary demand fleet pricing system.

Speaker Change: About 5%.

Speaker Change: On our last call, we talked about returning travel from country to country.

Speaker Change: Once again, we are seeing improvements with into European Cross border travel, which is up in mid double digits compared to last year. Additionally, our international inbound volume showed significant strength compared to last year.

Speaker Change: We continue to focus on leveraging our global brands and strategic partnerships with a particular focus on inbound volume from North America, and targeted growth and eat into European Cross border leisure business we.

Speaker Change: We expect this strategy will generate higher margin volume as these types of customers tend to keep the cars longer and have a tendency to take additional ancillary products.

Speaker Change: As we transition to a peak quarter summer reservations are strong and trending positively with demand stemming from into European Cross border and international inbound travelers as I just mentioned.

Speaker Change: Pricing for the quarter was down 5%, excluding currency impacts compared to last year and still up significantly compared to the second quarter of 2019.

Speaker Change: As it did in the Americas pricing throughout the quarter sequentially improved month to month the.

Speaker Change: The pricing trends in international are expected to improve throughout the third quarter as well.

Joseph Ferraro: And while in the early stages, we have set ambitious goals targeting sustainable utilization performance through better understanding of the state of each and every vehicle within our control. On our last call, I discussed how our international team has rolled out to more than 60 European locations self-service kiosks, allowing a customer to bypass the counter in an unsecured lot environment and obtain their keys by using biometrics to identify who they are.

Speaker Change: Any purchases are more affordable while there is still more to do model year 'twenty twenty-five purchases are expected to have materially lower holding costs as compared to recent years.

Speaker Change: It is still too early to determine the impact on our 2025 straight line depreciation we believe overtime, our depreciation rate will begin to normalize as we sell the higher priced vehicles and replenish them with the new lower priced vehicles, we will have more to say about this as our <unk>.

Speaker Change: Model year 'twenty 'twenty five five is completed.

Speaker Change: Now shifting gears to vehicle interest the full year impact of all of last year's vehicle financings and the issuances and renewals completed in the first quarter are reflected in the second quarter. These financing activities and higher base rates drove a 72 million interest increase in the second quarter.

Speaker Change: Compared to the same period in 2023, however, our monthly per unit interest cost decreased from the first quarter and we expect a similar decrease in the third quarter in total our fleet holding costs inclusive of interest expense accounts for $430 million of Ara.

Speaker Change: Year over year decrease in adjusted EBITDA.

Joseph Ferraro: We plan on utilization being above prior year throughout the third quarter, and our initiatives for cost control are well underway and continuing to favorably impact our results on a rental day basis.

Unknown Attendee: The industry volume is clearly growing a lot faster than that, so have there been some seismic shifts in other competitors, what they're doing with their fleets, and who's willing to take lower price demand, in your opinion?

Speaker Change: Commentary.

Speaker Change: We clearly preference price in the quarter, we thought that that was a prudent thing to do for us largely because of the inflationary effects on products and services. The interest costs that we've been talking about and the inflated vehicle costs. So it made sense for us to do that.

Speaker Change: At our systems allow us to take one type of margin business over the other I think if you look at in totality of demand, we still had a record demand quarter Chris.

Chris: In the second quarter for Us and if you look at you know volumes in TSA volumes just in general.

Chris: Double digit over 2019, and TSA volumes and not at that level. Yet. So maybe we took we have that we have.

Speaker Change: We have taken action to grow our company, maybe in different ways, but pretty comfortable with the demand aspect and then lastly in the quarter.

Speaker Change: The calendar had a head of.

Speaker Change: I think a pretty significant effect. So if you think about what happened we were up 5% rental days in the first quarter in the Americas and some of that 5% could've been second quarter activity is Easter fell in March this year and not April and then if you think about how the quarter exited.

Chris: July.

Speaker Change: Fourth of July holiday, we had the most the most cars on rent last year in June.

Speaker Change: And we also have data that you know on vehicles and what people are interested in buying based on trim levels and things of that nature. So there hasnt been any real soon.

Speaker Change: Seismic shift in the in the mix or how we plan on going about it we have both core and what we call core and noncore cars in our vehicles noncore cars are more of the people movers. They seem to be popular. These days, we have plenty of those to support the demand and as you know they come with a higher price, maybe a tad bit less utilization, but the.

Speaker Change: Margin benefit on those is pretty pretty impressive.

Speaker Change: As far as rotating the fleet.

Speaker Change: But we when we went into the year with a fleet size that we thought was a little bit higher than I would've liked. So we we did a whole lot to kind of get some of those cars out when I talk about 70% of our of our vehicles have been.

Speaker Change: Dispose of deleted whatever you want to call when we're talking about hundreds of thousands of cars here, it's not a small amount as a matter of fact, it's probably closer to 200 than it is 100 and giving you an idea of how we rotated some of these cars out and we've been pretty good at making sure that we rotate our cars out based on certain criteria and we took.

Speaker Change: Advantage quite frankly of.

Speaker Change: Of a rising above rising wholesale market earlier on in the year the disposal of a good deal of our vehicles. If youll look from kind of like March period to April there was a there was a time that the market improved and we took advantage of that by selling cars. When we thought was right are there more to do of course, I would never say I would never say that.

Speaker Change: That's not an opportunity for us as we go forward, but I think that's going to depend on a vehicle by when deliveries are coming in and things of that nature and that will that will determine our the terminal strategy as I said in my prepared remarks, we're going to have better utilization in the third quarter. We believe that that will continue and I <unk>.

Speaker Change: Want to go into next year with a fleet size that I feel is.

Speaker Change: Right size as compared to what we believe our demand is and I think if I'll end. It on this our overriding principle has been and always will be to have our fleet size inside of demand. It gives us the best opportunity for poor margin drop through and efficiency in our company.

Speaker Change: Okay. That's helpful. And then also could you just talk about what you view as an ideal level for utilization.

Speaker Change: And then also if you could follow up on that with just a little bit of kind of discussion on supply demand just want to understand where and where the market is right now.

Speaker Change: Yes, there's a lot of elements utilization and we have systems and technology and also on the ground experience for many many years now that allow us to put cars in the spots that we believe on the most attractive from both the supply pumps, sorry, promote demand standpoint, and a pricing standpoint.

Speaker Change: So we know in advance we have systems that tell us what close in demand is like what what longer term demand is like by city.

Speaker Change: Throughout the country and by country now that we deployed in Europe.

Speaker Change: As far as utilization.

Speaker Change: Our utilization has been pretty pretty.

Speaker Change: Stable if you go back decades quite frankly.

Speaker Change: And and we believe though that there is an opportunity to do more especially what we've learned in this higher price cost car cost environment.

Speaker Change: We have we have pilots going on right now are in flight that we believe we can generate a better utilization outcome within our cities by developing our machine learning and task analytics to give us the disposition of every car in our fleet. We know we know what the issue is and if we know what the issue is and then.

Speaker Change: Test base analytics going to our teams that will determine what car to fix and win I think we can make tremendous inroads into utilization.

Speaker Change: As we go forward based on that and quite frankly, what we've seen in the past couple of years with the price of vehicles, it's a necessary step in the evolution of our company.

Speaker Change: Okay, great thanks for that detail.

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

Luca <unk>: Our next question is from Luca <unk> with Goldman Sachs. Please proceed.

Luca <unk>: Hi, Thanks for taking the question.

Luca <unk>: You mentioned, the kind of losses have been a little bit better in the quarter than you'd expected.

Speaker Change: Kind of Mannheim declining 6% sequentially in June.

Speaker Change: I think the D. P guide also change a little bit in terms of the cadence to the year with full can you kind of remaining elevated I just wanted to understand kind of the moving pieces, there and kind of what's changed since you last kind of gave an update.

Speaker Change: Good morning, Lindsay I'll take that one.

Luca <unk>: As Joe just mentioned, obviously one of our top priorities was to have our fleet size inside demand.

Speaker Change: That resulted us in disposing quite a bit of vehicles actually it ended up that we disposed.

Lindsay: 8% of our full year estimate of dispositions in the first half so of course as you just said.

Speaker Change: The national election, coming up we're going to pay particular attention to that what that looks like as far as travel schemes and plans, but so far we have it now you know like it or not I've I've I've dealt with during my 10 year inflationary challenges during the recessions that we had in a weighting of nine and I was certainly.

Speaker Change: <unk> in the CEO spot during our during the pandemic and I think we have a good playbook on what to do as far as as far as how we react to that and I think we came out of both those areas as a stronger company than we were.

Lindsay: When we entered I think our costs are in line I think I'll fleet sizes in line, we made the prudent decision to take cars out early we're buying cars now that much.

Lindsay: A much reduced price so.

Speaker Change: While no one likes that level of uncertainty and no one from where.

Lindsay: It is I do believe that we are ready and so is our team should anything happen like that but as it stands right now I'd have to say I don't see it.

Lindsay: Yeah.

Speaker Change: Thank you so I guess, just a follow up on that.

Speaker Change: Believe that even in the light of recessionary environment that you could do you have enough flexibility to kind of protect GPU in used vehicle values I guess, what would be the general level of deterioration, we would see values recently.

Speaker Change: Accordingly.

Speaker Change: I think there was a couple of things to take into account everything that Joe said before given our experience, but typically in a recessionary environment you do end up seeing lower interest rates, which in turn ends up being an uptick for and become a used car price benefit. So that's what we've seen in the past.

Speaker Change: And so that's what we would expect on the used car side. If we if we had that recessionary environment, but I think it says we as I mentioned earlier, you know there's still a substantial cushion within our vehicle program show, there's more than $1 billion to to ride out any short term shocks to the to your to the used car market.

Speaker Change: I hope that's helpful.

Speaker Change: Yes. It is and then is the I'm sorry, I think either my phone cut out or are you did when you provided the <unk> EBITDA outlook did you say $5 50 to 600, I'm, sorry, I misheard you.

Unknown Attendee: I said 500 to 600. Okay, yes, and thank you.

Speaker Change: I said 500 to 600.

Speaker Change: Okay, Yes. Thank you I appreciate it.

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

Joe Ferraro: Okay to recap, we reported a strong second quarter with record volume in the Americas, we saw pricing improve sequentially in the quarter in the Americas with the third quarter, starting off with a strong fourth of July holiday, we took the necessary steps to adjust our fleet to be in a strong position to drive additional utilization pricing benefits as we transition into <unk>.

Speaker Change: The summer our teams around the world are well positioned and prepared to deliver what we believe is another strong summer and I want to thank all of our employees for their efforts in helping us achieve the results and I'm excited to see what we can accomplish in the back half of 2024 as always thank you for your time and interest in our company.

Speaker Change: Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.

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