Avis Budget Group, Inc. (NASDAQ:CAR)
F1Q09 Earnings Call
May 7, 2009 9:00 am ET
David Crowther - Vice President Investor Relations
Ron Nelson - Chairman and Chief Executive Officer
Bob Salerno - President and Chief Operating Officer
David Wyshner - Executive Vice President and Chief Financial Officer
Emily Shanks – Barclays Capital
John Healy – Northcoast Research
[Yelma Amibi] – JP Morgan
Michael Millman – Millman Research Associates
(Operator Instructions) Welcome to the Avis Budget Group First Quarter Earnings Conference Call. At this time for opening remarks and introductions, I would like to turn the conference over to Mr. David Crowther, Vice President of Investor Relations.
On the call with me are our Chairman and Chief Executive Officer Ron Nelson, our President and Chief Operating Officer Bob Salerno, our Executive Vice President and Chief Financial Officer David Wyshner. If you did not receive a copy of our press release, it's available on our website at www.avisbudgetgroup.com.
Before we discuss our results for the quarter, I would like to remind everyone that the company will be making statements about future results and expectations which constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act. Such statements are based on current expectations in the current economic environment and are inherently subject to significant economic, competitive, and other uncertainties and contingencies beyond the control of management. You should be cautioned that these statements are not guarantees of future performance.
Actual results may differ materially from those expressed or implied in the forward looking statements. Important assumptions and other important factors that could cause actual results to differ materially from those in the forward looking statements are specified in our 10-K, and in our earnings release issued last night. Also, certain non-GAAP financial measures will be discussed and these measures are reconciled to the GAAP numbers in our press release which is posted on our website.
Now I'd like to turn the call over to Avis Budget Group's Chairman and Chief Executive Officer Ron Nelson.
I’m going to start this morning by providing some context for our first quarter results. Demand for domestic travel services including car rental was extraordinarily weak in the first quarter. Year over year decline in our domestic volume was greater then it was in the fourth quarter, greater then we’d expected and frankly even greater then it was in the first quarter 2002 which was of course following 9-11.
Certainly volume is an important data point and I’m going to discuss it more in detail but we shouldn’t let it obscure several other important points about our first quarter. Demand for us and seemingly for other travel companies appeared to stabilize as the quarter progressed. Leisure pricing was robust. Our ancillary revenues on a per transaction continued to exhibit strong growth. The used car market redounded dramatically and we took full advantage of it.
Headcount and fleet were down significantly as we flexed our business model in the face of declining demand. Cost savings were even more substantial then we had forecast and as a result of all these factors our EBITDA was in line with our plan and well ahead of our covenant requirements even though the volume drop off resulted in a fairly significant shortfall in expected revenue.
Each of these factors is worth some further discussion and through the course of the call today, Bob, David or I will provide greater color on each one. We’ll also try to give you a sense of what we’re seeing so far in the second quarter and then touch upon the recent developments with respect to Chrysler and GM.
Depending on your perspective the calendar either provided an excuse for our results this quarter or a reason to cheer. I prefer the later but I’ll leave it to you to decide which is more appropriate. It shouldn’t go unmentioned that the first quarter is our seasonally slowest quarter even before you account for Easter moving to the second quarter and the fact that last year was a Leap Year which resulted in an extra day of results to compare against.
Nevertheless it wasn’t just the calendar that drove our domestic rental days down 18% year over year, which incidentally was about a five point greater decline then we had forecast going into the quarter. We saw significant declines in almost all segments and channels; commercial and leisure, on and off airport, daily and weekly, GDS, internet partnerships and associations. About the only area that didn’t suffer a decline was insurance replacement which represents a small portion of our volume and it was up slightly year over year.
I don’t think our experience is unusual; the decline in volume that we experienced has been reported by all our competitors and reflects the general weakness in travel demand. For sure, it was not company specific. We do look at our competitors results at airport authority reporting and other sources such as the 30% decrease in corporate travel sales that American Express reported, to provide a variety of perspectives on demand. They all point to our results being part of the overall trend.
That said, not all of our volume decline was demand or calendar related. A few points of the decrease were intentional on our part. You’ll recall that as part of our five point plan we were going to look hard at limiting certain types of business and customers whose rentals do not make a positive earnings contribution.
The way we tried to do this was usually increase the rate we were quoting in a particular channel for a particular rental. First prize in that endeavor has been to win the customer at a contribution positive rate and second prize and saw a profit improving outcome was not winning their reservation. To date, we’ve identified these sorts of opportunities among commercial accounts, high mileage rentals, opaque bookings, partnerships, and certain transaction types and we’re not done yet.
The last point about volume is that the streak of sequential monthly declines appeared to end in March. Consistent with others in the travel industry have been saying, we believe volumes, both commercial and leisure, likely bottomed in February or early March and have stabilized over the last six to eight weeks.
We also had a fairly robust leisure pricing environment throughout the first quarter. As we discussed on our last call we began to see some positive developments on the leisure pricing front beginning in December. These carried through to the first quarter. This translated into a composite increase in leisure pricing across both brands of 6% including 9% at Budget which is a pretty good proxy for leisure pricing.
This contributed to an overall increase of 3% in time and mileage per day across all of our business which should tell you two things. Our split between commercial and leisure business remained at around 50/50 and commercial pricing was down around 1% in the first quarter. If you measure our time and mileage on a per transaction basis which often is a better proxy for transaction profitability, we were up 7% across both brands, reflecting both price gains and an increase in the average length of rental by a few points.
To us the relative strength of pricing at Budget continues to highlight the importance of our two brand strategy. The Budget brand allows us to participate more fully in the leisure space, let’s us take advantage of the modest shift towards value price brands that typically occurs in a tougher economic climate and affords us incremental fleet flexibility.
That said, we remain committed to improving price realization wherever and however we can. You don’t need to look any further then a five year chart of average revenue per day and fleet costs to know that as an industry we have been well behind the curve in keeping our price in harmony with our primary cost driver.
Since 2004 our average RPD has increased 1% over the entire five year period. By comparison fleet costs even taking into consideration the dramatic shift from program to risk cars have increased 40%. If you’re wondering where our margin went, don’t kill any brain cells trying to look much further. Nonetheless we’re hopeful we can maintain favorable pricing trends, especially in face of the continued challenges in both cost and capacity in the credit markets.
We continue to see good results from our increased focus on ancillary revenue growth. This grows directly out of a comprehensive sales training initiative that we’ve talked about previously and a change to our recruiting strategy to focus on filling customer facing positions with people who have sales experience. As a direct results our ancillary revenue was up 18% year over year on a per rental day basis.
There’s no question though that the biggest story in our first quarter was the realization of the benefits from our cost reduction initiatives. Three separate programs together projected to deliver over $300 million of benefits and each one hitting on all cylinders. The five point plan that we outlined in November, our ongoing performance excellence process improvement initiative and the benefits from the reductions we made early on in the third quarter of last year all contributed what they were forecast to in the quarter and then some.
The proof is in our results in a quarter where our revenue declined 17% we were able to reduce both our direct operating expense by 18% over $135 million and our SG&A by 20% or $34 million year over year. This is the payoff from relentless focus, hard work and sacrifice of our people. Every layer from top to bottom in our organization has contributed to identifying and executing on cost savings.
We have taken full advantage of the benefit of our business model by adjusting the size of our field organization to stay in line with volumes, even in a time when volumes were declining at unprecedented rates. We are also addressing fixed costs and overheads in a manner we’ve not had to before and we are challenging established ways of managing our business to generate additional savings. It is in times like this when the sacred cows are let out of the barn.
Early success doesn’t mean this is an initiative that we’ve wrapped up and filed away. We continue to strive for operational and management austerity on a daily basis across our entire organization. As a management team we are regularly reviewing our cost saving efforts project by project and line by line to optimize our execution and identify incremental opportunities.
Just as a reminder, the principal components to our five point plan are:
Reduce costs across the operating fleet and overhead expense areas.
Review and respond to underperforming or unprofitable business segments.
Improve the contribution from sales and marketing initiatives including our sales of ancillary products and services.
Further consolidate back office and customer facing functions and locations.
We’re pleased to be making substantial progress on every one of these. Just since the start of the year, we have eliminated another thousand employee positions bringing our total since December to over 3,200 with more then 96% of these completed. If you look at all the actions we’ve taken since last year at this time we’ve eliminated nearly 5,700 positions or 22% of our headcount.
We’ve signed agreements to outsource several back office functions from damage claims to citation processing. We’ve closed our Wichita Falls reservation center and have begun to close our Orlando claims processing facility as we’ve consolidated these functions into other existing operations. We’ve acted on our commitment to identify and reduce unprofitable business segments as I mentioned earlier. We’ve implemented changes within our loyalty programs to reduce expenses.
We’ve been conducting detailed field operation reviews city by city, expense by expense, looking for opportunities both to reduce costs and enhance our customer’s experience. Some of these reviews actually resulted in our adding people to make sure that we’re properly serving customers. Then finally we’ve begun negotiating and signing new purchasing agreements, some covering areas that previously were not under a master agreement but all are expected to save us millions of dollars a year.
These actions have allowed us to over deliver on our cost saving goals in the first quarter and to overcome the headwind of weak travel demand and allow us to achieve our EBITDA targets for the quarter. They’ve also allowed us to raise our estimate of cost reductions for the full year. Just by way of example, none of the benefits of our procurement initiatives or detailed field operation reviews were reflected in the first quarter. These actions were all taken towards the end of the quarter and will be sequentially felt over the balance of the year.
While we’re very focused on cost reduction process improvement revenue initiatives we know we can’t lose sight of the fact that in the long run our principal differentiating element is our service proposition. We remain steadfast in our commitment to provide customers with a quality rental car experience.
What does this mean for the rest of the year? Despite the signs that the worst may be over in terms of the recession we still expect that 2009 will be challenging economic environment. While we don’t intend to give specific earnings projections I do want to mentioned a few key points, some positive and some negative, that may be important to those of you who model our results.
One, over the course of the year our five point plan should deliver in excess of $200 million in savings. Our third quarter 2008 actions another $50 million plus and our performance excellence program over $100 million for a total savings of more than $300 million. Two, we expect to see a year over year increase in vehicle related interest of $15 to $20 million due to higher rates. That similar amount of corporate interest as a result of last year’s bank facility amendment.
Three, with the strengthening of the dollar particularly in the fourth quarter of 2008 we expect a negative 18% impact on international EBITDA due to foreign exchange despite results that are only down slightly on a local currency basis. Four, we won’t be immune to cost increases and inflationary pressures. While salaries and wages will be down overall as a result of the headcount reductions, the remaining personnel covered by collective bargaining agreements and our non-union hourly employees will be subject to a 2% to 3% wage increase.
Five, fleet costs, our largest expense is expected to show a middle single digit increase on a per unit basis in 2009. Finally, and probably most significantly we don’t expect revenues to increase year over year in this environment. For those reasons our first quarter results have not changed the way we’re looking at the year on any measure.
Airline capacity is expected to be down around 10% in the first half and broader economic conditions are also anemic. We expect rental day volumes in the second quarter will be down year over year in the mid teens as the trends we have seen in the first quarter continue. Although our revenue does suggest modest improvement from the first quarter one of the byproducts of the current market is that bookings are occurring closer into checkout date so its difficult to draw any meaningful conclusions more then 30 days out.
Commercial rentals will likely be the weaker segment but leisure isn’t tracking that much ahead if we could offer any meaningful projections at this juncture. Fleet will continue to have a higher cost per unit increase then we would like due to the various actions we have taken to manage levels versus demand during the first quarter.
On the other hand, what I’ve seen in used car sales so far in the second quarter have continued to be bright spots. On the pricing front we continue to pursue price initiatives wherever and whenever possible and our principal focus is on profit. We are continuing to benefit from first quarter price increases, especially in April as fleets have tightened and the Easter effect is reflected itself in pricing.
In April alone Budget recorded pricing gains north of 15%. As long as fleet levels remain reasonable we think pricing trends should continue although we don’t expect year over year gains that we experienced in April. In fact, conditions in the credit markets and at the OEMs probably helped discourage over fleeting. That is a good thing since price typically follows fleet levels and it is always a key determinant of profitability.
Pricing remains as important as ever given the current macro economic environment. At the risk of repeating myself from last quarter, our industry has not gotten the pricing it should for the capital required but we’ve prospered nonetheless because of the amount of leverage that was available in the market and the fleet cost impact of past OEM market share initiatives. We live in a dramatically different world now and we simply can’t look to either of those crutches being available to subsidize pricing an already under priced market.
While Bob will discuss fleet in more detail shortly, I do want to reiterate in this environment the art of fleet management and the value of experience is critical. On an almost daily basis we are making decisions that balance new car orders with risk car sales opportunities. The trade off residual value risk in risk cars with perceived credit risk program car dispositions all in addition to managing longer hold periods that increase mileage and maintenance while sliding down a declining residual value curve.
Throw in some volatile demand patterns and you have a complex, constantly changing optimization exercise. It is made somewhat easier by our fleet management tools but it certainly doesn’t make it crystal clear. With all these considerations we ended the quarter with our fleet down 22% from the year earlier, having opted to take full advantage of the reinvigorated auction market in the first quarter.
Do we think volume will be down 22% in the second quarter? No, but in the current environment we would much rather add or hold fleet to meet known demand or try to push utilization and price then be in a position of guessing wrong then having to accept what we would consider to be brand dilutive transactions.
Let me say a word or two about our exposure to Chrysler following their Chapter 11 filing. Chrysler is our fourth largest vehicle supplier in the United States. We have payables to them and receivables from them both in the single digit millions and Chrysler vehicles subject to guaranteed depreciation programs represent less then 2% of our domestic fleet. Based on their actions to date and the court rulings last Friday we expect at this point our relationship with Chrysler to operate pretty much business as usual.
We also have a number of non-program Chrysler vehicles in our fleet but watch to see how Chrysler’s perform at action over the coming weeks and will adjust our depreciation rates old periods and disposal plans accordingly. Our general view is that the auction market for Chrysler cars is probably already discounted the impact of the bankruptcy and that further erosion of residual values other then perhaps on a very temporary near term basis will not likely be material.
We’re also continuing to monitor the developments at General Motors as our relationship and the car rentals industries total purchase volume is larger there. We believe that each of the three largest car rental companies including us sources between 25% and 40% of their US fleet from GM. To be sure, GM like Chrysler has lived up to each and every commitment it has made to us including the timely receipt of payments when due. We have no expectation that the future will dictate otherwise.
While it’s never useful to speculate about hypotheticals under the most likely scenario through GM over the next few months, we expect that our interactions with GM will also continue to be business as usual. All that being said, we’ve worked hard to balance our GM exposure with the realties of the current situation and the need to run our business. We do have receivables from GM, although at this point in the cycle their at a low ebb. We do have payables to GM. We do have program cars both at auction and in our fleet and we do have orders pending for cars to be delivered during the second quarter.
In the business as usual scenario we’d expect these items all get resolved in the normal course. Something other than that it would be speculation. So all I would point out is that our continued purchasing of vehicles is likely to be particularly valuable to GM at this juncture.
Let me conclude my remarks with a brief summary and an observation. First, our cost saving initiatives are real, on track and above target. Second, we met our debt covenants comfortably and our fleet levels and I believe this is true for the industry, are in line if not below demand forecasts. Third, we are seeing, hopefully some game changing dynamics in our industry evolve.
Each of the three largest competitors has a similar profile at this juncture. We all have far reaching cost reduction programs in place. We all have brands in both the premium and value segment. We all have meaningful revenue streams in the same segments and channels. All are demonstrating conservative attitudes toward fleet levels. All are dependent on the same manufacturers. We all seem to be adopting a new approach to pricing.
If these elements remain in place we believe the potential exists for a fairly accelerated and leveraged return to profitability for our industry with even modest amounts of volume recovery.
With that let me turn the call over to Bob Salerno.
I’m going to focus my comments this morning on fleet. Both the steps we’ve taken to reduce fleet levels and what we’re seeing in the used car market. As Ron mentioned we continued to manage the fleet down aggressively as volumes diminish. Our average domestic fleet for the quarter was down 16% year over year in line with the decline in rental days particularly when you remember that one point of the decline in rental days was due to 2008 being a Leap Year. At the quarter end our fleet was down 22% year over year.
Shifts of this magnitude are not without cost. Fleet costs which for us includes depreciation, disposal costs and any gain or loss on sale were up 13% on a per unit basis. This is down from the 22% increase reported last quarter and reflects a sequential decline in absolute per unit fleet costs of 9% from fourth quarter 2008 to first quarter 2009. The rapid decline in demand from the fourth quarter through Q1 had a negative spill over effect on per unit fleet costs and some of this will continue into Q2 as well.
The real issue is that the least expensive month in a cars life is often the last month. As a result, demand weakness that causes us to sell or turn back vehicles sooner then we have planned imposes an incremental cost on us. That has impacted us in the last two quarters and will also have an effect in Q2. On the flip side, conditions at the auctions improved dramatically in the first quarter. Our conversion rate increased significantly and we are seeing the same positive trends in the used car market that the auctions have reported perhaps even magnified a bit.
Following a very weak fourth quarter Manheim reported a 4% increase in used vehicle values at January adjusted for mix, mileage and seasonality from December. Dealer supply of used cars was falling due to the lack of trade-ins providing support to the auctions. Declining auction inventory and growing demand helped produce another 4% used vehicle value increase in February and an additional 1% in March. In total for the first three months of 2009 used vehicle values increased more then 8%.
The segments of the used car market on which we rely were particularly strong. By March Manheim reported risk units sold by rental car industry achieved prices that were nearly equal to a year earlier despite having 26% more mileage on average. Data painted a similar picture as they are seeing significant pricing strength and the youngest used vehicles which are typically generated by the car rental industry.
In short, there are many factors that are contributing and that should continue to contribute to the relative strength of the used car market this year. First, the supply of late model cars will be declining as we as an industry purchase fewer cars. New vehicle sales into rental fleet were down more than 50% in Q1 and today’s new cars become tomorrows used cars. While demand may be decreasing for cars, the supply is also shrinking and will likely continue to shrink as the car rental industry sees lower levels of demand and extends the hold period.
In addition, there are far fewer trade-ins due to the decline in new car sales. These dynamics particularly the car rental industries reduced purchases should continue to constrain the supply of late model used vehicles for some time.
Second, declining gasoline prices are having a positive price impact on vehicle classes that have been the weakest performers, particularly SUVs. We chose to hold on to some risk SUVs when gas prices were high and instead sold some incremental small and mid-sized cars, the prices of which were less volatile. We are currently benefiting from that strategy. In fact, prices for certain SUVs are up more than 10% from the fourth quarter. The normalizing of gas prices has certainly helped that component of the used car market stabilize.
The third factor contributing to the health of the used car market isn’t obvious but important one. The late model used vehicle substitution effect. Because used cars cost less than new cars they are becoming a more attractive alternative for many consumers in the current economic environment. Consumers remain exceptionally value oriented which is good for our mix of cars which appeal to the value oriented buyer.
For the remainder of the year we see access to cars as ample even with the extended Chrysler plant shut downs and the potential for a longer than usual shut down for GM this summer. Our fleet financing is in place and we should not have any issue obtaining cars to meet our summer peak levels which we expect will be in line with our projected volume.
We are currently forecasting that our per unit fleet cost for all of 2009 will increase in the mid single digits year over year. This will depend on the used car market, the mix of ‘08, ‘09 and ‘10 models we ultimately have and our model year ‘10 negotiations with the manufacturers. We expect the year over year fleet cost increases will again be elevated in the second quarter but will gradually fall over the course of the year.
We expect our risk program mix to be generally similar to last year with our domestic fleet being comprised roughly 50% of each. Our manufacturer mix will also be generally similar although the Chrysler component of our fleet will be down a little bit and the percentage coming from foreign manufacturers will increase as we keep a close eye on developments with the domestic manufacturers.
We are also increasing our vehicle sales through internet auction channels. We achieved record online sales in the first quarter with 16% of our vehicles being sold online. Last year at this time we had sold less than 8% through this channel. Online channels allow us to reduce our cost of sale. In Q1 we reduced this cost by 18%. Much of this is due to reduced transportation charges which of course are non-existent with an online sale.
Also this 18% reduction doesn’t even include depreciation and interest savings from faster turn of the sale unit. Online sales have a 57% faster turn time then our regular auction sale. By faster turn time I mean from the date of the last revenue movement until sale. Dealers are able to view our available inventory online, select the vehicles based on the criteria they specify and then efficiently purchase the vehicles right from our location.
The other very important part of our fleet management work has been actions taken recently to reduce our model year ’09 purchases. As we have talked about previously we were always planning to purchase fewer model ’09 then we did ’08 but we struck our model ’09 deal which includes volume incentives before the economy went south in the fall. We have been working very closely with the manufacturers to right size our buy, keep most of our incentive monies and even reduce our exposure to risk vehicles.
We currently expect to purchase about 30% fewer cars for the total model year ’09 then we did roughly prior year about 120,000 fewer cars. As you would expect we are also taking a very cautious approach to model year ’10 purchase commitments. Most importantly, as I mentioned earlier, we will continue to keep our rental fleet in line with demand even if volumes are weaker than anticipated levels.
With that let me turn the call over to David Wyshner.
Today I’d like to discuss our recent results, our debt covenants and our financing strategy. Turning to our results, excluding unusual items in the first quarter revenue fell 17% to $1.2 billion, EBITDA was just below break even at negative $3 million and our pre-tax loss was $63 million. EBITDA declined from the $31 million we reported in first quarter 2008 due to domestic and international results that were impacted by lower volume and higher fleet costs as well as foreign exchange in the case of our international segment. Truck results were modestly better then last year.
We had $7 million of unusual items in the quarter most of which was severance for the elimination of more than 2,200 employee positions in the fourth quarter and additional reductions in the first quarter. Our worldwide workforce is down more than 22% versus a year ago.
In our domestic segment EBITDA declined for the quarter due to lower volume and higher fleet costs, the effects of which were partially but not fully offset by our cost savings initiatives. First quarter revenue decreased 15% reflecting an 18% decline in rental days and a 3% increase in time and mileage revenue per day. The increase in rate was, as Ron mentioned, primarily due to price increases for leisure rentals.
We believe the 3% increase in T&M rates reflects the industries adjustment of fleet levels in response to weakening demand and is a testament to the car rental business model which has inventory flexibility that makes it quite different from the hospitality industry. Most of the pricing benefit was in the spot or leisure market due to contract pricing on the commercial side of the business.
Ancillary revenues increased 18% on a per rental day basis reflecting the considerable progress we’ve made on sales of insurance products and where to GPS rentals. As Bob discussed, year over year fleet costs rose 13% on a per unit basis but declined 5% in total and made a 16% reduction in average fleet.
Direct operating expense declined 50 basis points as a percentage of revenue despite the decline in revenue and SG&A declined 80 basis points as a percentage of revenue. The decline in expenses was primarily from our process improvement and cost reduction initiative and demonstrates how we have attacked infrastructure costs in addition to reducing expenses to narrow declining volumes.
In our international car rental operations revenue decreased 29% year over year driven by an 8% decline in rental days and 25% decrease in time and mileage rates per day which was substantially all due to foreign exchange. Excluding the impact of FX, ancillary revenues increased 10% per rental day, again reflecting our initiatives in this area.
EBITDA declined $11 million but $6 million was due to foreign exchange movements. Fleet costs were at 7% on a per unit constant currency basis. Going forward, we expect the global economic slowdown will continue to create conditions for our international business that are challenging but not as difficult as in our domestic business. Year over year impact from foreign exchange will diminish a bit as the year progresses unless the dollar strengthens further.
In our truck rental segment, revenue declined 10% in the quarter versus last year due to a 3% decline in time and mileage revenue per day and 9% decrease in rental days. The decline in T&M per day reflected lower pricing across all channels partially offset by an increase in the proportion of one way rentals which typically carry the highest daily rates. EBITDA was slightly better year over year reflecting lower fleet costs and cost saving initiatives.
Our cash balance at March 31 was $345 million and our free cash flow for the quarter was $89 million. Even excluding cash from vehicle programs our free cash flow exceeded our pre-tax income. We are managing our capital spending judiciously. Expenditures totaled just $8 million in Q1.
As I noted last quarter we are aggressively curtailing discretionary items and prioritizing projects based on necessity and those that generate returns in less than one year. Capital expenditures will be a bit higher in subsequent periods then they were in the first quarter but the total for the year will be well below 2008 levels.
From a covenant perspective the company exceeded the minimum credit agreement EBITDA requirement by more than $20 million or about 18% in the first quarter despite the challenging demand dynamic that developed. Please remember that EBITDA as calculated under the credit facility excludes certain unusual items, stock based compensation and corporate overhead costs and therefore is usually higher then the EBITDA we report for our four segments.
Turning to our financing strategy, as we previously discussed we started the year with only about $300 million of domestic ABS term debt maturities in 2009 of which only $42 million of maturities are remaining this year, all in the fourth quarter. We have ample funding to meet peak needs this year as a result of the renewal of our $2.45 billion in conduit facilities in December. We’re even seeing some excess capacity develop as we reduced our projected fleet levels.
At the end of March we had $2.3 billion of available liquidity in the form of cash or commitments under our corporate and vehicle backed facilities. Perhaps the most important development is that in late March the Federal Reserve added rental car ABS funding to the list of eligible asset classes under the Feds term asset backed securities lending facility known as TALF.
We view our inclusion as a very positive development toward unlocking our access to the term ABS market and toward improving ABS liquidity generally. We are actively working through the logistics of issuing debt under this program and we hope to issue TALF eligible asset backed securities in the coming months. Early indications are that costs under this program will be in line with our current conduit facility costs.
We are also actively looking at additional sources of liquidity including borrowing structures such as operating leases and manufacturer financed vehicles. As I said, our peak needs in 2009 are taken care of and the financing we’re doing is to prepare for 2010. In particular, our domestic vehicle funding needs for 2010 total $3.5 billion comprised of the annual maturity of our $2.45 billion bank conduit facilities and $1 billion of ABS term debt maturities.
At this point and will the help of TALF we plan to meet our 2010 needs by issuing $1 to $1.5 billion of term ABS debt over the next 12 months and by renewing our bank conduit facility for around $2 billion. We will also look at seller financing and operating lease structures which may also provide a few hundred million of capacity. Along those lines, we are in negotiation with operating lease providers for several hundred million of financing which we are hopeful we can conclude before the end of the year.
Stepping back, while we know we face challenges in several areas including commercial pricing, our domestic suppliers and the current economic climate we are excited about progress in leisure pricing, ancillary revenues, TALF eligibility and cost savings. As a management team we remain focused on executing against those opportunities we can control in returning Avis Budget to prosperity.
With that, Ron, Bob and I would be pleased to take your questions.
(Operator Instructions) Your first question comes from Emily Shanks – Barclays Capital
Emily Shanks – Barclays Capital
I wanted to see if you guys could give me what revolver availability was at the end of the first quarter, corporate revolver availability.
At the end of the first quarter we had no borrowings under the revolver and I believe roughly $800 million of letters of credit outstanding which would give us about $350 million of capacity. We’ll get an exact number for you as well. It was $765 million of LCs outstanding which would give us availability of $385 million.
Emily Shanks – Barclays Capital
I appreciate all of the details you gave us around your outlook for the back half of ’09. I just wanted to make sure I think I caught everything. In the press release you do indicate that you expect the second half of ’09 to be up year over year on the on airport rental volume if I’m reading it correctly. I want to understand what the drivers are that you think are going to be doing that.
The way to read our comments is that we expect the comparisons year over year to be stronger or better then they are in the first half of the year and then they were in the first quarter, not necessarily that they will be up year over year.
Emily Shanks – Barclays Capital
In terms of the dollar amount for cost savings that you went through the different buckets, is there a portion of that that reflects the shrinking of operating model to reflect the lower demand levels, i.e. when you quote the headcount reduction of I believe it was negative 22%. Is a portion of that simply just ratcheting down the operating model?
In terms of the number that we gave for year over year headcount 5,700 positions that does include a ratcheting down for the operating model. For the most part the earlier number that I gave was 3,100 positions, that almost all is not related to the business model. It’s taking real fixed overhead out of the business.
Emily Shanks – Barclays Capital
You gave the three buckets, the five point plan at $200 million, 3Q08 at $50 million and performance excellence at $100 million, what portion of that $350 million of savings for ’09 is attributable to simply your variable cost structure which is what makes car rental so attractive.
Let me see if I can answer your question a little differently. The five point plan we expect to be over $300 million I think you can assume that $200 million of that is unrelated to volume. The third quarter 2008 reductions which we said were about $50 million plus are all unrelated to volume. The process improvement initiatives at $100 million if you think back to our earlier calls we’ve probably told you those were $125 million this year.
Some of those are related to volume because if you’re improving a process and there’s less volume you get less savings out of it which is why we’ve trimmed it back to $100 million. If you look at the overall total of somewhere around $300 to $350 million not very much of it relates to volume.
Your next question comes from John Healy – Northcoast Research
John Healy – Northcoast Research
From a big picture standpoint, in the quarter you made an incredible amount of progress on the fleet and the pricing and it really appears the industry is doing the right things at this time. When you look at the changes taking place do you think that there are more things that you guys can do maybe from a pricing or a fleet management standpoint then you’re already doing? Maybe charging for guaranteed reservations and things along those lines. Are there additional things you see on the horizon that the industry can move towards?
I’m trying to understand your confidence that the progress you guys have made in the first quarter and it looks like for the second quarter this progress is sustainable.
I think I’d put each of your items I’d qualify it all with the word potential. We’ve thought about all those things. I think it’s very hard to unilaterally implement them. They can have dramatic profit improvements but again you can’t do it all at once. On pricing as I tried to point out everybody has a historic cost structure that has been driving them towards going after more pricing. In the leisure market you can effect pricing quickly and I think that’s why you’ve seen price increases move up in leisure.
It’s still pretty competitive in commercial but I think we’re optimistic just given the way price increases have been adopted during the last part of last year and the first part of this year that we can continue to realize some price. Again, you can’t do it unilaterally you can raise prices and you can hope that it sticks but eventually the industry has to go along or you got a competitive market action you’ve got to deal with.
I think on fleet there’s always a possibility that you can move utilization a point or so during the course of the quarter. Certainly given that our fleet is down 22% going into the second quarter and we don’t think volume is going to be down that much we’re either going to have to add fleet or improve utilization a point or so.
Meaningful amounts of utilization gains are pretty tough. If you’re thinking three, four, five points of utilization that’s pretty tough given our business mix and given the fact that we have a lot of corporate clients that want guaranteed availability of cars no matter what the day of the week is.
The other opportunity that we have in fleet is our model year ’10 negotiations. Everybody’s coming to table with a pretty sobering view of the economy and a sobering view of where each party stands economically. We’re hopeful that we’re going to come to a rational conclusion that starts to narrow that gap that I talked about over the last five years where our rates went up 1% and their prices went up 40%. Those are generally the opportunities. It’s a competitive market and you can’t do anything unilaterally.
John Healy – Northcoast Research
On the vehicle funding facilities, could you walk through, you may have I might have missed it, what the aggregate level of enhancement that’s required on the facilities today on a blended basis and maybe what the letters of credit outstanding were for the vehicle funding facility at quarters end.
When you combine the pieces of ABS debt we have our blended enhancement rate in the US is in the mid 30s and as a result we end up with about $500 million of letters of credit right now supporting our fleet.
Your next question comes from [Yelma Amibi] – JP Morgan
[Yelma Amibi] – JP Morgan
You had $89 million of free cash flow in the quarter and it looks like it was $113 million of that was just from vehicle program cash. I understand you’re not giving forecasts but directionally how should we look at that cash going forward, vehicle program cash?
As we’ve talked about before I think pre-tax income continues to be a proxy for free cash flow in our business. Capital expenditures and depreciation tend to run over time pretty much in line with each other. We’re not a tax cash payer. We’re not seeing a significant amount of working capital uses. In fact we continue to try to find ways to squeeze cash out of working capital.
As a result, pre-tax income is a good proxy for free cash flow. As a result, which you see in the first quarter is that we did take some cash from our vehicle programs as cash that was available in the first quarter as our fleet levels came down a bit.
[Yelma Amibi] – JP Morgan
As you re-fleet back before the summer travel season would there be use of cash related to vehicle programs?
No, the cash we were able to take out I think we will probably be able to keep out and be able to fund the increase in in-fleet levels dollar per dollar with additional debt. I don’t see us being under pressure to put that cash back into the vehicle programs.
[Yelma Amibi] – JP Morgan
About $15 to $20 million of incremental interest expense related to fleet, can you walk us through generally the assumptions behind that in terms of debt levels to get to that incremental interest expense?
I can give you the key items that are going through it. The map is more detailed. The three impacts we have are number one that fleet levels are down so the amount of borrowings we have are down. Libor is down to the extent we have some floating rate exposures and borrowings, we’re getting a benefit from Libor being lower.
Those two benefits are being more than fully offset by the fact that our borrowing spreads are significantly higher this year then they were last year particularly on our asset backed conduit facility where we’re borrowing at over 300 basis points over Libor compared to being at 30 and 42.5 basis points over Libor last year.
Your last question comes from Michael Millman – Millman Research Associates
Michael Millman – Millman Research Associates
I’m wondering if you could go into some more detail about the commercial market because we seem to hear how bad it is. I think you suggested it was at least on a pricing basis only down 1% but maybe you can talk about what you’re seeing in new negotiations if you’re seeing trading down and if you’re still seeing that National is being a very tough competitor in terms of new contracts, if you’re seeing any price deterioration on present contracts and anything else that might help us.
I’m not going to go into specific numbers and specific negotiations. I think some of the trends that you allude to are certainly there. Travel departments of major corporations have gotten very aggressive about bidding out business and making sure that they get as competitive price as possible. Corporate America is having the same kinds of challenges as we are in looking to reduce costs at each and every line on the income statement and that factors into it.
I think of a competitive environment between the three major corporate rental car companies is as strong and healthy as it’s ever been. I will point out that in the first quarter we renewed over 99% of our relationships and we added some new account relationships. The only guidance I would add is that I think that in that environment it’s going to be a challenge to see increases in the corporate rental rate. We continue to push for them and we will hopefully get them. It’s certainly more challenging then the spot or the leisure market.
Michael Millman – Millman Research Associates
Are you getting current contract rates or are they discounting against current contract rates?
Our current rates are holding. I don’t think that we’re having to give up much if any ground. I think I alluded to our last call, I think he real art of this is learning how to provide value in ways other than simply the time and mileage rate per day. We need to convince our customers of the productivity gains of taking GPS. I think we have an enormous opportunity to co-brand and co-market with a lot of our consumer products customers.
Frankly I think the biggest opportunity is to reinforce the service proposition that we give the corporate customers with e-receipt and Avis Interactive Reporting and all the things that make their life easier. I think the service proposition is clearly what we have to sell. That’s how I address that.
Michael Millman – Millman Research Associates
You indicated that April you were seeing as much as 18% increase at least on the leisure side in T&M. Obviously Easter bolsters that number greatly. Could you give us some indication of a normalized number?
What I said was Budget was booking gains north of 15% in April and yes you’re right clearly the Easter effect has an impact. I will say though that looking forward on Budget is achieving what I would say are impressive RPD gains. They’re certainly not on the order of north of 15% but they’re certainly above last year.
Michael Millman – Millman Research Associates
Where do you expect your peak fleet to be relative to a year ago?
As we said, the fleet is going to be in line with what our projected volumes are. Right now we’re looking at about right there.
Our fleet is going to be down. We’re not going to give a summer projection on demand. We think that we’re going into the quarter down 22% and this is something that Bob and his team review on a weekly basis with the entire field operation. We’ll adjust the fleets in accordance with how our demand shapes up.
For closing remarks the call is being turned back over to Mr. Ron Nelson.
We’d like to thank you all for joining us today. We’re enthused about how well our team has been able to achieve the cost reductions that we had targeted for this year. We’re hopeful that we can get a little more volume in the second and third and fourth quarters. We think when we do we’re going to have a relatively quick and leveraged return to profitability and we hope we have a good story to tell you in three months time. Thanks for joining us.
This concludes today’s conference call. You may disconnect.
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