Q4 2024 Avis Budget Group Inc Earnings Call
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Speaker Change: Greetings and welcome to the Avis Budget Group's fourth quarter and full year 2024 conference call. At this time all participants are in listen-only mode.
A question and answer session will follow the formal presentation.
Speaker Change: If anyone today should require operator assistance, please press star zero from your telephone keypad. As a reminder, this conference is being recorded.
Speaker Change: It is now my pleasure to introduce David Calabria, Treasurer and Senior Vice President of Corporate Finance.
Thank you, David. You may now begin.
Speaker Change: Good morning everyone, and thank you for joining us. On the call with me are Joe Ferraro, our Chief Executive Officer, Izzy Martins, our Chief Financial Officer, and Brian Choi, our Chief Transformation Officer.
Speaker Change: 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.
Speaker Change: Such risks and assumptions, uncertainties, and other factors are identified in our earnings release and our periodic filings with the SEC, as well as the Investor Relations section of our website.
Speaker Change: 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.
Speaker Change: We undertake no obligation to update or revise our forward-looking statements.
Speaker Change: 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.
Joe: Thank you, David. Good morning, everyone, and thank you for joining us today.
Yesterday, we reported our fourth quarter and full year results.
Joe: For the quarter, we delivered revenue of $2.7 billion and adjusted EBITDA loss of $101 million.
Joe: For the full year, we achieved $11.8 billion of revenue and adjusted EBITDA of $628 million.
Joe: Let me start by providing additional color around the 2.5 billion non-cash asset impairment and other related charges we disclose in our earnings release.
Joe: Izilda will go into the accounting implications surrounding the charge, but I want to explain the business rationale for recently accelerating our fleet rotation strategy, which resulted in this impairment.
Joe: As you are aware, the auto industry has seen significant movement in price on both new and used vehicles over the post-COVID period in the last few years.
Joe: The strong retail market for Model Years 23 and 24 forced us to purchase these vehicles at higher prices than historic norms.
Joe: Our strategy to address this challenge was to hold these vehicles for a longer period of time.
Joe: This would have allowed us to depreciate vehicles across a flatter portion of the residual value curve and manage our fleet purchase to an appropriate return on invested capital.
Joe: However, when we saw prices for model year 25 vehicles return to normalized levels, we had a new decision to make.
Joe: One option was to hold the course with a fleet largely comprised of model year 23 and 24 vehicles.
Joe: The other option was to pivot strategies and refresh our America's fleet by exiting model year 23 and 24 vehicles aggressively and replacing them with new cars purchased at sustainably better prices.
Joe: We believe accelerating our fleet rotation is the right strategy for our company.
Joe: creating greater certainty on our fleet costs back to normalized levels and positioning us to increase utilization and reduce maintenance or repair costs, provide an enhanced customer experience, while sustainably growing adjusted EBITDA in 2025 and beyond.
Joe: Now, none of us took this situation lightly, and for those of you who have followed Avis for some time and are familiar with our company's culture, you can probably surmise that there was only one acceptable option for us.
Joe: We're not happy taking this impairment, but accelerating our fleet rotation now allows us to position ourselves to better manage our fleet costs and maximize our earnings this year and the years to come.
Thank you for watching. See you next time.
Joseph Ferraro, David Calabria, Izilda Martins
Joe: Now let's move to our segment results, beginning with the America segment.
Joe: The Americas generated more than $2.1 billion of revenue in the fourth quarter with an adjusted EBITDA loss of $63 million or an adjusted EBITDA of $156 million if you exclude the year-over-year increase in fleet costs.
Joe: Rental days in the Americas were consistent with the fourth quarter of 2023.
Joe: We did see some volume impacts during the week surrounding the hurricanes and the national election.
Joe: However, our strategy for the quarter was to maximize revenue over the peak leisure periods of the holiday season. The Thanksgiving and December holidays were strong, with Christmas in the U.S. being a record for our company.
Joe: Pricing was down 2% compared to the fourth quarter of 2023, but improved sequentially throughout the quarter, with December finishing flat the prior year period, showing improving ESGA trends.
Joe: In January, we saw a continuation of strong leisure demand associated with the longer holiday season as well as a robust MLK weekend.
Joe: As we look further into the first quarter, there are year-over-year comparisons to take into account with the loss of a day due to leap year and Easter falling in April.
Joe: However, we view a later Easter season as an overall positive because Easter is traditionally much stronger in April due to warmer weather that opens up more destinations for our rental customers to travel than you would have in March.
and David Calabria.
Joe: As always, we strive to keep our fleet inside of demand, which allows for the most optimal price outcome.
Joe: This strategy has resulted in ongoing improvements on our vehicle utilization.
Joe: For the quarter, our utilization in the Americas was over 67%, which is more than two points higher than the fourth quarter of 2023, with December finishing at the high end of our historic norms.
Joe: For the Christmas holiday period, vehicle utilization averaged four percentage points higher than last year in our U.S. rental business.
Joe: Transactions for Christmas far exceeded last year's Christmas peak, which I had mentioned was a record in the U.S.
Joe: We believe we can continue to improve our vehicle utilization as we implement further transformational enhancements to better understand vehicle dispositions and actions to support more available fleet to optimize supply and demand opportunities.
Joe: We expect the first quarter of 2025 to continue to show strong vehicle utilization as we started the year with substantially fewer cars than we started in 2024, and we will continue to aggressively exit vehicles while rotating in newer, more cost-effective units.
Joe: Earlier I discussed the recent change in our fleet strategy, but I want to take this time to discuss Amalia 25B in greater detail.
Joe: The 2025 buy is virtually complete, although we believe we could still take advantage of some attractive spot buys throughout the year, which will also help us cycle in new cars faster.
Joe: The use of data analytics and enhanced residual value modeling have benefited us in our fleet negotiations.
Joe: The new 25 model year vehicles are more affordable than in recent years, allowing us to reach more normalized vehicle costs as they rotate into our fleet throughout the year.
Joe: As we discussed, we will aggressively accelerate our disposal plans on our 2023 and 2024 higher cost vehicles to make room for the new model year 2025 vehicles in our rental fleet.
Joe: And by year end, we expect the average age and miles of our America's fleet to be back to pre-pandemic levels.
Joe: So to recap, the travel environment demand is robust, the leisure holiday of Thanksgiving and Christmas was strong, and we saw this continue into January with the MLK holiday weekend.
Joe: The extra day last year and the calendar switch of Easter will impact the quarter, but we believe will be more than made up next quarter with Easter falling in April.
Joe: And while the results of this quarter were negatively impacted by the non-cash charges we recorded in connection with the recent change in our fleet strategy, we believe these actions create more certainty surrounding future fleet costs and position us for sustainable growth going forward.
Joe: Our model year 2025 fleet buy is well positioned with lower holding costs and will continue to accelerate our fleet rotations as we transition through the first quarter and beyond.
Joe: As always, our goal is to be disciplined in aligning our fleet size with demand driving higher utilizations in the first quarter and throughout the year.
Joe: The Americas is well positioned to take advantage of what we believe to be a strong travel environment and an enhanced summer peak.
Let's shift gears to international.
Joe: International generated over 590 million of revenue and a loss of 11 million for adjusted EBITDA in the fourth quarter, largely due to non-reoccurring higher vehicle related operating costs as we accelerated rotating out a fleet in the region.
Joe: As a result, vehicle utilization was over 68%, up nearly 3 points compared to prior year. This allowed us to start 2025 with fewer cars than we did in 2024.
Joe: Revenue was down 1% compared to prior year, driven by a 1% decrease in rental days.
Joe: Price was flat in the fourth quarter as compared to the same period last year, which is an improvement from the negative 4% year-over-year in the third quarter of 24.
Joe: We continued our strategy that we discussed on previous calls to build on the robust international inbound and inter-European cross-border leisure travel as it generates higher margin business while exiting lower price volume.
Joe: This drove a year-over-year increase in our leisure business, which helped propel our overall revenue per day.
Thank you. Thank you.
Joe: As noted on our previous call, our proprietary demand fleet pricing system is fully operation in our European business, which allows for improved contribution margin by generating increased vehicle utilization and improved revenue per day.
Joe: We're in the process of implementing this system in our Pacific region and expect to see similar benefits there as well.
Joe: Our international regions continue to be a popular destination for cross-border travel, and I believe we are well positioned here to capture this demand.
Moving on to technology and marketing.
Joe: As I mentioned on our last call, we launched a new customer app in October. This new app offers a more dynamic user experience, providing our customers with a new rental dashboard as well as quick and easy access to their trip details on their travel journey.
Joe: We're getting a lot of great customer feedback so far and are planning further app enhancements in the first half of 2025, which will integrate with our Touchless Rental and Ancillary product offerings.
Joe: We are confident this new app makes our customers' car rental experience smoother and more enjoyable, and will continue to differentiate our company and the market by delivering exceptional customer service.
Joe: With that, I'm also proud to mention we finished the full year with record net promoter scores.
Joe: In addition, following Xander Shafley's successful 2024 season, where he won two major PGA championships as an AVIS ambassador, we're expanding our partnership with the launch of Xander Embedded, an exclusive content series presented by AVIS.
Joe: This monthly series premiered in December 2024 and will air throughout the 2025 PGA season, offering a behind-the-scenes look at Xander's life and the planning and preparation that fuels his success, aligning with our Avis Plan on Us brand campaign.
Joe: We've also continued the development of proprietary in-life fleet technologies which will drive operational efficiencies.
Joe: As I discussed before, we've been piloting digital tools in key cities throughout the U.S. that we believe will drive better vehicle utilization.
Joe: These pilots have gone well, and we are operationalizing these tools with the intent to continue to scale across the U.S. These tools will allow for a better understanding of vehicle dispositions, drive more timely repairs and improve vehicle movements, all designed to create more available fleet.
So, to conclude.
Joe: We took the necessary actions to create more certainty around future fleet related expenses and best position us for sustainable growth going forward.
Joe: By 2025, not only have I came in much closer to pre-pandemic levels.
Joe: Leisure peak period travel was especially strong around the holidays with the US record at Christmas and we saw this strength continue over the MLK holiday weekend.
Joe: Overall, travel is strong and we expect this to continue into the summer peak and our brands are well positioned to take advantage of this.
Joe: We will continue to aggressively rotate our fleet by adding lower-priced new Malia vehicles while exiting older, more expensive fleet.
Joe: Izzy will address more about our future outlook, but I want to affirm that based on our strategy and current line of sight, we expect to generate no less than 1 billion of adjusted EBITDA in 2025.
Speaker Change: Now, before I turn it over to Izzy, I want to comment on a succession plan announcement of last evening.
Izzy Martins: I've had the privilege to work at this company for the past 45 years and the honor of being the CEO for the last five.
Izzy Martins: At the careful consideration and conversations with our board, I will be transitioning out of my current role on June 30th and stay on as an advisor to the board.
Speaker Change: Ryan Choi, the company's chief transformational officer and previous CFO, who I've worked with for many years now, will take over as CEO effective July 1st.
Speaker Change: who served as board member since 2018 and chairman since 2024 will become the executive chairman.
Speaker Change: I will continue to run the company as CEO through June and will ensure an orderly transition to Brian as he takes over effective July 1st.
Speaker Change: These succession planning actions will position us well, drive performance throughout 2025 and beyond.
Brian Choi: I'll now turn it over to Brian for say a few words.
Brian Choi: Thank you, Joe. Everyone at Avis owes you a debt of gratitude for the contributions you've made to the company throughout your 45-year career here. You've always led from the front and personified our motto of trying harder. It's a legacy I hope to continue.
Brian Choi: I'm very grateful for the opportunity to serve as Avis' next CEO and fully appreciate the responsibility that comes with stewarding the global brands we've built over decades.
Brian Choi: The next leg of our journey holds tremendous potential, and I am certain that Avis' role in the evolving mobility ecosystem will translate to significant value creation for all of our stakeholders.
Thank you, Brian.
Izzy Martins: With that, I'll turn it over to Izzy to discuss our earnings, liquidity, and outlook.
Speaker Change: Thank you, Joe, and good morning, everyone. My comments today will focus on our adjusted results, which are reconciled from our gap numbers in our press release.
Speaker Change: As Joe mentioned, the results in the fourth quarter were impacted by a non-cash impairment and other related charges of $2.5 billion. The impairment charge was due to a recent operational change in strategy implemented in the fourth quarter to significantly accelerate our fleet rotation in the Americas.
Speaker Change: This affected the vast majority of our America's fleet, and the size of the impairment reflects that. Let me provide a bit more color on how we came to this decision.
Speaker Change: If you recall, coming out of COVID, there was a shortage of fleet supply and the vehicles we obtained over the past few model years were purchased at elevated prices.
Speaker Change: In order to achieve an appropriate return on invested capital on these higher cost vehicles, we intended to elongate the holding period to capture a flatter part of the depreciation curve.
Speaker Change: However, as the competitive landscape shifted and new vehicle incentives returned closer to pre-pandemic levels, we came to the conclusion that aggressively rotating out of these higher priced vehicles was the optimal long-term economic decision for our company.
Speaker Change: Since we are depreciating the vehicles over a shorter period of time, the straight line depreciation curve is steeper than we initially modeled. We adjusted our fleet valuation to their current fair market value to reflect this recent change.
Speaker Change: The impact consisted of a $2.5 billion impairment for our rental fleet and other related charges recorded in the fourth quarter.
Speaker Change: We expect an additional non-cash charge in the first quarter related to the disposition of vehicles as part of our accelerated rotation strategy.
Speaker Change: To avoid any confusion, let me be clear, we expect no further fleet charges beyond the first quarter of 2025.
Speaker Change: While this non-cash impairment and related charges fully reflects current market prices, our go-forward depreciation will be impacted by this shortened holding period until these higher price vehicles are disposed of.
Speaker Change: This created noise in our fourth quarter results, and we expect some residual impacts in our first quarter, where we will also see elevated monthly depreciation levels in the first quarter.
Speaker Change: Once we are past the peak vehicle selling season in April, we should see depreciation levels normalizing beginning in the second quarter of 2025.
Speaker Change: The decision to accelerate our fleet rotation was not taken lightly. Even though this resulted in an impairment, we are confident that this strategy puts us in the best position for adjusted EBITDA growth in 2025 and beyond. We will provide more guidance around this in our Outlook section.
Speaker Change: Overall, our adjusted EBITDA for the quarter was a loss of $101 million, or adjusted EBITDA of $118 million, excluding the fleet cost variance as compared to $311 million in the fourth quarter of 2023.
Speaker Change: It is challenging to compare these results to last year, due to one-time impacts and uncharacteristic expenses associated with the impairment.
Our full year reported adjusted EBITDA was $628 million.
Speaker Change: However, if you exclude our losses on sale and additional incremental depreciation,
Speaker Change: associated with our change in fleet strategy, our adjusted EBITDA would have been approximately $850 million.
Speaker Change: We feel confident that with the actions we have taken and the impacts that occurred this quarter, that we are set up for a much stronger 2025.
Speaker Change: As we mentioned on the last call, we issued $700 million of senior notes in the third quarter and used the proceeds in the fourth quarter to repay outstanding borrowings under our secured term loan fee.
Speaker Change: This allowed us to reduce our secured borrowings and provide us more flexibility in our ability to refinance in the future.
Speaker Change: In February, we issued $500 million of a secured term loan A and used the proceeds to pay down fleet indebtedness.
Speaker Change: We wanted this term loan A to ensure we were in a position to opportunistically evaluate model year 25 spot buys in the first half of the year, giving us the flexibility to further accelerate our fleet rotation.
Speaker Change: As of December 31st, we had available liquidity of over $1.1 billion, including committed and uncommitted facilities, with additional borrowing capacity of approximately $2.8 billion in our ABS facilities.
Speaker Change: Our net corporate leverage ratio was 7.8 times. This is temporarily elevated given the effects of the impairment discussed earlier.
Speaker Change: By the end of 2025, we expect our net corporate leverage ratio to be back closer to normalized levels.
Speaker Change: When you look at our total net debt leverage, the ratio remains relatively unchanged at under five times as our corporate debt issuances were used to pay down fleet debt. Additionally, we are in compliance with all of our financing facilities.
Speaker Change: We will continue to evaluate the best use of our capital and we anticipate being more balanced capital allocators going forward as we look to repay debt and return capital to our shareholders.
Let's move on to Outlook.
Speaker Change: As we mentioned earlier, we did not take the change to our fleet rotation strategy lightly.
Speaker Change: But the biggest benefit going forward is more certain outcomes for our fleet costs. That along with inflating more cost-effective model year 25 fleet during the year gives us confidence that the fleet cost per unit per month will significantly reduce throughout the year.
Speaker Change: Due to the fleet rotation we previously spoke about, the first quarter will still show lingering effects on our fleet costs.
Speaker Change: In the first quarter of 2025, we expect all-in fleet costs per unit per month to be approximately $400 for the total company.
Speaker Change: This will continue to optimize throughout the year as we rotate our fleet and anticipate our fleet costs as we exit the year to be around $300 per vehicle per month.
Speaker Change: In the first month of 2025, as Joe stated, we saw a continuation of leisure holiday travel as well as strength in the MLK holiday weekend. We expect this strength to continue, but it will be offset by one less day in the quarter and Easter shifting into mid-April.
Speaker Change: As we mentioned, we anticipate that having Easter in April will more than offset the loss of Easter in March as the warmer weather allows for more robust travel.
Speaker Change: Although we expect revenue per day in the first quarter to be down slightly year over year, we anticipate pricing trends to improve compared to prior years as we move into April.
Speaker Change: For the first quarter, we expect an adjusted EBITDA to be approximately a loss of $100 million, largely due to the elevated fleet costs and the calendar shifts previously discussed.
and Improved Operational Efficiencies.
Speaker Change: will more than make up for the slow start to the year and gives us confidence that we will generate no less than $1 billion in Adjusted EBITDA in 2025 and beyond.
With that, let's open it up for any questions.
Thank you. Thank you.
Speaker Change: Thank you. We'll now be conducting a question and answer session. In the interest of time and to allow as many as possible to ask questions, we ask that you please limit yourself to one question and one follow-up question.
Speaker Change: If you'd like to ask a question at this time, please press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue.
Speaker Change: Can we press star 2 if you'd like to withdraw your question from the queue?
Speaker Change: For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys.
One moment please while we poll for questions.
Speaker Change: Good morning and first congratulations to Brian on his new role and for Joe, best luck in your next endeavors.
Speaker Change: In terms of my first question here, I guess what I wanted to talk about is cash flow. You did share some guidance on DPU and EBITDA. I wanted to get a sense for how we should think about cash flow from quarter to quarter as we go through the year.
Speaker Change: Hi John, thank you for the question. I think the first point in cash flow is really starting with what our earnings are expected to be. As I said, we're confident in being able to generate no less than a billion dollars.
Speaker Change: So when you keep that in mind, really the only things taken away from cash flow will be our interest expense, our investments in capital, and obviously our tax payments. And actually this year we expect our working capital to be positive.
Speaker Change: So I would expect our free cash flow to be really, really solid in 2025.
Speaker Change: Okay, thank you. And then I guess just my following question here. With the free rotation, have you had any change in mix? And then also, you know, if you have, you know, will this have any notable impact on RPD and earnings, or will this be more on the margin?
Yeah, hi, this is Joe.
Speaker Change: No, we've had no change of mix. So the fleet rotation is going to be purely, you know, taking out the higher priced vehicles and as you said earlier, very aggressively as we change our...
in New York City.
Speaker Change: It's always looked at what our demand is, what our customer demand is, what the reservations are like. And over the years, we've managed to increase the size of our vehicles because they bring us a better price, even with a maybe lower utilization. So no, there's no change.
and how we look at our police size.
Thank you. Appreciate it.
Thank you.
Speaker Change: The next question is from the line of Chris DeSopolis with Susquehanna International. Please proceed with your question.
Good morning, everyone.
Speaker Change: Hey Jay, I want to understand here the, so the firm guide for 1Q with I guess some residual or smaller impairments, the timing of Easter, so a hundred million dollar loss.
Speaker Change: I've understood to be typically a shorter booking window for rentals normally 30 to 40 days. Thanks.
Speaker Change: Hi Chris, thank you for the question. I'll take the first half of the your question. So talking about DPU and our expectations for the first quarter.
Speaker Change: I think the way to think of it is based on our change in our strategy for the fleet to accelerate the fleet rotation, you should think of the depreciation costs in the first quarter actually very similarly to our exit trends.
Speaker Change: So where we landed in the fourth, which was very close to the 400 mark, that's how I would think about it in the first quarter.
as for charges.
Speaker Change: As we said in our press release, we have a one-time impairment charge.
Speaker Change: We had other related charges and we expect another related charge in the first quarter once again to do with the fact that we are accelerating this fleet rotation.
Speaker Change: But past the first quarter, there will be no further charges.
Speaker Change: related to this strategy. I think it's also important to think about, even though we'll have a little bit of a slower start, but compared to prior year, that slow start and when we normalize the fleet costs going out, there's absolutely no challenge in achieving the billion dollars.
Speaker Change: And yeah, I'll jump in here if you want to just talk about the business case going forward.
Speaker Change: You know, listen, the first quarter is traditionally not our biggest quarter. It's, you know, the winter season. Only certain states play in that, and that we continue to see. But like I said earlier, you know, I was really pleased with the leisure demand over the holiday periods. It was very robust.
Speaker Change: As a matter of fact, our December Christmas was a record in the U.S., and we saw positive rental days.
Speaker Change: really over TSA volume, quite frankly, and we saw a good price, positive price, you know, over the holiday, which we then see transition into MLK. Now, we have a problem in the first quarter because you got one day less and Easter is, you know, migrating into April, which will make the second quarter
Speaker Change: you know, certainly better than maybe, you know, we had thought of earlier in the year.
And then we're really, you know...
Speaker Change: All about our summer season, you know, every year the summer is the peak season We feel we we operate on a very high level during that period of time So yeah, our operating performance will be biggest in the summer as it traditionally is through seasonality
Speaker Change: And then, you know, we transition out into the fourth quarter. You know, this past year, those hurricanes were a challenge for us in Florida, because
Speaker Change: It was, you know, Florida's busiest month is October, and that was, it came back a little later than we thought, but yeah, I think to answer your question, you'll see this, you know, kind of a seasonality approach as we go through, big summer, better quarter in the second because of the holiday flip, and then finish strong at the end.
Speaker Change: that are sized inside of demand. Are you baking in any sort of seasonal plus?
Speaker Change: on volumes or the base case sort of seasonally in line as we work through the year.
Speaker Change: You know, yeah, listen, as I would say, you know, you know, I think our I what we're seeing and you're right about, you know, reservation demand kind of close in in our industry. But basically, what we're seeing is we're seeing reservation demand, you know, we got President's Week coming up next week, seemingly is pretty good. And, you know, like I said, the Easter holiday, but the summer we believe will be strong.
Speaker Change: and yeah that's where that's where the majority of our volume and our rate differential will be and you know and our EBITDA and that's been the case for you know for as far back as I can recall but
Speaker Change: going, you know, transitioning up as we get to the peak periods. And the thing about our fleet...
Speaker Change: and what we've done, you know, even with this accelerated fleet rotation.
is keeping it well inside at demand.
Speaker Change: So we think that offers us the best price opportunity, and you'll see that as we go forward as well. Because we're saying that our utilizations are going to be strong going out.
Speaker Change: Okay, Joe, if I could get one more in. How are you thinking about the tariffs potential impact? So there was a comment, I believe, from Ford or one of the OEMs.
Speaker Change: yesterday that the tariffs are wreaking havoc on the industry. It would seem
At first blush that
Speaker Change: Higher new vehicle prices could stir demand or spur demand for used car markets and typically that would be good as we think about residual values and DPU. I realize it's still early, but initially how are you thinking about pluses and minuses around the tariffs should these move forward? Thanks.
Speaker Change: Yeah, you know, that's a good question. We've been thinking about that quite a bit lately because it certainly has been a very fluid situation and an ever changing and I think our job is to understand what could potentially happen and then as we do be flexible enough to react.
Thank you.
Speaker Change: You know, we have cars that are being produced in those places that are that are talked about at tariffs But they're all you know coming in imminently And I don't see that as a big problem for us in the near term about you know If something happens having elevated having elevated prices where all the deals are done with our OEMs
Speaker Change: It's, you know, going forward, what could potentially happen. I mean, look, I think there's a go forward and then there's, like, maybe a longer term.
Speaker Change: I think what you said is right, you know, used car prices, you know, if new car prices get elevated, you know, used car prices should benefit from that. And you know, that's normally what happens in an environment like this. And secondly,
Speaker Change: You know, what's going to happen with new car production, you know, as a guest? Will OEMs continue to produce at the levels they're producing? If they can't pass on those costs to consumers, will they produce less? I think both those last two points have a near-term positive effect for us.
And then as we go out...
You know, we'll have to see. You know, we have...
Speaker Change: You know, the beauty of how we manage our fleet, obviously, you know, you see it today, we are extremely flexible. And what we've learned, you know, throughout the years, even during the COVID years, is that we can respond very quickly to changes in, you know, macroeconomics. And I'm pretty confident we'll do just that.
Speaker Change: Thank you. Our next questions are from the line of Stephanie Moore with Jeffries. Please proceed with your questions.
Thank you. Thank you.
Hello, this is Harold Onto on for Stephanie Moore.
So, you know...
Speaker Change: I guess on DOE, I know you took on some charges in the quarter, but I guess, could you provide us a sense?
Speaker Change: in 2025, how we should expect that to improve, and if there's anything that you can provide that would give us confidence that you could see material improvement in DOE in 2025. Thank you.
Good morning, Harold. Thank you for the question.
strategy that we implemented in the fourth quarter.
Speaker Change: It had actually lingering effects in both regions, both in the Americas and in international. Even if we only took a charge in the Americas, we did have an acceleration of a fleet. We'll call it the rotation of worldwide. So those call it impacts relating to getting the cars up to snuff to sell them.
Speaker Change: Dealing with some salvages here and there that's really what caused the quality inflection point in the operating expense
Speaker Change: Now, going forward, you heard many of the things that Joe mentioned as what we're working on. So, not only have we seen the benefits of our operational efficiencies, we expect that
Speaker Change: be at a greater magnitude in 2025. So we expect our operating expense to be back to normalized levels, and really the fourth quarter being about non-recurring items.
I hope that was helpful.
Speaker Change: Okay, yeah, I'll take that. And I can only comment on what we're trying to do as far as our fleet rotation.
Speaker Change: None of us took that impairment lightly and we thought long and hard about it, but the 2025 model year by came in you know
Speaker Change: better than we thought. If you can recall my comments, you know, over the last couple of months, basically said it was more affordable than I said it was better than 24 and 25. When we finally finished, you know, the fleet negotiations, we're saying it's back to pre-pandemic levels.
Speaker Change: And I think based on that, it required us to accelerate our fleet rotation in a greater way. Because I think it not only has fleet cost benefits for us, but it has downstream effects on variable vehicle costs.
You know.
Speaker Change: less aged. So, you know, we believe in it has benefits and utilization and a customer experience as well as the EBITDA benefit. If you think go back in time, you know, we're a bigger company than we were back in 2019.
Speaker Change: and we could potentially, you know, have Corset Fleet that's the same back then. So, that's why we think there's a benefit in our actions over the next...
Speaker Change: you know, over the next, certainly, few months and majority of the year is to rotate these cars in quickly. What other people do, up to them, but I do believe that us doing this gives, you know, gives us a competitive advantage, in my opinion.
Speaker Change: As far as, you know, I'll comment on, you know, the CEO transition.
Thank you for joining us. Thank you.
Speaker Change: You know, I think when you, you know, when you look at our company.
Speaker Change: Over the years, we develop our own. We develop our own. Now, granted, we hire from outside as well, but we develop our own, which is a uniqueness, which creates stability in our organization. I was here 45 years. Brian worked for me for five years.
Speaker Change: The common goals, we'll look at things similarly, will the actions be different, of course. But I think what you have here in our company is a sustainable transition.
Speaker Change: that benefits not only the people that we work with, the customer base that we serve, but more importantly, the shareholders who we provide equity to.
Thank you for the call.
Speaker Change: Thank you. Our next question is from the line of Ryan Brinkman with J.P. Morgan. Please receive your questions.
Thank you. Thank you.
Speaker Change: Hi, good morning. This is Josh Fatwa, on for Ryan Brinkman. Thanks for taking our question. I just wanted to start with a question on your disposition mix and how that has changed over the past few years.
Speaker Change: As you accelerate fleet creation initiatives, is there potential to incrementally lean into direct-to-retail or direct-to-dealer channels?
Speaker Change: It would also be great if you could remind us on the difference in remarketing outcomes between the direct-to-retail and direct-to-dealer channels as opposed to the auction channels. Thanks, and have a follow-up.
Speaker Change: Over the past number of years, we've always talked about alternate channel as a differentiating factor for us because of the cost base it entails. I think 70% of our cars, give or take, go through non-auction-related channels, some of which are retail. It's arguably a smaller portion. We announced that we have this.
Speaker Change: and the online brand called Ruby Car which was starting to generate some activity for us but the majority of our sales are done through non-auction related activity.
Speaker Change: The auction provides you a way to get out of course quicker, but we look at how we're doing compared to MMR very seriously. And that's always a KPI that we manage closely.
Speaker Change: Understood, that's helpful and I think you alluded to this in your response to the prior question but
Speaker Change: I would imagine that the certainty around fleet costs also yields incremental benefits with regards to revenue optimization, especially in terms of, you know, pricing, management, and volume optimization.
Thank you.
Speaker Change: Sure. I think first thing, when you change a rotation and you get newer cars in, you have an immediate impact on utilization. More more available cars, you know, the frequency of repair isn't quite as needed as necessary. So I think that adds to the revenue lines.
Speaker Change: You know, more available fleet. We have our demand fleet pricing system which allows us to understand supply and demand and it really focuses on contribution. One of those contributions is utilization and this allows for a high propensity of car use.
Speaker Change: As far as some of the downstream effects, which I talked about earlier,
Speaker Change: There's going to be a lot because, again, newer cars, less parts, less maintenance.
Speaker Change: less turnover, and I think that position as well from a...
variable vehicle point of view.
Speaker Change: that you have cars that are not in need of oil changes and repairs quite as frequently as the cars that we've had in our fleet. I think it leads to productivity improvements overall for operationally because, again, the less downtime.
Speaker Change: and as far as revenue goes, having more available cars at the point of sale.
Speaker Change: to take reservations will certainly allow us to benefit in the revenue streams.
Very helpful. Thank you so much and good luck.
Thank you.
Speaker Change: Our next question is from the line of Dan Levy with Barclays. Please proceed with your questions.
Thank you.
Dan Levy: Hi, good morning. Thank you for taking questions and congratulations to both Joe and Brian.
Speaker Change: I wanted to first just follow up on the fleet rotation, and really what I want to try to get to is the rationale, because I think I'm hearing two things.
Speaker Change: You're talking about the opportunity to normalize, you know, your DPU and DOE But you're also giving some comments about sort of ancillary benefits to RPD So I'm trying to understand is more of the rationale on this
Speaker Change: to normalize those expenses, or was this really more a reaction to the competitive environment that we saw Hertz refreshing their fleet and potentially Enterprise going out there and refreshing fleet. This is just what's required given the competitive environment to have a much fresher fleet.
Speaker Change: I think our goal here is to have the best possible fleet that our company could have.
Speaker Change: and because of the cost basis of what we saw the 25s coming in, it made this decision for us one that we wanted to do and do very quickly.
Speaker Change: Because when you think about it, we're going to change the course of our trajectory. I told you we're going to be no less than a billion-dollar company early on in my commentary, actually in my quote, and I believe that wholeheartedly because of two things.
Speaker Change: One is, we see the cost of this fleet going down, and we don't have to deal with the fact that these higher costs are being incurred.
Speaker Change: higher priced vehicles are going to impact us going forward. So that's a big benefit for our company. The second is, there's going to be a good deal of benefits on an operational standpoint because the cars are newer.
Speaker Change: I talked a little bit about the holding cost of vehicles. You see that we're going to benefit from that. Our utilization is going to be a lot better. There'll be less downtime so we'll have more improved productivity and we're going to be able to provide a better customer experience.
Those elements
Speaker Change: you know, breed well for our success. And we wanted to do it. So we saw those in 2025 and not stretch it out to 26 and beyond. So we believe we see, you know, a median impact in the current year, and then use that as a springboard to future years.
Speaker Change: As far as competitive, we pride ourselves on providing the best possible mobility alternatives to our customers, and that's one of the forefronts of how we manage our business.
Speaker Change: Yeah, we had to take this impairment. No one liked it, but on a go forward, it's it's it's there's a lot of benefits
Speaker Change: Great, thank you. As a follow-up, I wanted to double-click on one of the earlier questions that was asked on
Speaker Change: And maybe, Izzy, if you could just talk about the vehicle programs line in the cash flow bridge. You know, in the last few years, it's been anywhere from $500 to $800 million drag. Pre-COVID, it was actually more sort of neutral. So, as you are doing this fleet transition, what should we expect on that piece?
Speaker Change: of the cash flow bridge in 25, and at what point does it normalize to being more of a neutral?
I think the first thing that I would mention is.
Speaker Change: on that line, so the vehicle programs and related that you see that we report on Table 4.
Remember, that is all discretionary, that's not required.
Speaker Change: for your modeling purposes, I think for now you could just assume, you know, what we've traditionally done to continue. But once again, I think the most important point is the fact that it's discretionary.
Okay, but the transition of the fleet. Sorry, go ahead.
Speaker Change: No, no, I was just going to say earlier there was a, you know, a free cash flow question. I think I want to make it clear as well that we're expecting our free cash flow to be, you know, by year-end no less than $500 million.
Okay. Thank you.
Speaker Change: Thank you. Our final question is from the line of Chris Soronka with Deutsche Bank. Please receive your questions.
Hey, good morning guys and Joe, congratulations on
Speaker Change: You know, heck of a run at Avis, and congratulations also to Brian.
We're happy to have you taking over mid-year.
Speaker Change: So, I guess first question, the gist of the question is going to be...
Speaker Change: What's the normalized hold period going forward, but if I can lengthen it out a little bit. You know, if you get the fleet refresh mostly done by April, we know you fleet up into summer.
You know, we think we know where you're buying cars.
Speaker Change: Your exit rate, DPU, I think you said would be around 300. So, you know, if the whole period is at least 18 months still.
Speaker Change: Is there any reason, what would cause fleet costs to be above, DPU to be above 300 next year, just at a high level? I mean, it just seems like that run rate would have to be in that range or lower. Is that a good way to think about it?
Speaker Change: Thank you. Yeah, you're spot on. You know, it's about that whole period as you articulate it is pretty much kind of where we've been historically. And I think that's where we will tend to be. We're going to get our age and mileage back to those levels. And yeah, I think, you know, that whole period and the DPU that you talked about is, you know, it's
Speaker Change: is a good proxy to say what life will be going forward.
Speaker Change: Okay, thanks Joe. And then follow-up, this might be a little bit for Brian, maybe.
Speaker Change: Is the CTO role, is that something that's going to be refilled after Brian takes over as CEO? And then along those lines, you know, Brian, I know you've worked on a lot of stuff in the role. And is there any high-level thoughts going forward, any targets you guys are looking at on DOE, whether it's an index to inflation or just an absolute number you'd like to get below per transaction basis or anything like that that we can think about?
Speaker Change: Hey Chris, thanks for the good wishes. You know, in terms of the transformation role,
Speaker Change: I don't think that that's something that we see immediately failing right now because our whole company is in a transformation mode right now. I think there are a lot of initiatives that we've put in place.
that we'll be executing on throughout the year.
Speaker Change: And I totally appreciate where you're coming from with your question, but I don't think it's time to dive into that yet. Joe is the CEO through June. We have a thoughtful transition laid out, and I think it will be more appropriate to address priorities and initiatives when we report our second quarter earnings.
Okay. Thanks, Brian.
Speaker Change: Thank you. At this time, we've reached the end of our question and answer session, and I'll hand the floor back to Mr. Ferraro for closing remarks.
Ferraro: Okay, thank you. So to recap, the travel environment demand is robust. We finished 2020 forward with record December holidays and we saw continued strength in January with the MLK holiday weekend. We took the necessary actions to create more certainty around our future fleet related expenses and to best position us for sustainable growth going forward. The new 25 model year by is more affordable, allowing us to reach more normalized vehicle costs and will continue to accelerate our fleet rotations as we transition through the first quarter and beyond.
Ferraro: Our ongoing goal is to be disciplined in aligning our fleet size with demand, driving higher utilizations and allowing for the most positive price outcome.
Ferraro: And I want to thank all our employees for their continued dedication to our organization. We are positioned well for a very successful 2025. And as always, thank you for your time and interest in our company.
Ferraro: Thank you. This does conclude today's teleconference. We thank you for your participation. You may now disconnect your lines at this time.