Avis Budget Group Q3 2008 Earnings Call Transcript

| About: Avis Budget (CAR)
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Avis Budget Group (NASDAQ:CAR) Q3 2008 Earnings Call November 7, 2008 9:00 AM ET


David Crowther – Vice President, Investor Relations

Ronald Nelson – Chairman and Chief Executive Officer

Robert Salerno – President and Chief Operating Officer

David Wyshner – Executive Vice President and Chief Financial Officer


William Truelove – UBS

Manav Patnaik – Barclays Capital

John Healy – FTN Midwest

Michael Millman – Soleil

Jeff Kessler – Imperial Capital

Emily Shanks – Barclays Capital


Good morning and welcome to the Avis Budget Group third quarter earnings conference call. Today's call is being recorded. 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. Please go ahead.

David Crowther

Thank you and good morning everyone. Thank you all for joining us. 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 Chef 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 forwardlooking 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 forwardlooking statements. Important assumptions and other important factors that could cause actual results to differ materially from those in the forwardlooking statements are specified in our 10K, our 10Qs, and the earnings release issued last night. Now I'd like to turn the call over to Avis Budget Group's Chairman and Chief Executive Officer Ron Nelson.

Ron Nelson

Thanks, David, and good morning everyone. Announcing our earnings is usually an occasion for us to talk about growth and success, but we are in the midst of one of the toughest conditions I have faced in my 30 plus years in business. So, instead, we need to focus on the challenges we face and the factors that force us to reduce our outlook. So with my time this morning, I am going to discuss the trends we are seeing, how we as a management team are responding aggressively to the challenges before us. Bob will then discuss several fleetrelated issues. And David will briefly review the third quarter results and focus on liquidity and covenant issues that we know are top in mind.

Let me start at the higher level and then move into the details. We are facing the perfect storm for our industry. First, the decline in employment and the downturn in the global economy have and, for the foreseeable future, will significantly impact leisure and commercial car rental demand. Second, while vehicle manufacturers have been willing to make lots of cars available to us of late, we share the market's concern about the rapid deterioration of their financial health, which has complicated fleet management and financing. Finally, there is the challenge of the credit markets, which are critical to the funding of our fleet and, secondarily, critical to the disposition of our fleet.

In the span of two months, the availability of capital, particularly vehiclebacked financing, has significantly tightened as banks move to reduce their auto exposure, both consumer and institutional; and capital has become increasingly expensive. This is an issue that has magnified as you will hear from David by our own covenant pressures.

Each of these factors is impacting us significantly, beginning with our third quarter results. As you may recall, we said last quarter that pricing generally looked good and fleet levels appeared reasonably tight, relative to demand. This is certainly the case for July, but as we moved to the balance of the quarter, commercial volume declined even faster than we had anticipated. And leisure volume, which had been holding up reasonably well through July, began to decline as well.

Despite our rampup of vehicle sales in both August and September, this rapid weakening in demand outpaced our ability to defleet; and the industry, including Avis Budget, went from being in a rightfleeted situation to an overfleeted situation. As a consequence, pricing suffered. Looking at it another way, after having reservation volumes up slightly in first quarter and down 1% in the second quarter, we finished down 7% in the third quarter, with September down about 9%. Pricing moved similarly. While in July price was up 3% yearoveryear for us, we ended August down 1% and September down 5%.

While some of this is due to mix issues from weak commercial demand and longer length of rental, much of our commercial rental volume is at contracted rates. As a result, third quarter averages actual understate the shortness of the falloff we experienced in the spot leisure pricing for car rentals as the quarter progressed. Price declined a little less than 1% overall for the quarter after conditions throughout July strongly supported an expectation of prices increasing.

While we were concerned about the last four months of the year, it was difficult to contemplate the extent to which conditions have deteriorated. As the entire world has witnessed, the operating environment for the entire travel industry has deteriorated far further than anyone expected. I don't believe we are alone in the volume and pricing trends we're experiencing. They both appear to be reflective of the broader market forces impacting all of our competitors. In fact, our 3% decline in volume, while disappointing, is actually favorable compared to what some others experienced.

It's worth a mention that the soft results of the third quarter are being compared against the best quarter the company has ever had. In the third quarter of 2007, volume and pricing were up 5% and 3%, respectively, and revenue increased 12%. In other words, we were up against very strong comps and, even with the challenges of this year, achieved double-digit growth from 2006.

But in this environment, looking backward is of little help. The focus needs to be on what's in front of us. Unfortunately, the volume and pricing trends that we experienced in the third quarter are accelerating in the fourth. On the volume side, fourth quarter reservations are down in the mid to high single digits, with commercial volumes driving this trend. The declines in rental day volumes are a few points less severe due to some modest but helpful increases in our average length of rental.

On the pricing side, we are seeing time and mileage rates per day that are also down a few points. Notwithstanding leisure price increases that we implemented in September and that have subsequently been matched and in some cases more than matched by our competitors.

We continue to believe that modestly higher pricing, a couple of dollars per rental day, is critical to our ability to earn an acceptable return on capital. The pricing elasticity associated with our core product offering is such that an increase of 5% or 10% or more in pricing for car rental is unlikely to have any meaningful impact on the demand for our product. Accordingly, we are continuing to pursue price increases when and wherever possible as we view profitability is more important than share.

We are facing a very difficult yearoveryear comparison in Q4 and while we're not providing any new estimates for year, given the various macroeconomic headwinds, we have updated our estimates for several key drivers. You can work through the sensitivities with our drivers, but let me assist you with the answer for the fourth quarter. We are expecting an EBITDA loss in domestic and a pretax loss overall for the company with unfavorable comparisons in price, volume, and fleet costs reflecting the economic environment for both travel and the used car sales market.

For the full year, we now expect domestic pricing to be down 1% to 2% in 2008 compared to 2007, which is about 2 points lower than our last estimate. Similarly, we now estimate fullyear domestic rental days will be flat to down slightly versus 2007, also down 2 points from our prior estimate.

Lastly, fleet costs will be up an additional 2% to 3% on a per-unit basis or by around $40 million, because of our defleeting faster and more significantly than we had anticipated and the resulting impact that had on the remaining fleet mix. Bob will provide some further details on our fleet costs.

There's one additional point that I do want to emphasize, that we are taking full advantage of the flexibility in our business model. We have reduced the size of our fleet; we've cut our field staffing levels. Our reservation costs, our maintenance and damage costs, our commission and concession payments, and our salary and wage expense are all lower in response to lower volumes. As is the case with many companies around the world, the rapid deterioration in the financial markets and the economy and in travel volumes simply had a more significant impact on our business than anticipated due to the very short time frame in which this sharp decline has taken place.

Given everything that is happening with respect to the financial markets, the economy, and airline capacity, it's easy to lose sight of the things that are going well. We're not going to suggest that these will offset the decline in our results in the fourth quarter, but it does show that we are maintaining focus and executing against the key objectives we control.

First, our ancillary revenues continue to enjoy strong growth, increasing 10% in the third quarter and 12% yeartodate. Second, our insurance replacement business is strong and continues to grow with third quarter revenues up 19%. Yeartodate, our offairport and insurance replacement businesses have grown 8% and 27%, respectively. Third, our commercial account growth has been solid. In the quarter, we won more accounts than we lost as measured by revenue. In October alone, we signed $15 million of new commercial business.

Additionally, our small business program growth continues to exceed our expectations. In this quarter alone, we enrolled almost 20,000 new accounts in the program. We are pleased with the sales momentum we are seeing across all areas. Fourth, our performance excellence process improvement initiative continues on track to deliver more than $40 million of pretax savings this year.

We remain committed to the $100 million to $150 million target we announced last year, and we expect to achieve this when this initiative is fully implemented. In addition, our performance excellence program was recently named the best organizational achievement in lean enterprise improvement by WCBF, a leading process improvement group.

While we are certainly facing some significant challenges in the short term, both from the economy and in the financial markets, we have been making significant progress against many of our strategic and tactical goals for 2008. In addition to that, we responded quickly to the softening market we saw in the third quarter.

To counteract the volume drop-off we saw in August, we taxed a team to right-size our domestic operations with the goal of further reducing overhead costs and improving efficiency, without sacrificing the service level to our customer base. In early September, we eliminated more than 700 employee positions, including the termination of nearly 600 employees, and implemented several organizational changes including productivity enhancements following this review. These actions, while not at all easy, will save us more than $50 million annually.

We also reduced our field employee head count more than 12% from the beginning to the end of the quarter, some of which is attributable to the recent action, with the vast majority represents how we operate and flex the work force based on demand. The number of field employees is now down 10% yearoveryear.

Independent of our operating challenges, we completed a review of our sales organization, which resulted in the decision to realign the sales team to better serve and penetrate key market segments, with a renewed emphasis on midmarket accounts, small businesses, and travel partnerships in associations. Our accounts gained since this realignment are already validating the success of this initiative.

Finally, we implemented an energy recovery fee in most states which ranges from $0.47 to $0.70 per day, depending on the level of cost increases, to try and offset the impact of higher energy prices on our business. The annual impact of this fee could exceed $20 million.

Also in the third quarter, we increased the outsourced portion of our general reservation calls by over 10 points, now outsource nearly 70% of these calls.

Considering the acceleration of the economic challenges in September, these steps alone are not enough. The ongoing weakness in our industry, the economy, and the credit markets make it imperative for us to take further action to strengthen the foundation of our business.

As a result, we intend to build on the steps taken during the third quarter and the savings achieved from our ongoing performance excellence initiative through a fivepoint cost reduction in productivity enhancement plan. We anticipate that this plan will enable us to reduce our annual operating costs by an additional $150 million to $200 million by the middle of 2009.

We expect to realize these savings through five specific actions, which we are pursuing aggressively. We are targeting significant reductions in operating costs, fleet costs, SG&A expenses, head count, discretionary spending, and other variable costs. We are taking a hard look at station, customer, and channel profitability to identify and respond appropriately to unprofitable aspects of our business. Third, we are reviewing our pricing strategy and intend to pursue selective price increases in order to improve revenue per day and overall profitability. Fourth, we plan to further consolidate both customer-facing and noncustomer-facing activities and locations, which we anticipate will provide considerable synergies. And fifth, we are further consolidating our purchasing programs and streamlining our procurement practices.

These items that we are pursuing should produce savings ranging from $150 million to $200 million on an annual basis. None of this is lowhanging fruit but most, if not all, is within our control. We are not relying on the market per se for any help.

All of this, I would emphasize, is in addition to the savings that we've achieved through our performance excellence initiative and in addition to the savings we're achieving from our third quarter staffing reductions. [inaudible] process improvement and strategic, while some of the actions that I had outlined above are tactical responses to the operating environment. These actions are well considered, fairly dramatic, and wholly appropriate in light of the challenges we face.

While many of the actions we are taking are being driven by negative trends, we do believe we are building a stronger foundation and becoming a leaner and more nimble organization, better positioned for longterm growth and prosperity. While we are operating in the most difficult environment any of us have ever seen, we are taking all the appropriate steps. When the economy rebuilds, which it absolutely, positively will as it has always done, our actions should provide the platform for meaningful earnings growth. With that, I will turn the call over to Bob.

Robert Salerno

Thanks, Ron. Good morning. Today I am going to discuss the trends we are seeing in the used car market, provide an update on our model year 2009 fleet negotiations. Before I do that, though, I want to echo Ron's comments. The current environment is incredibly challenging, but it is pushing us and our teams to attack costs mercilessly. The actions we took in Q3 were an important step, but they were only the initial step. With that, let me talk about fleet.

Prices we realized on our used car sales in Q3 were where we expected them to be. We sold 35,000 risk units in the quarter, principally through traditional wholesale auctions. However, we are also continuing to see that about 7% of our sales coming through direct-to-dealer wholesale ecommerce channels, Openlane, SmartAuction, and Manheim/OVE.

Our aggregate cost per month per car we sold, including any gains or losses on disposition, was in line with the depreciation rates that we set. This is a continuing trend that indicates we have been managing our risk fleet effectively. Smaller, more fuel efficient cars, which comprised the majority of our risk fleet, continued to outperform the broader used car market. Even prices for SUVs rebounded a bit as gas prices fell.

Nonetheless, while we achieved our expected results in the third quarter, we think the fourth quarter will likely tell a different tale. More because of creditrelated issues than anything else. Starting in September, demand for used vehicles slowed as both dealers and consumers were getting squeezed by credit availability. We are watching this closely, and we expect the used car market to be very soft until dealers' access to credit improves.

The size of our fleet and our projected utilization are okay for Q4, and we can take steps to address continuing softness. We can slow or delay purchasing new cars. We also have the option to slow the deletion of cars from the fleet to minimize the effects of volatility in the used car market. And we continue to optimize which cars we sell, at what times, and what geographic regions, and through what channels in order to mitigate negative developments in various pockets of the market.

Lastly, on the topic of fleet costs, in order to try to avoid any confusion, I should address why our per unit fleet cost increased at a double-digit rate in Q3 if the used car market was performing as we expected and why our expected fullyear fleet costs have increased as well. As we moved to aggressively defleet in the face of rapidly declining demand, we were forced to dispose of some cars, both program and risk, sooner than we would have preferred, thus shortening the hold period.

As we have said in the past, the longer we can hold a car, the less expensive it is. And the converse is also true. If we turn the car back after 11 months instead of 13, we generally have to forego the two least expensive months for us to hold that car. While we were able to bring down the fleet to match demand in the quarter, there is cost to the flexibility. But this cost is far less than holding excess cars that aren't needed.

Since we sold more risk cars than planned in Q3, we incurred more shuttling, vehicle preparation costs, and auction fees than we had projected. We include these costs as part of our fleet costs, something that isn't uniform across the industry. The higher disposition expenses accounted for about two to three points of the fleet costs increase in Q3 and a point of the overall increase in the 2008 fleet costs.

Lastly, as I mentioned, we are very cautious in our outlook for the used car market. We have adjusted the depreciation rates for the SUVs we are carrying in our fleet and are constantly looking at the rates we're using for each of our other models in our risk fleet. And lately, more of these adjustments have been upward, not downward as you would expect.

This will add about a point to the full year fleet costs. As a result of these three factors, shorter hold periods, more disposition costs, and higher depreciation due to expected softness in the auction market, we now expect fullyear fleet costs to be up approximately 8% to 9%, compared to our previous estimate of a 4% to 6% increase.

Turning to the model year 2009 fleet purchases, we are in the final stages of negotiations with the OEMs; and we have a pretty good sense of where our purchase agreements will end up. Access to cars is very good and we are looking to have even further manufacturer diversification of our fleet. We are still working through the final risk program mix but continue to expect that our risk car portion of the fleet will remain consistent with this year at about 50%.

Once again, our risk fleet is expected to be weighted toward small and midsize vehicles as we negotiate our overall fleet mix to reflect changing consumer preferences. In terms of per unit domestic fleet costs, including vehicle disposition costs, we continue to estimate an increase in the 1% to 3% range for 2009.

I would like to provide a little more detail around this increase. First, remember that this is our all in fleet costs, including selling costs. Our depreciation expense is actually expected to be flat yearoveryear. But we have moved fleet to a 50/50 program-to-risk mix in model year 2008 from model year 2007. We have more risk cars to sell, so we have an incremental expense hitting yearoveryear in 2009, which is causing most of this increase in per unit cost. Even with this expense, risk cars are still less expensive than program cars.

Lastly, just looking at our stats on table three of our release, you can see that the fleet was down 2% with days down 3%. We made progress throughout the quarter in reducing our fleet. We couldn't exit cars quite fast enough to keep our utilization equal to the strong third quarter 2007 levels.

Let me put it in a different perspective for you. When we initially planed the fleet, our net Q3 deletes were about 50,000 units. In fact, our net deletes totaled some 60,000 cars, over a 20% increase over what we originally had planned. So when looking at the two largest expenses we control, people, which Ron has mentioned, were down 10% over the course of the quarter and vehicles. I hope you can see that we're actively managing these costs. With that, let me turn to call over to Dave.

David Wyshner

Thanks, Bob, and good morning everyone. This morning, I would like to discuss our recent results, our free cash flow, and our liquidity and debt covenants. In the third quarter, revenue declined 1% to $1.7 billion. EBITDA was $141 million; and pretax income was $87 million, excluding unusual items. EBITDA declined from $168 million that we reported in third quarter 2007, due to domestic results that were impacted by increased fleet costs, higher gasoline prices, and decreases in both pricing and volume.

We also reported lower results in our truck rental business, due to the continuing weakness in the housing market and a softening economy. Separately, we recorded an impairment charge of $1.3 billion or $1.1 billion after tax, primarily due to the decline in our stock price and market valuation generally. The charge is comprised of $923 million for the writedown of good will, a reduction of $321 million in intangible assets, and $18 million to reduce the carrying value of our investment and carry holdings. Impairment charge does not impact our cash flows or our covenant calculations, but does reduce our reported GAAP earnings and our book equity.

We also had $11 million of other unusual items in the quarter. $5 million was for the settlement of a litigation claim outside of the normal course and for which we have an insurance claim pending. $6 million was to reflect expenses associated with personnel actions taken in the quarter. There will be additional restructuring charges in future periods as we take additional actions to reduce costs.

In our domestic car rental operations, third quarter revenue decreased 1%, reflecting a 3% decrease in rental days and a slight decline in time and mileage revenue per day, offset by a 10% increase in ancillary revenues.

Rental volumes were impacted by decline in enplanements. On-airport rental days decreased almost 4% with both commercial and leisure volumes down. The data we have seen so far indicate that our rental day volumes were modestly better than market trends, most notably a decline in domestic enplanements of approximately 7%.

The $27 million increase in ancillary revenue reflects considerable progress in take rates on our insurance product. The penetration rate on where2 GPS rentals is more than 25% higher this quarter than in the third quarter of 2007. Domestic EBITDA for the quarter also benefited from cost savings from process improvement and lower interest expense.

These benefits of ancillary revenue growth and productivity were fully offset by lower volume and inflationary pressures impacting gasoline, wage, and fleet costs. As I mentioned before, even with significant progress in reducing nonfleet expenses, it's difficult for us to grow earnings when pricing is flat or down yearoveryear.

Domestic fleet costs increased 13% on a per-unit basis, primarily due to earlier defleeting as Bob discussed. Excluding gasoline expenses and unusual items, our direct operating expenses decreased by more than 90 basis points as a percentage of revenue yearoveryear. This reflects our cost reduction initiative, performance excellence program, and the tactical actions Ron discussed. SG&A expenses declined slightly yearoveryear due to our focus on cost containment.

Turning to international car rental operations, revenue increased 4% in Q3, driven by a slight increase in time and mileage rates per day and a 12% increase in ancillary revenues. EBITDA increased 18%, driven by foreign exchange movements, revenue growth, moderating fleet costs, which were flat on a per unit basis excluding the impact of exchange rates, lower self insurance costs, and lower interest costs due to a decline in vehicle debt levels.

In our truck rental segment, revenue declined 10% in the quarter due to an 8% reduction in time and mileage revenue per day and a 3% decrease in rental days. EBITDA declined as lower fleet costs and operating cost savings were more than offset by the decline in pricing and volume. The drop in T&M per day reflected lower pricing across all channels, magnified by a decline in the proportion of oneway rentals, which typically carry the highest daily rates.

We are managing our capital spending judiciously. Expenditures totaled $20 million in the third quarter, primarily for rental site renovations and information technology assets. The substantial majority of our CapEx was infrastructure related. We have aggressively cut back on discretionary items.

Our free cash flow yeartodate was $300 million, reflecting our pretax income excluding the impairment charge, our efforts to focus on cash generation, some timing issues, particularly with respect to our fleet, and utilizing our vehicle-backed funding structures more rather than using corporate cash to fund our fleet.

We continue to target free cash flow of 85% or more of pretax income in 2008. We are pursuing opportunities in working capital management and in our vehicle programs to reach this target. We expect to pay cash taxes of $20 million to $25 million in 2008. And our capital spending will be close to our depreciation and amortization expense.

As Ron highlighted, and as we mentioned in our earnings release, conditions in the fourth quarter are shaping up to be remarkably difficult. Rental volumes are weak, particularly for the month of November. Demand for used vehicles has fallen sharply since midSeptember in most geographic areas. Our per-unit fleet costs and our financing costs are up. The pricing we are achieving is down, despite the retail price increase we led in September and the one we rapidly followed in October.

We are also facing a difficult comparison to fourth quarter 2007, a period in which our results were stronger than the industry as a whole and in which we reaped the benefits of improving insurance claims experience. Currently, even our interest rate and gasoline hedges, some of which must be marked to market, appear likely to have a negative effect on our fourth quarter results.

As a result of these factors and despite the aggressive actions we are taking to reduce costs and improve profitability, we expect our yearoveryear comparisons in Q4 are likely to be the weakest we report in this business cycle. We expect that such fourth quarter results will include an EBITDA loss in our domestic car rental segment and a pretax loss for the company as a whole, excluding any restructuring or unusual items.

Turning to liquidity and covenant issues, as we announced last week, we have extended $1.35 billion of our principal assetbacked conduit facility for 60 days. In conjunction with the extension, we took several steps to reflect evolving market conditions. We increased the borrowing spreads associated with the facility by nearly 3 percentage points. We have upped the collateral requirements so that the facility is now rated AA by both Moody's and S&P.

We also remained in compliance with our covenant requirements as of September 30. Our leverage ratio under the covenant calculation was four times, and our interest coverage ratio was three times, both well within our requirements. Renewal of our assetbacked conduit facility into 2009 is a key objective for us. It's really part and parcel of a larger issue, our potential inability to remain in compliance with the financial covenant contained in our corporate credit facility going forward.

With travel demand having deteriorated significantly over the last three months, with our financing costs having increased more than we expected, and with the macroeconomic outlook for Q4 and first half 2009 being very challenging, the cushion that we had expected with respect to our covenant has been evaporating and appears likely to continue doing so.

In October, prior to the extension of the conduit facility, we had conversations with many of our banks regarding our need for an amendment of the covenant package in our credit facility. While all parties, we in particular, are disappointed to be having these discussions, we were fortunate that our banks understand the perfect storm we are facing and are seeing the source of issues arise in many corners, including the banks' own balance sheets, as a result of broad macroeconomic and market issues.

Our banks understood that while ongoing covenant compliance is a challenge for us, we have generated $335 million in EBITDA over the last 12 months compared to $124 million in corporate interest expense. At this point, I would characterize our discussions today with our banks as constructive.

We are pulling together our detailed plan for 2009, including the steps we will take to pursue aggressively the incremental cost savings that Ron discussed. We expect to use that information and our dialogue with the banks regarding not only the covenant amendment, but also the renewal of our principal conduit facility and possibly the renewal of our seasonal conduit facility, which matures in February. Our goal is to amend our covenants to provide relief and to renew a substantial portion of the $2.5 billion of bank conduit capacity we currently have. We will also continue to look for opportunities to issue assetbacked term debt, although market conditions will dictate the term ABS issuance we'll move into in 2009.

We are as disappointed and frustrated as anyone with the current trends in our business. But our focus as a company is on two principal items. Our top priority will be to address the covenant constraints and conduit renewals. At the same time, we are responding to a weakerthananticipated business climate by aggressively re-looking at our operating costs, our fleet costs, our SG&A costs, and all of the other components of how we do business to find ways to strengthen our results. I have been heartened by how the Avis Budget team has rallied behind these critical initiatives. Ron.

Ron Nelson

Thanks, David. Before we open this to Q and A, I want to reiterate there's no question that this is an extremely difficult business climate. It's important to emphasize that we remain confident in the foundation of our company and our ability to exploit the flexibility in our business model in a manner to support our longterm growth.

We have the right business model and a strong management team to help us navigate the challenging environment. We have great people who provide the same high quality of service to our customers day in and day out. This is critically important to helping us attract and retain customers, attract new customers and retain our existing ones in today's tough market.  While our business model allows us to take aggressive steps to reduce our costs, we will not compromise in our commitment to service excellence. We are asking a lot of our managers, employees, and vendors. In the process, we are positioning the business for longerterm prosperity. With that, David, Bob, and I will be pleased to take your questions.

QuestionandAnswer Session


(Operator Instructions) Our first question is from William Truelove UBS.

William Truelove UBS

I want to ask you guys the same question I asked one of your key competitors who was unable to answer it yesterday. Holding the vehicle you said, obviously, costs you less. I get that, over time. But what I want to understand is, is there a revenue impact to holding the car longer? Because if it's obviously cheaper to hold the car longer, then why wasn't that sort of the operating policy maybe a year ago or what not. There has to be some kind of offsetting problem to it. Can you walk us through why now holding a car longer is still financially better than it may have been in the past or what not? That kind of discussion I think needs to be had.

Robert Salerno

I think a lot of it has to do with what are the alternative deals that are out there. At points in time, it was actually cheaper to buy a new car because that's what the manufacturer wanted you to do; and they made deals available to you to do that. Of course, the financing market was such that it was negligible. That was why it was cheaper to buy a new car than hold it. As things have changed now, it is cheaper from a depreciation standpoint and also from an interest standpoint to hold the car longer.

That's what governs all this, this fleet management, is what's going on at the time in the world from the OEM standpoint and our own standpoint and determines what we want to do in keeping the car longer or going out and buying a new car. Does that answer your question?

William Truelove UBS

I think so. So you're saying sort of the incentives given from the OEMs plus the way to finance those purchases versus what you get today. Am I reading that correctly? I would assume that if you are going to hold the car longer, there could also be a revenue impact as, couldn't it be more difficult maybe to get pricing power if the cars are getting older? Will customers push back on that?

Ron Nelson

I just want to add to what Bob said. I think all of us, you have to take into consideration what's going on in the competitive market. I think if all your competitors are having 6 and 7monthold cars and you're out with 20 and 25monthold cars, there is going to be a revenue impact. Some people will switch because they look at those things.

The other thing that I think factors in to the equation is you hold cars longer. Again, it depends on how you want to define longer. You start to incur costs like tires, which are not cheap, batteries, transmissions; and you have got to weigh all that against the deterioration and the depreciation curve. Not depreciation on our books, but in the market value curve. So I think all those things get taken together.

We have been fairly vocal over the last two years about our desire to lengthen lives. We have taken them from probably 78 months average 2 years ago up to about 11. We're all certainly going to extend the lives in the coming year. I think the good news for all of us, for the industry, is that we're all doing it. There isn't going to be a competitive issue one way or another whether somebody has got newer cars than another.

William Truelove UBS

Let me thank you for a very thoughtful response to that question. That was very helpful. One simple question, then. I know there's a long lead time you mentioned earlier this year about buying trucks. Are you guys planning on buying trucks for 2009 or not? Obviously, when we saw the fleet increase in the second quarter of 2008, it was a little bit of a surprise, given the lead time factor. Are you making that purchase decision now, and what's it going to look like?

Robert Salerno

We're going to finalize our 2009 business plan. But I think right now I think we're quite happy with the volume of trucks we have. The whole truck group, we're taking a look at it relative to our costs. I think we're going to reposition it. I think you will be hearing about that over the next several quarters. I think that will probably mitigate any need to purchase any more vehicles.

The vehicles we actually purchased last year or at least the majority of them, were vans, cargo vans. And the RPUs on those have actually been quite good. It's a business that we weren't in previously. So, that was really the big factor in the fleet increase that you saw.


Our next question comes from Manav Patnaik Barclays Capital.

Manav Patnaik Barclays Capital

A few questions. Firstly, obviously it's positive that you guys are going ahead with pricing increases, or at least attempting to, and so are your competitors. I was just wondering, given the current situation and also the industry demand dynamics, at what point in time, you obviously said fourth quarter pricing was still looking weak. How long do you anticipate before things stabilize and you actually start seeing those pricing increases materialize?

Ron Nelson

I wish I knew. You have heard all three calls now. All of us are facing the same kind of pressures in our financing costs and our cost structure and in increasing fleet costs and the soft used car market. So, presumably at some point in time we're all going to act rationally and increase prices. There's been three or four price increases over the course of the last month. I think Hertz led one, we led two, and National and Alamo led a third. The adoption rates have actually been pretty good with the Enterprise group being much more aggressive than they have been in the past.

I think we're at a particular point in time right now in the fourth quarter where everybody is defleeting. We've got a backup of the used car market. So it's going to be tough to get pricing while people are looking at marginal contributions to their fleet expense since they can't right-size their fleet quick enough. So, hopefully, with some better credit applied to the consumer end of the market and the used car market picking up, some of the fleet clog will start to move through and pricing will start to improve. I think that's one of the essential ingredients.

Manav Patnaik Barclays Capital

Just on your fleet mix, you said you targeted 50% for next year. One of your competitors obviously saw the number of risk go down this quarter for whatever defleet and timing reasons. I was just wondering what was your fleet mix, what is your fleet mix as it stands today going into the fourth quarter?

Robert Salerno

I think it's right around 50/50. That's what we're talking about targeting for next year as well. I don't think we want to get any heavier in the risk right now. We're pretty satisfied with operating it this way.

Manav Patnaik Barclays Capital

Finally, just one big picture question. A lot, on other calls, these people have noted how the industry could be ripe for consolidation. I was just curious from your perspective, if consolidation were to occur in the car rental business, what is it that one would typically look for in terms of the company acquiring.

What I am trying to get at is basically almost all the big three out there have the same number of locations and typically the same area. Right now, accessing fleet is not a problem if you were to capture market share. Could you give us just an idea from your experience and your history, what would be the few attributes to look for in terms of industry consolidation?

Ron Nelson

Putting aside the improbability of it in the current environment, I think you only need to look at our Budget experience. We took over $100 million of costs out within 12 months, largely from back office and noncustomer-facing types of consolidation. I am certain that Enterprise is seeing the exact same kinds of economics is they move to consolidate National and Alamo. I think the predominance of the benefits are all going to be on the cost side.


Our next question comes from John Healy FTN Midwest.

John Healy FTN Midwest

I was hoping we could talk a little bit about the five-point plan. Obviously, it's tough decisions you're making, but the right ones for the long term. I hope you could talk a little bit about the buckets, and maybe where those cost savings, those synergies are coming from and maybe, you said mid2009 it would be achieved by. How much of that we should anticipate to show up in terms of EBITDA or pretax contributions, just how we should think about where the costs are coming from as well as kind of the magnitude of how we will see them in the results.

Ron Nelson

I would say the biggest bucket of the $150 million to $200 million is going to come from [inaudible] cap reduction and operating cost reduction. We are probably going to lay off somewhere around 1,000 to 1,200 people over the course of the next three weeks. We are going to take a fair amount of related discretionary costs out of the system. That's going to be the probably the lion's share of the $150 million to $200 million.

There's also, within each book of business, there's unprofitable transactions. We're slicing and dicing transactions as carefully as we can to try and see where we can put business rules in place to enhance the profitability of those transactions. I would lump putting in a very rigorous procurement program into the mix. We have always had a procurement program here. I think we're going to put renewed emphasis on it. As I said, I think the majority of these costs are ones that are under our control; and we will be able to effect them, some faster than others.

David Wyshner

In particular with respect to timing, I think we're going to be aggressive in taking a number of actions in the fourth quarter so that we can start January 1 at a run rate well north of $50 million. So that the rampup in the first half of the year would be from an annual run rate of $50 million to $70 million to $150 million. And we could be looking at a run rate average over the course of the quarter of $110 million, which would generate $55 million of savings.

Then the run rate in the second half would be $150 million to $200 million and contributing about $85 million to $90 million for a total for the year of savings dropping to the bottom line in the $140 million to $150 million range. We're still working through the details, but the key point there is that we will be taking a number of actions in the fourth quarter so that we're starting the year with a running start, not a static start.

John Healy FTN Midwest

This fivepoint plan and the numbers you talk about there and you just ran through, which was really helpful. Does that encompass the $50 million due to the reductions that took place in third quarter? Does it also include the opportunities you are getting from the tax savings?

David Wyshner

All three are incremental to each other. We will have this year's tax savings, additional tax savings next year, plus the $50 million of benefit from the actions we took in the third quarter, plus the $150 million to $200 million run rate benefits associated with the fivepoint plan.

John Healy FTN Midwest

Then, just with how we think about fleet for next year. Everybody in the industry is talking about holding vehicles longer. I guess I am trying to understand the benefit that you guys get. It's easy to understand taking cars from 10 months to 12 months or 14 months and the benefit you get. When you look at the residual values and the market value curves, is there a point where extending the life of the vehicle makes it more expensive? I guess what I am trying to understand is I know there's not much of a difference between selling a car at 13 months and 15 months, but is there a point where it's not advantageous for you guys to hold the car longer?

Robert Salerno

You are absolutely correct. There is a point at which the residual value drops off faster than the depreciation. That's before you even talk about our customer experience. While we're going to extend the life of our cars, we're trying to do so in a judicious manner and not only watch what the total cost is as Ron was telling you from a maintenance standpoint and from a residual value standpoint, but also what it's going to take us to keep the car looking as our customers expect cars when they come to Avis and Budget. There is a point, and we're working through right now exactly how long we're going to keep them.

John Healy FTN Midwest

From your past experience, is that point usually 18 months? 24 months? Just trying to get comfortable with where that point is.

Robert Salerno

I think from my past experience, that's a [inaudible]. I will tell you my past experience, when I started in this industry, cars were several years old with 60,000 plus miles on them. I don't think we're headed there. I think we're talking at the outside 18, 20, for a portion of the fleet.


Our next question comes from Michael Millman Soleil.

Michael Millman Soleil

I have several questions. Starting with what you just said, the cost reductions you're talking about, is this above and beyond the usual 70% of variable costs taking that out of the business to go along with the market or does this go beyond it? Could you also talk about, given all these price increases, is it not being followed by the companies we heard in the last couple of days? Or is this the smaller companies that are doing this? Then, can you also talk about what are the alternatives or options that you have if, indeed, you can't extend the conduit.

David Wyshner

With respect to those three questions, the cost reductions we're talking about are generally, if not entirely, related to items and actions we're taking above and beyond what we would normally do to adjust for changes in demand or volume levels. They're incremental, if you will, to the variable costs like commissions and size of our fleet and even staffing levels in our operations and in our reservation centers. We look at most, if not all, of them as incremental.

With respect to your question about price increases, I think it boils down to why are we seeing prices down if we and the rest of the industry have been implementing price increases? I think part of it is the starting point that we were at where prior to the price increases we were looking at being down. But the larger issue in the fourth quarter is that the amount of volume that is at sort of the retail rate ends up being somewhat limited at the fourth quarter, other than a week at the end of November and a week and a half at the end of December, is a heavily commercial month. And a larger portion of the volume is that contracted rate or pursuant to various programs. As a result, there's not quite as much of an impact in the quarter from movement in retail rates as you would expect.

Lastly, with respect to hypotheticals about the conduit, we're not going to speculate on hypotheticals there. I think our focus is very much on renewing the substantial majority of capacity that we have there. As I mentioned our conversations with the banks are certainly constructive.


Our next question comes from Jeff Kessler Imperial Capital.

Jeff Kessler Imperial Capital

With regard to the financial difficulties being faced by the OEMs, I know this is probably a sensitive discussion you're having. To what extent are you discussing continuing to diversify the fleet. I know that you've already done so. The question is you have to make provisions for the possibility that your suppliers are going to have a rougher time providing you with cars in 2009.

Robert Salerno

We have continued to diversify the fleet. Now we're working with over ten different manufacturers. While we continue to hope and believe that domestic OEMs will weather the storm along with ourselves, we have the opportunity to supplement what they can give us by other manufacturers. That's kind of in our longrange planning as we go forward.

Jeff Kessler Imperial Capital

The second question, I know, David, this is one hard to push on. I know you basically gave Mike the answer to this. I am trying to get a feel for the nature of your longterm conversations with your banks and what types of potential structures could evolve for financing fleets over the course of the next year or two. Assuming that, again, one has to hope that the ABS facilities come back in 2009. I realize, again, I hear what you just said on the last question. I am trying to get a more generalized picture of what these conversations are about much more than just doing the conduits. About how are you going to finance cars in a difficult environment?

David Wyshner

It is a very interesting question, Jeff. I think there are two components to it because clearly we and the industry and the financial markets have changed in ways that we should expect will impact how rental car companies finance themselves going forward. I think there very well may be changes in the amount of assetbacked capital that is available, what that means for our mezzanine capital needs and so forth.

The interesting part about the discussions we have had to date, and we have had a lot of them, is that no one really knows at this point. Given the tremendous pace of change and volatility and uncertainty that's been in the capital markets, particularly over the last 60 to 90 days, the advice in our view tends to be that this is actually not a time to try to figure that out. We actually need to see how the markets sort out and what pockets of financing are going to be the most attractive, the most reasonable, and the most accessible for us as a company and as an industry before we get very far into figuring out how longer-term companies in this industry and Avis Budget are going to finance themselves. That's been the basis of the longer-term discussions. As a result, our focus is really, as I mentioned, on the nearer term and the conduit renewals.


Our last question comes from Emily Shanks Barclays Capital.

Emily Shanks Barclays Capital

I wanted to ask about the remaining defleeting that you have for fourth quarter. What is the mix of your fleet between program and risk that you're trying to sell?

Robert Salerno

I think for the remainder of the quarter originally had a plan that was pretty much going along utilizing the wholesale markets. Although in the November and December, they're kind of dead anyway. We have really scaled that back. We just see no sense in going out. I think the wholesale markets are really unsettled now. We believe that once we turn the corner into January, this will even out.

Basically our defleeting for this quarter is really going to be heavily skewed toward the other half of our fleet, which is GDP, turnbacks.

Emily Shanks Barclays Capital

Will that allow you to defleet using just your program vehicles or GDP however you want to refer to it. Will it allow you to hit your goal that you want to be at?

Robert Salerno

I will tell you that other than in November, with the election taking out the first week. Other than November, October and December right now, at least we anticipate acceptable utilization. We don't consider ourselves grossly overfleeted.

Emily Shanks Barclays Capital

Just a couple questions around the specifics of the new conduit that was put in place. Can you please let us know what the enhancement rate was that was required to get the AA rating?

David Wyshner

It varies by manufacturer and the enhancements on average being probably run into the mid to high 30s.

Emily Shanks Barclays Capital

Then, also, away from this principal conduit facility that now is rolling in December and on the seasonal in February. Are there any other conduit facilities that are part of your vehicle financing that are coming due in the next 12 months?

David Wyshner


Emily Shanks Barclays Capital

Then, one final question. My understanding from past conversations is that there's also $400 million of ABS debt that is rolling off in the first half of 2009. Can you confirm if that is correct and, if so, what month that is please?

David Wyshner

In 2009 in aggregate, we have about $400 million of ABS debt rolling off. It actually amortizes over a sixmonth period. Most of that is in the first five months of the year.

Emily Shanks Barclays Capital

In terms of being able to finance that, what are your plans?

David Wyshner

The way we're looking at it is that the conduits should help us meet the majority of our needs. As I mentioned, we will continue to look either at the ABS market for term issuance and we're also going to explore or continue to explore alternative sources of financing, including similar to some pockets that we tapped into this year, other than the traditional ABS term and conduit markets.

Emily Shanks Barclays Capital

So you would, in fact, need the renewal of those conduits in order to refi, outside of all the other things that you just mentioned ,other sources of liquidity.

David Wyshner

That's right.


For closing remarks, the call is being turned back over to Mr. Ronald Nelson.

Ron Nelson

Thank you all for listening, and we look forward to talking to you in the next quarter.


This concludes today's conference call. You may disconnect.

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