Avis Budget Group Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 8 speakers on the call.

Operator

Good day, everyone, and welcome to today's Avis Budget Group Third Quarter 2023 Conference Call.

Speaker 1

In contact

Operator

with the operator. It in. It is now my pleasure to turn today's call over to David Calabria, Treasurer and Senior Vice President of Corporate Finance.

Speaker 2

In line with us. Good morning, everyone, and thank you for joining us. On the call with me are Joe Ferraro, our Chief Executive Officer and Brian Choi, our Chief Financial Officer. In line with us. Before we begin, I would like to remind everyone that we will be discussing forward looking information, including potential future financial performance, in the range of the company, which is subject to risks, uncertainties and assumptions that could cause actual results to differ materially from such forward looking statements and information.

Speaker 2

Such risks and assumptions, uncertainties and other factors are identified in our earnings release and other periodic filings with the SEC as well as the Investor Relations section of our website. In the call. 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 in the range of 10% to 15% 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, in line with us.

Speaker 1

We will discuss certain non GAAP financial measures.

Speaker 2

Please refer to our earnings press release, which is available on our website for how we define these measures and reconciliations to the closest in comparable GAAP measures. With that, I'd like to turn the call over to Joe.

Speaker 3

Thank you, David. Good morning, everyone, and thank you for joining us today. In the press release. Yesterday, we reported our 3rd quarter results, which delivered a record quarterly revenue of 3,600,000,000 in line with the financial results and adjusted EBITDA of over $900,000,000 We all went into this quarter understanding that certain market dynamics of the Q3 of 2022 in the range of 2.5 times this year. However, our team was able to remain focused on cost discipline, while delivering on record customer demand, in the range of earnings results that I'm incredibly proud of.

Speaker 3

I'd like to thank all our employees across the world for contributing to this achievement in the range of $1,000,000 and demonstrating operational excellence throughout the year. For the past few quarters, we pointed out normal demand seasonality has returned to our industry. In line with us. As I stated on our last call, the 2nd quarter is traditionally a transitional period into the summer peak and that showed this quarter in the Americas with the summer being the busiest on record with strong leisure activity and July having the most cause on rent in the company history, while representing the largest demand in the quarter, then sequentially declining into September as it normally does as summer travel diminishes in attendance and schools reopen. Our ability to accurately forecast some of demand allowed us to yield appropriately to sequentially increase RPD in the range of $1,000,000 and diminish the year over year declines versus the previous quarter.

Speaker 3

However, on the international side, we were forced to navigate a more in a market environment this quarter that saw higher than expected inbound demand, but rate pressures on the intra Europe business. In the call. We'll get more into the details on that later in the call. But before I do, let me review the key takeaways of the quarter for Americas segment. In the call.

Speaker 3

On our last call, I said the summer of 2023 would be one for the record books and the Americas segment did not disappoint. In record rental days, record transactions and record revenue in the quarter highlighting robust travel demand. In the range of $1,000,000 Rental days this quarter were 7% higher year over year and more impressively that was on top of a rental day record being up 16% last 3rd quarter. In line with our expectations. As long as I'm talking about year over year stats, I want to include we were up 14% over 2019, which was our last full year of pre pandemic in activity.

Speaker 3

If you look quarter to quarter, our volume increase year over year was more than twice as large as the first two quarters, in the range

Speaker 1

of 3%

Speaker 3

respectively. This does not reflect the shift in strategy in our part, but is rather an outcome to the long in the corporate and partnership business we've signed over the past years bearing fruit. We saw a sizable change in demand in the same period as we started the summer season as customers booked closer in with a velocity never before seen as travel was peaked and extremely robust. In the range of 2,000,000,000. We saw demand in both traditional outdoor environments like beaches and mountains with tremendous growth of inbound customers and different than prior year, in more travel to the traditional cities, which was similar to what we saw pre COVID, just at a much higher level.

Speaker 3

In and demand does not stop through October, which looks to be the busiest October on record with solid midweek commercial demand in the range of the year. We are now in the range of the year. We are now in the range of the year. We are now in the range of the year. We are now in the range of the year.

Speaker 3

We are now in the range of the year. We are now in the range of the year. We are now in the range of approximately $1,000,000,000 in the market after summer and leisure influence as fall getaways become prominent. The weather conditions are great for rentals related to foliage, footfall in the market and outdoor activities all support increased leisure activity. Moving on to RPD, there are several ways to analyze the results of this quarter.

Speaker 3

In the Americas was down 5% in the Q3 of 2023 versus the Q3 of 2022 in line with our expectations. If you recall, last year pricing from the second to the third quarter in the range of $1,000,000,000 was largely relatively flat due to coming out of Omicron and supply chain challenges surrounding semiconductor and vehicle part shortages. In a position to be in a position to be in a

Speaker 1

position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to

Speaker 3

be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to in the Q2 of 2019. 2, the year over year decline in RPD went from 8% in the 2nd quarter to 5%. Answering. 3, we were able to achieve a greater level of sequential RPD growth from the Q2 to the Q3 than in 2022. In the range of $1,000,000,000 All three of these notes depict a pricing environment that is more favorable than the absolute year over year growth would suggest.

Speaker 3

In the range of $1,000,000 However, perhaps the most encouraging thing we're seeing around pricing environment is best reflected in another metric we follow, which is quarterly RPD in the range of $1,000,000 versus comparable RPD in 2019. For example, the RPD in the Q4 of 2022 in the Q4 of 2019. In the Q1 of 2023, it was 33% higher than the first in the Q2 of 2023, it was again 33% higher than the Q2 of 2019. In the range of $1,000,000,000 And lastly, in this quarter, RPD was 29% higher than the Q3 of 2019, which we believe would have been north of 30% if not for the travel in the range of approximately $1,000,000 in our highest RPD region of Hawaii due to the tragic effects of the Maui fires. We interpret this as a sign that the industry supply and demand dynamics in the mix are well matched and resulting in RPD that's roughly 30% higher than pre pandemic levels.

Speaker 3

Is this the new normal? In the range of 2,000,000,000,000,000, maybe so, but it's apparent that we are back to a more normalized seasonal trends just at a much higher level. In line with us. With regards to operating costs, the team was met with significant challenges across several market dynamics. Vehicle depreciation, in the Q3 of 2022 started to normalize and we were faced with a $350,000,000 headwind this quarter.

Speaker 3

In the interest rate environment continued to climb this quarter on a larger fleet base with higher cap costs resulting in another $80,000,000 vehicle interest costs in the Q3 of 2022. Utilization, while strong, was also negatively impacted due to higher than expected recalls

Speaker 1

in the range of the

Speaker 3

most recent developments in the world. However, despite these challenges, our teams continue to demonstrate in a position to deliver strong disciplined discipline while servicing a record number of customers and investing in our brand. Although rental days grew by 7 in the range of 10% and we continued our nationwide Plan on Us marketing campaign. Direct OpEx and SG and A in the Americas grew by only 4%. In the range of $1,000,000 This operating leverage we created by reducing the costs in our control helped us to overcome those costs out of our control.

Speaker 3

In line with the Q4 of 2018. We're able to deliver our 4th consecutive quarter with Americas adjusted EBITDA margins over 25%.

Speaker 1

In the range of

Speaker 3

$1,000,000 On that note, let me provide a few additional income statement results in the quarter. In the Americas, revenue increased over $30,000,000 year over year, in the range of record rental to Europe of 7%, offset by RPD declines of 5%. Americas adjusted EBITDA during the same period increased by roughly $445,000,000 due to the aforementioned headwinds from vehicle depreciation, vehicle interest and rate. Answering the question and answer session. These factors will continue to be a headwind throughout the balance of the year, but as we did this quarter, we will continue to mitigate those costs within our control in the range of $1,000,000 and demonstrate operating leverage that translates into adjusted EBITDA and margin attainment.

Speaker 3

From what we currently see, as I mentioned earlier, in a listen only mode. Travel demand remains healthy as we experienced the busiest October on record. Bookings for the outer months are robust as we look at reservation bills in the same period for the Thanksgiving and Christmas leisure periods. In summary, demand continues to be strong and price will adjust seasonally as it normally does from the 3rd to the 4th quarter. In the range of $1,000,000 And as always, we will continue to manage with operational excellence and I'm confident that our teams will show what it means in the Q4 and beyond.

Speaker 1

In a position to be in the range

Speaker 3

of $1,000,000 Now let's shift gears to international, which is more of a complicated story to unpack this quarter. On our last call, I detailed the different business segments in the international, which is made of domestic, cross border and international inbound. Typically, demand patterns for all three of these segments are correlated adjusting for predictable mix shifts due to normal seasonality. This quarter, however, we saw significant strength in the in the international inbound segment, primarily from U. S.

Speaker 3

Customers traveling to Europe, but less apparent with domestic and cross border business. In the range of $1,000,000,000 The combination of these two factors resulted in a blended rental day growth of 1% for the region, significantly lower than the guidance in high single digit rental day growth we gave on our last earnings call. I'd like to provide a bit of color on what we saw in our latest thoughts going forward. In line with the Q3 of 2023, our international segments saw 9 consecutive quarters of year over year revenue growth. In the Q2 of 2023, our international rental days were still down 23% versus the Q2 of 2019.

Speaker 3

In line with our view is that while the post recovery in Europe started later than the Americas would eventually follow a similar trajectory in the range of $1,000,000,000

Speaker 1

with continued recovery in the

Speaker 3

days billing throughout 2023 and into 2024. While we still believe this is the overall macro in a great line. Europe is a more fragmented rental car in line with our expectations. We saw small domestic operators build fleet inventory in what we all assumed would be a record summer. However, what we saw in the 3rd quarter in a position to be recognized as unprecedented travel disruptions with labor strikes and flight cancellations, civil disruptions and protests in key markets in the range of $1,000,000 and perhaps more importantly, a dour economic environment with high energy prices, surging borrowing costs and waiting export demand, in a position to be in

Speaker 1

a position to be in a position to be

Speaker 3

in a position to be in a position to be in a position to be in a position to be in a position to be in a position

Speaker 1

to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a

Speaker 3

position to be in in the home market being the U. S, we benefited from the boost in international inbound travelers. However, the domestic and cross border segment in a position to be in a position to be in a position to be in a position to be in a position in a position to forego low RPD business this season and concentrate on those transactions that met our return on invested capital hurdles. In an environment where monthly per unit costs are up 27% and monthly interest costs are up a multiple of that, we felt the only prudent decision encouraged to remain disciplined and voluntary pass on low margin business and this is reflected in our results. Yes, rental days were only up 1% year over year, in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in at a 24% margin, the 2nd highest quarterly adjusted EBITDA in our international segment's history.

Speaker 3

In line with demand. In the range of $1,000,000 We continue to believe that substantial opportunity for recovery in this region exists and we'll focus on capturing our share of it going forward. In the fleet, where as usual, we'll focus more on the Americas segment. On our last call, I said that while we saw a stronger than in the market in the beginning of the year, we did not expect gains at those levels to continue for the balance of the year. In a position to be recognized as a result of the continued growth in the Q2.

Speaker 3

We believe that the in the range of $1,000,000 and there continues to be strong demand for used cars of our type. Used car inventory is still down and the price point of these cars to be more in the range of $20,000 lower than a new car, which presents significant value for our consumers. We have said that we expected our gains to continue to normalize and our monthly in the same period of time. We expect depreciation costs to continue towards our gross depreciation of roughly $300 per vehicle. This will happen by next in the Q2 and we're seeing it reflected in the October results.

Speaker 3

The lower gains on sale this quarter versus the Q2 of 2023, in line with the additional new vehicles we inflated, increased depreciation costs in the Americas from $168 in the Q2 of 2023, dollars 2.19 per vehicle per month in the Q3 of 2023. In the range of $1,000,000 We expect this trend to continue throughout the Q4 where our monthly net depreciation per vehicle continues to converge with our monthly straight line depreciation in line with the company's financial results. Let's shift gears now to monthly vehicle interest. In the Americas, in a range of

Speaker 1

$1,000,000,000 monthly per unit

Speaker 3

interest costs grew from $62 per vehicle in the Q3 of 2022 to $105 per vehicle in the Q3 in 2023, an increase of 70%. On a fleet base of roughly 550,000 vehicles, in a listen only mode. That equates to over $70,000,000 of cash outflow from interest expense. I've said it before and I'll say it again. In an environment where our core input costs are rising, both the cost of vehicles and the cost of finance, we must be hyper vigilant in matching our vehicle supply in the range of the year.

Speaker 3

We'd rather run out of the incremental vehicle than have an unutilized vehicle on our lot. In the press release. You'll see us put this rhetoric into practice as we deplete in the Q4 to sequential declines consistent with what we've historically done in pre pandemic years from the 3rd to the 4th quarter. Lastly, with regards to vehicle availability and previous labor disruptions, in the range of $1,000,000,000. Deliveries are still on track, parts are still available and we're progressing with our talks about future buys.

Speaker 3

Currently, our model year in 2020 4 buys are largely complete. We have a great relationship with our OEM partners and I want to thank them for their continued support. Answering. Before I leave fleet, let me comment on EVs. As you know, our strategy is centered around ensuring that our infrastructure was developed to service vehicles of this type in a manner that's consistent with our operational logistics.

Speaker 3

We've been investing in those capabilities. And while we currently have all necessary resources to appropriately service our in the queue. Today, we will continue to build our EV infrastructure resources across our footprint commensurate with our anticipated growth. In the range of 2.5 times. This provides us the ability to react given changes in the demand curve.

Speaker 3

We have ensured we have EVs of different makes in the range of the company's most important and models

Speaker 1

from our majority of

Speaker 3

our manufacturers, which helps with customer demand and further insulates us from cost pressures in the range of the 2nd quarter. We manage our REB similar to how we manage our regular gas cars, focusing on our airport activity, in line with our expectations, which gives us our best margin outcome, while we continue to have supply slightly under our demand. This ensures our per unit economics stay in line. In the range of 2023. While our demand for EVs have improved considerably, we will continue to monitor our supply and ensure that it keeps up with this ever changing environment.

Speaker 3

In the call. Let's turn towards technology and how it's an integral part of everything we do. Our proprietary demand fleet pricing system continues to allow us to optimize price and volume in a position to be recognized by forecasting volume down to the store level both close in and months out and pricing our vehicles at an individual vehicle level while optimizing utilization in contribution margin. This technology along with our revenue management team and operational field experience in the range of $1,000,000,000 to $1,000,000,000 to $1,000,000,000 This increase continues to generate a significant advantage at maintaining our supply, demand and pricing process. We have made technological enhancements in our maintenance in the prepared processes generating efficiencies and operating expenses.

Speaker 3

These enhancements provide our technicians with faster visibility of data analytics in line with our expectations as well as ensuring we optimize our spend with outside service providers. In the field level productivity due to strengthening our workforce planning tool. We've been able to realize this improvement in our field direct operating expenses. In the execution of technology enhancements allow us to keep our costs inside of increasing demand and help margin profitability. In line with us.

Speaker 3

As you know, we have implemented vehicle telematics in our fleet, which provides actual fuel readings and helps insulate us from rising gas prices as well as in the process of providing improved asset control. On the customer experience side, we continue to promote a seamless experience from our

Speaker 1

customers.

Speaker 3

In our Avis Quick Pass offering now at a majority of our airports enables our customers select from a choice of vehicles on their phone, proceed directly to their car in exchange their car if they like and drive to the exit gate utilizing a QR code for an automated exit. In the queue. On return, customers can close out their rental on their own utilizing our connected car technologies. Similarly, our Budget Fast Break Choice in an expedited pickup process that allows you to select your vehicle right from your mobile device by taking a picture of the vehicle's license plate and proceed through an automated in the exit gate, thus expediting your rental checkout. Upon return, our connected car technology allows you to check-in automatically and receive your seat within minutes.

Speaker 3

In contact with

Speaker 2

our customers. Before I conclude, I

Speaker 3

would like to make mention of in a press release last night announcing changes to our management structure and VoIP dynamics. Brian Schweik, our CFO, in the company's role in our company, EVP and Chief Transformation Officer. I asked Brian to step out of his current CFO role in the range of $1,000,000 and take on this new challenge designed to help create sustainable adjusted EBITDA in the years to come. Brian has experienced looking at our company in the same period both from the outside during his days as an investor and over the past 3 years helping us managing from the inside in his current role as CFO. In line with our expectations and this will benefit our business as we look to grow our profitable revenue while creating efficiency in our cost lines by working with the stakeholders both in our headquarters in our field operations, all designed to improve our overall performance.

Speaker 3

Izzy Martins will move from our current role in the Q1 of the Americas to fill Brian's role as CFO. Izzy's prior experience as the VP of Tax, in the company's press release. Chief Accounting Officer and CFO of the Americas, now combined with the operational experience she gained over the past four in the range of years position her extremely well in her new role as Global CFO. Izzy has been instrumental in delivering the record setting performance in the in the past 3 years. We will get to know Izzy more formally in the coming months.

Speaker 3

Adding in David Calabria with his experience in accounting, Investor Relations in the terrific work he's done in treasury make this a formidable team. In addition, we announced some changes on the Board level as well. Bernardo Hees, the Executive in the position of Chairman since 2020 will transition from his current role and remain a member of our Board starting in May of next year. In touch with us. Bernardo has been instrumental in the company's performance, helping us navigate through the pandemic and transform into the company we are today.

Speaker 3

In touch with his insights and partnerships very much needed and help guide our future, and I look forward to continuing to work with him as a member of our Board.

Speaker 4

In contact

Speaker 3

with the Chairman role to the Chairman role starting in May as well. Jagdip, the President of SRS, in the company's office, has been with our Board since 2018 and like Bernardo has been a large part of our success and I look forward to working with him in a greater capacity in the months to come. We are extremely fortunate to have terrific talent on our team and a gifted Board to help align our strategies. In line with us. So let me conclude.

Speaker 3

We had another great quarter with reconciling revenue in the Americas and the strongest summer ever recorded in line with price improving from the Q2 to the Q3 as we noted on our last call. International continues to drive towards margin attainment with profitable revenue in the range of the 2nd quarter and cost efficiencies. The 4th quarter started off strong with good commercial leisure demand and record setting volume in the U. S. In the range of $1,000,000 and advanced reservations surrounding Thanksgiving and the holiday seasons are strong.

Speaker 3

Price will moderate and adjust seasonally as done historically. In line with demand. Our team is focused and driven to once again deliver another strong quarter in line with the financial results. With that, let me turn it over to Brian to go through our liquidity and our outlook.

Speaker 1

In line with us.

Speaker 4

Thank you, Joe, for the kind words and opportunity to take on this new role. I'm beyond excited to start, but first, let me do what CFOs do in line with the financial results and 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. In the line with us. I'd like to start off by addressing my favorite topic, capital allocation.

Speaker 4

We again took a balanced approach to free cash flow deployment in the quarter by addressing both fleet debt and return to shareholders. We voluntarily contributed over 100 in a listen only mode. We voluntarily contributed over $100,000,000 to our vehicle programs by foregoing the refinancings of higher cost in the range of our ASOP term debt as they came due and funded those tranches with cash on hand instead. With interest costs in the high single digits now for our in the C and D tranches of our ABS, you'll continue to see us deleveraging here going forward. We also deployed nearly $500,000,000 into repurchasing entering 2,200,000 of our shares outstanding this quarter.

Speaker 4

Given that we strongly believe that our current share price does not reflect the fair value of our transformed company, in a position to aggressively buy back shares until that gap closes and this will be reflected in the cash flow usage of our Q4.

Speaker 1

In the range

Speaker 4

of $1,000,000 This summer has filled our war chest and we have full confidence that substantial free cash flow will continue to be generated in 2024 and beyond. In capital with shareholders. We continue to find ourselves in the privileged position of being in the strongest financial standing in the history of our company.

Speaker 1

In line with our expectations.

Speaker 4

Our last 12 months adjusted EBITDA is $2,800,000,000 During the last 9 months, we've contributed nearly $1,000,000,000 back into our vehicle programs, in a position to deploy over $200,000,000 into investments in our systems, operations, customer experience and EV capabilities, in line with additional borrowing capacity of $1,100,000,000 in our ABS facilities. Our corporate debt is well laddered with over 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 in line with significant headroom on our maintenance covenants tests as of the end of September. Let's move on to outlook. In the range of 2.5 times. 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 in the same period as the business environment changes.

Speaker 4

Here's some color around what we're currently seeing for the Q4. Rental demand in the Americas appears to be robust in line with the expectations of the strong demand we're currently seeing. We're encouraged by the strong corporate demand we saw in October and in touch with us and believe that will continue until late November when major holiday season kicks in. And as Joe stated, the advanced reservations around the holidays are strong. In line with the normal sequential seasonal decline we saw last year from 3Q in contact with the Q4.

Speaker 4

In international, as we stated previously, we expect to return to revenue growth with rental day growth in the low single digits and flat answering. Consolidated monthly per unit vehicle interest, which was $92 in 3Q 'twenty three will move up slightly in the range of $100 as we indicated on previous calls. Monthly net vehicle depreciation will converge with our straight line depreciation by the 4th quarter in line with us. As we expect gains on sales to be insignificant. And while those gains will be missed, the silver lining is that we're returning to a more normal environment, both in terms of fleet in the range of 2,000,000,000,000 and seasonal demand, which better enables us to do what we feel is our competitive advantage, analyzing the field, setting ambitious targets in the range of $2,500,000,000 in the 2nd highest annual adjusted EBITDA in our company's history.

Speaker 4

With that, let's open it up for questions.

Speaker 1

In a listen

Speaker 2

only mode. Thank

Speaker 1

in line with us.

Operator

And we have our first question from Stephanie Moore with Jefferies.

Speaker 5

In. Hi, good morning. This is Hans Hoffman on for Stephanie. Congrats on the strong quarter and appreciate all the color. So just my first question, just thinking about 2024, understanding there's not a whole lot of visibility on demand in agreement.

Speaker 5

And right now, it looks like kind of vehicle funding costs are going up, vehicle depreciation kind of getting to a more normalized level. So I guess kind of putting that on the line of sight. Can you talk about in terms of what's kind of what's in your control and your sort of ability to preserve margins or in the line with the

Speaker 3

operator. Hi, this is Joe. I'll start off and then Brian if you want to jump in. Answering. So you're right.

Speaker 3

We are currently working on our business planning process. So I don't have all the details surrounding 2024. In the next couple of months. But what I want to probably say is that and I said this earlier in our prepared remarks, in the We're back to a normal seasonality. So I would anticipate that that would ring true going into next year as well.

Speaker 3

And what I mean by normal seasonality, in the Q2 is bigger than the first and the third quarter is bigger than the second and the 4th quarter is somewhat in line with the second or thereabouts. In the demand patterns and the pricing patterns will adjust seasonally. I think that that would be a good starting point with how we would look at in 2024. There is some guiding principles, however, that I think about. If you take a look at this past summer, It was the busiest peak that we've seen and I going into it and I said on the last call, but I thought the summer was going to be in the quarter.

Speaker 3

It was going to be big like it normally is just a larger peak because the Q2 was like a transitionary period into the summer, Which was exactly what we saw in 2019, right. So coming off a busy summer, you would say, well, as demand slowed down a little bit, answering. Are we going to see that going into the Q4? And I have to tell you, October is, like I said earlier, it's going to be the biggest October on record. We didn't in normalized the exact metrics quite yet, but it's all indications that it will be.

Speaker 3

And so the volume didn't stop, in the right demand is still strong. We see strong growth in commercial and we see strong growth coming from leisure. And I see that continuing going into the 4th in the same period. What's surrounding holidays, Thanksgiving and Christmas and a good deal of Q4 activity, once all said and done surrounds Christmas and that looks pretty good. I don't believe that that's going to stop when you get to January or February or March.

Speaker 3

And I think we'll start picking up. Yes, it'll adjust seasonally, in the range of the year. But demand should be strong. And I think pricing, you've seen what I said earlier, very strong and elevated compared to 2019. I don't see no reason in the line with the operator.

Speaker 3

However, we have the outpacing interest costs, as you say, and there are and depreciation costs are starting to normalize. In line with us.

Speaker 1

One of the key reasons why

Speaker 3

I asked Brian to come out of his role is to help us monetize some of the activities that we have in the process of providing data and data analytics to make our team better operators. I believe we have a great operational team right now. But the way we're looking at things in keeping our direct operating costs and things of that nature more in line. With that, Brian, I'll turn it to you.

Speaker 4

Yes. Sure. I think you covered everything, Joe. Just the one thing in the range of $1,000,000 to highlight is these interest cost pressures are going to continue into next year when the cost of play to take on a new car It's going to be over $100 per vehicle per month. You have to reevaluate the appropriate return on invested capital for that car.

Speaker 4

So I think that means that we're going to be very in yield management next year. We're going to be focused on utilization. And as Joe mentioned, we intend to fleet slightly below demand in order to remain disciplined around return on invested in

Speaker 5

capital. Got it. That's super helpful. And then just appreciate kind of all in a call around sort of Europe, but maybe just kind of wanted to unpack it a little bit more. So I guess maybe just thinking about Q4, in the queue.

Speaker 5

Have you seen sort of any easing in terms of some of the pressures on domestic and sort of cross border travel? Or is it kind of the expectation that maybe just the European consumers maybe weaker than kind of here domestically in that Maybe some of those pressures could kind of continue into Q4 and maybe into Q1, maybe offset a little bit by some continued strength in sort of the international inbound segment.

Speaker 3

In. Listen, there's a lot of geopolitical pressures over there and I think we have to be we have to react. In the And so I'm comfortable with where we are today. I thought that the margin attainment in the Q3 was terrific. It was the 2nd highest we had in in company history and you're going to see us operate that way.

Speaker 3

And if things change, we'll deal with it and react accordingly. But our fleet is going to be in line with demand. In line that allows us to produce margin. We still have an extremely strong, in, what I would call, inbound demand coming out of the United States. We have terrific partners with all our airlines here in the U.

Speaker 3

S. In the queue and they continue to drop customers off and we will concentrate our ability to generate that highly profitable business in Europe. Answering. Now, when we looked at it, compared to 2019 in the United States, we started to overcome the in COVID or related challenges in 2021. And we thought that that was going to happen this summer.

Speaker 3

But like I said, inbound business, terrific in the European business and domestic not so good. So we will prepare as if we will prepare to operate on a in a range of $1,000,000

Speaker 1

or of a drop through basis.

Speaker 3

And if things change, we can react very quickly. And that's what I like about our business compared to in the same period where we were pre COVID. We took a lot of cost out. We're able to optimize as we go.

Speaker 5

Got it. Thanks.

Operator

And in. And our next question comes from Chris Woronka with Deutsche Bank.

Speaker 1

In line with us. In line with us.

Speaker 3

Hi, Chris.

Speaker 6

Hey, thanks for taking the question. So in a listen only mode. Congratulations on another great quarter first. And then my first question is really when you think about fleet for in 2024. I know you said most of your buys are already done, but what's the kind of the macro, very high level macro view in the marketplace that kind of underpin your decision on sizing.

Speaker 6

There's a lot of stuff going on in the world and we don't know what economics in the range of the year. So can you just talk about kind of when you say you're entering next year with a more cautious view on overall fleet size And you did and maybe in view of that some apparent market share gains you've had that might make you want to go

Speaker 1

bigger on fleet. Thanks.

Speaker 3

In the queue. So the way we operate, Chris, and you've covered us for a long while now.

Speaker 1

In the summer and we

Speaker 3

do everything we can to make sure that our fleet is in line with demand going into the summer, anticipating the strong are anticipating the strongest quarter of our year. And I think we did a really good job about that this year. In the range of the 2nd quarter. We had our fleet size where we thought it would be. Fortunately, we had those Maui wildfires, which when those occurred, they occurred in the process of getting into the business.

Speaker 3

We are now in the process of getting into the business. We in the range of 2,000,000,000. They had a very large effect on our overall utilization and our fleet size. People just stopped going not just to Maui, but everywhere else. In the same period.

Speaker 3

It's kind of like what happened during COVID very quickly. But what normally happens every year is that when we come off the peak, in We started to deplete and we deplete rapidly. You saw that last year as well. It came out of the 3rd quarter peak with the most cars we have in our business and we start taking cars out in a rapid fashion and we have done that in the month of starting in September and certainly October and we'll continue to do that So we get the fleet size down to what we believe is a normal operating size to go into the Q1 and predominantly the winter months here in the United States. I think the key word for us for next year is flexibility.

Speaker 3

Over the years, we've proven that we can in the range of 2,000,000,000. Even during the COVID years, we've proven that we can get cars and fleet up as demand increases or we can take cars out quickly in line with our demand. I think if you look historically at our company, you'll see that we do that. We have great experienced people. We have technology.

Speaker 3

With DFP that gives us some insights into what's going to happen by certain cities. And so we will continue to do that. Going into next year with uncertainties around these geopolitical environments and things of that nature, we will be prudent. And in line with the interest cost that we're seeing now and the in the range of $1,000,000 appreciation more normalizing. I think that's the most prudent way to attack our strategy surrounding fleet.

Speaker 4

In. Chris, just to add to that on the market share front, I just want to reiterate as we've had in the past that we don't solve to maximized market share here. We solve to maximize long term sustainable EBITDA. I think that was shown this quarter as well where we grew 7 point in Rental Days in the Americas. That's well below the 11% that TSA volumes did year over year in Q3.

Speaker 4

You'll continue to see us, in, like I said, fleet slightly below demand.

Speaker 6

Okay. Appreciate that. Thanks, guys. And as a quick follow-up, I think we were pretty impressed with in your DOE margin performance this quarter again and as you're still growing volume or appear to be still growing transaction days in the U. S.

Speaker 6

We normally think about RPD and price flowing through to the bottom line and less so on volume given the variable in cost, but it seems like have you reached a point where whether it's a utilization level where the incremental transactions are perhaps more profitable at the unit level even if in the same store. Pricing is slightly lower, if that makes sense.

Speaker 3

There's part of that is absolutely true, Chris. As in the queue. There are certain segments of business that allow us to have a better price opportunity than others. For example, inbound business. It comes with especially further out, it comes with a higher price and a lot of ancillary in the range of $1,000,000,000 and on revenue that comes with that type of business.

Speaker 3

Some leisure demand, especially on our large company, our bigger in the brand Avis, which actually we saw Avis grow at a much significant level, more significant level than any of our other brands this quarter. And that comes with a higher price point. In the range of $1,000,000 So to put to keep the fleet at that brand or things of that nature, that certainly has a benefit on what we see as far as price. In the range of

Speaker 2

$1,000,000 As far as operating

Speaker 3

dynamics, we utilize technology in a differentiated way to look at how we manage in line with our cost lines. And as I said earlier, Brian was running as a CFO and a part time job was to kind of look at in a position to improve our some of our direct operating costs. And that's why I moved them out into this role because I think that There's a future in our ability to keep knocking that down a little bit. But over the past couple of years, our efficiencies has improved. In a field, especially with our labor in the field is better than it was in 2019 and we've been able to improve our NPS.

Speaker 3

So So I think overall, yes, there are segments of business that promote the best rate and the best profitable outcome as well as dynamics associated in line with how we manage our direct operating and SG and A.

Speaker 6

Okay. Very helpful. Thanks. Thanks, Joe.

Speaker 1

In the queue.

Operator

And we have our next question from Ryan Brinkman with JPMorgan. In.

Speaker 7

Good morning and thanks for taking my question. And thanks for the comments on capital allocation, including fleet pay down, fleet debt pay down versus repurchases. In the allocation pivot there in 3Q like you indicated it would. Maybe just as a follow-up, given the changes in used vehicle prices and in the range of $1,000,000,000 now of these voluntary contributions in your vehicle programs in the 1st 9 months of the year. I just wanted to check-in on like what percent equity in the range of approximately $1,000,000,000 across your programs or in your biggest vehicle programs currently versus the amount that you're required to maintain.

Speaker 7

In the line with us. I ask firstly to understand like how much cash you could potentially take out if you wanted to for repurchases or anything else? And then secondly, to maybe understand, I guess, conversely, like

Speaker 1

answering questions. How much of a cushion there

Speaker 7

might be there now in terms of what percentage decline in used car prices it would take Before you might be required to put more cash into the programs assuming similar fleet size, etcetera.

Speaker 1

In.

Speaker 4

Sure. Ryan, I'll take that question. In terms of the equity cushion that we have, You can take a look at our press release. We listed out every quarter what our vehicle assets are and what our liabilities are under our vehicle program. Subtracted to that's a good proxy for both the equity that we've the base equity we have in our fleet plus the additional contributions in the queue that we've made.

Speaker 4

And as you can see, that ratio has been growing kind of in favor of the assets And that reflects kind of the voluntary contributions that we've made to that program. We've mentioned before that We can what our advance rates are, that's remained fairly consistent. So we can go in the in high 80s in a lot of markets. We've chosen not to do that. Like I said, the further down we go on are refinancing to the C tranches and the D tranches.

Speaker 4

Those are becoming close to 10% now, 8%, 9%. And you'll see us continue unable to forego refinancing at those high rates as those term debts come due. So we feel really good about where we are in terms of leverage ratios there. Again, you can see the assets which we mark on a monthly basis here And how much higher that is than the liabilities we have. So I mean, you can kind of calculate what the cushion is over there.

Speaker 4

In the queue. And in terms of capital allocation, as I said on the prepared remarks, we still believe that our shares are undervalued in relative to the fundamentals around our current and future earnings trajectory. We repurchased shares yesterday and we still have $1,000,000,000 remaining in our buyback authorization, in a position to be a formulaic when it comes to capital deployment. We evaluate the full spectrum of options from M and A, CapEx, in debt repayment, dividends, one time or regular and of course share repurchases. So we'll continue to allocate capital to those areas that best benefit all stakeholders in attendance.

Speaker 7

Very helpful. Thank you. And then just on EVs, what is the number of electric vehicles that you have globally? What are the brands there that you're most exposed to? In the range of 2,000,000,000.

Speaker 7

And are you thinking any differently about how quickly you might onboard EVs or what percent of your fleet you might expecting to rise to over what period of time, just in light of the lower electric vehicle prices we've seen this year. And so I assume higher depreciation And maybe some of the direct operating cost implications too as highlighted by one of your competitors.

Speaker 1

In the line. I'll take that.

Speaker 3

I'll try to answer it thinking about a little bit about strategy and then give you some insight to where we are as far as fleet. In line with us. We wanted to be consistent and measured in our approach to EVs and our strategy, I feel, Denise in centers around a few principles. First thing we wanted to do is make sure we had an infrastructure. Everything we heard was that EVs are going to be very prominent in the range of $1,000,000 as far as manufacturing goes and obviously that changed over the last couple of months, but we wanted to make sure that we had an infrastructure capable to rent these at a utilization level that's commensurate with our utilization levels on gas cars.

Speaker 3

Given the

Speaker 1

in line with us.

Operator

And it looks like we have reached the allotted time for our Q and A session. I will now turn the call back over to Joe Ferraro for any closing remarks. In line with me. If you will please hold,

Speaker 1

in a listen only

Speaker 3

mode. Bear with me and I'll start again on the question about EVs. Is that fair? So like I said, to answer this question, I'll give you insight to where we are on a level of cars. But I think when you look at our EV Strategy, it centers around 3 real principles.

Speaker 3

We wanted to be consistent and measured in our approach. First thing was we need an infrastructure to support EVs, in the queue, especially at our airports. And we spent the last year and a half doing just that. So I'm comfortable with our infrastructure is, yes, there are more airports coming online in the same period as the grid levels increase at certain cities and airport authorities. So we will continue to do that.

Speaker 3

The second is we wanted to have in cars of different makes and models and from different OEMs. And similar to the way we run our gas car fleet, we believe that gives customer choice. In the process of providing a reconciliation of the in the range of $1,000,000,000 of cost and certainly of late residual value pressures associated with some of the price declines we've seen in some of the cars that are being produced. Answering. And third, the majority of business occurs at our airports and we wanted to make sure that we had the ability to rent cars to consumers that fly into our locations.

Speaker 3

So we spent a good deal of time trying to organize ourselves around that demand level. In the market. It gives us the opportunity to have our best margin outcomes on vehicles of that nature and is the atypical type of vehicle that we rent in the same store as far as gas costs because that's where the lion's share of our businesses. I think what I like most about it is we have ultimate flexibility. There are EVs available You know that the manufacturers want to sell.

Speaker 3

And right now, we are very much looking at keeping our EVs in line with our demand. As far as like the numbers, I don't like to get into that, but I will say this, if you look at the total amount of EVs sold as comparable to the total amount of cars, we're well under that percentage. Hope that helps. In the queue. But I think, as the situation grows, I think you'll find us to be able to take advantage of that, just like we would a normal car.

Speaker 3

Sorry for the interruption on that. I don't know why we disconnected. I apologize for that.

Operator

In line with us. It looks like we have reached the allotted time for a Q and A session. I will now turn the call back over to Joe Ferrero for any closing remarks.

Speaker 3

Yes. In the line with our Q1 results. So to recap, we had another quarter with solid earnings driven by the strongest summer ever recorded with great demand, sequentially improving pricing. In the call. We will

Speaker 1

continue to invest in our

Speaker 3

technology to have improved customer experience and drive enhanced efficiencies in our operations. And finally, in the call. I would like to say thank you to all our employees for the hard work they've put in this past year. Thank you for your time and interest in our company.

Speaker 1

In contact with us.

Operator

Thank you. That does conclude today's teleconference. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Avis Budget Group Q3 2023
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