Avis Budget Group CEO Discusses Q3 2010 Results – Earnings Call Transcript

| About: Avis Budget (CAR)

Avis Budget Group, Inc. (NASDAQ:CAR)

Q3 2010 Earnings Conference Call

November 4, 2010 9:00 AM ET


Neal Goldner - VP, IR

Ron Nelson – Chairman and CEO

David Wyshner – EVP and CFO


John Healy – North Coast Research

Emily Shanks – Barclays Capital

Chris Agnew – MKM Partners

Neil Portus – Goldman Sachs

Chris Dougherty – Oppenheimer & Co.

Michael Millman – Millman Research Associates


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. Neal Goldner, Vice President of Investor Relations. Please go ahead, sir.

Neal Goldner

Thank you. Good morning to everyone and thank you for joining us. On the call with me are Ron Nelson, our Chairman and Chief Executive Officer; and David Wyshner, our Executive Vice President and Chief Financial Officer.

Before we discuss our results for the third quarter, I would like to remind everyone that the company will be making statements about its future results and expectations which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Such statements are based on the current expectations and the current economic environment and are inherently subject to 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 earnings release which was issued last night and our second quarter Form 10-Q, and our Form 10-K, and in other SEC filings.

If you did not receive a copy of our press release, it is available on our website at avisbudgetgroup.com. Also, certain non-GAAP financial measures will be discussed in this call and these measures are reconciled to the GAAP numbers in our press release.

Now I’d like to turn the call over to Avis Budget Group’s Chairman and Chief Executive Officer Ron Nelson.

Ron Nelson

Thanks, Neal, and good morning to all of you. While many of the people listening to this call probably spend a lot of time dissecting every word regarding the Dollar Thrifty situation, our strong third quarter results clearly illustrate that for the 21,000 Avis Budget Group employees around the world, it has thankfully been business as usual. Amidst the challenge and distraction that a lengthy M&A process necessarily involves, the store was being minded. We continued our focus on driving growth, profitability, and margins. We continued our important work on improving the rental experience at every customer touch point, and we continued to diligently pursue cost-savings and productivity opportunities that still exist within our infrastructure.

I do want to comment briefly on the Dollar Thrifty opportunity upfront so that we can then focus most of our time this morning on our business fundamentals. As you know, in July we submitted a bid to acquire Dollar Thrifty Automotive Group for $46.50 per share in cash and stock, and in September increased our offer to approximately $53 a share. On September 30th, Dollar Thrifty shareholders voted not to approve the proposed merger with Hertz, and Hertz subsequently terminated its merger agreement with Dollar Thrifty and withdrew its anti-trust application for the FTC.

On October 5th, we and Dollar Thrifty announced that we had agreed to cooperate to pursue anti-trust clearance of our proposed acquisition of DTG. We also affirmed our commitment to pursue an acquisition of Dollar Thrifty on the previously announced terms. Dollar Thrifty represents a substantial growth opportunity for our company, and our offer represents a premium evaluation of the Dollar Thrifty shareholders. Beyond that, there isn’t much to report. We continue to diligently pursue the proposed transaction. We and Dollar Thrifty have provided the FTC with literally millions of pages of documents and data. We believe several of our competitors, licensee and others, have also provided large amounts of requested information to the government.

The FTC is reviewing that information. And while we continue to have a regular productive dialog with the FTC, they have not provided us with a view as to whether, when, or under what condition they will approve our proposed transaction. We do believe it is appropriate for them to take the time to understand the fundamentals and competitive realities of the vehicle rental business. There are a significant number of details that cause our industry to differ sharply from others, and we continue to work cooperatively with the FTC to bring those details into clearer focus.

With that, we don’t intend to say anything else or to speculate regarding the Dollar Thrifty transaction on this call. So we’d ask you to refrain from asking any related questions during the Q&A.

Turning to our business, we’re happy to report strong third quarter results that reflect positive revenue growth, strengthening traveling trends, continued cost control, expanded margins, and increased earnings. I think the headline speaks for itself. We delivered our best quarterly bottom line performance since 2005 with adjusted EBITDA of $219 million, up over 30% excluding certain items. Year-to-date, our international EBITDA is up 31%, our domestic EBITDA is up 53%, and our truck EBITDA is up 114%, all on an adjusted basis. The risk of being immodest (ph), we think this growth is a significant accomplishment than an otherwise tepid economic recovery.

As we anniversaried the initiatives we undertook last year to step away from unprofitable or marginally profitable business, the market growth that is returning to the economy yearn to be reflected in our numbers as we said it would. We reported revenue growth of over 3% in the third quarter, our first quarter of positive revenue comparisons since mid-2008. In U.S. car rental, our pricing declined 3.7%, which in part reflects a shift in our business mix to longer rentals. Given that the longer length rentals tend to be more profitable, this is a trade-off we’re happy to make. In addition, our reported pricing was impacted by somewhat faster growth at Budget than at Avis.

We also need to take into account the very different comparison with last year’s third quarter when our pricing was up over 9% in order to get the complete picture. We believe the two-year comparison is the better measure, and with that, we maintained considerable price improvement, with price up over 5% overall versus the third quarter of 2008. Put that in perspective, our two-year increase of over 5% compares to a 2% decline by our largest public competitor over that same time period.

Domestic volume growth was up over 4% with year-over-year volume growth actually accelerating through the end of the quarter as we anniversaried last year’s actions and successfully captured available demand. October was up as well. The acceleration was most pronounced in our commercial business with commercial volume up 2% for the quarter but up 6% in September. We had a particularly solid quarter in our large commercial accounts with volume up nearly 6% for the quarter and up double digits in September. Commercial account retention remained well over 99% and we continue to win new accounts, particularly in the small business area, which tends to have a higher average pricing than other commercial segments.

Leisure volume grew 7% this quarter reflecting improved consumer confidence compared to last year and stronger overall travel trends. We also saw a good off-airport growth, the same-store volume up over 6%. When you look at our volume growth of 4% in total, it’s worthwhile to remember that the closing of certain unprofitable off-airport locations last year and turning Budget LAX back over to the franchisee cost us approximately two points to total volume, but were also profit positive moves. But even with that headwind, our volume growth was a few hundred basis points better than employments, which tends to be the historical relationship in a growing market.

The most significant news on the volume front are the new renewed and expanded agreements with the number of airlines, in particular during the third quarter and more broadly over the course of this year. As part of our longer term strategy, we have relooked at the revenue generation opportunities that we gained from co-market and even co-promotion relationships with third parties.

Our affiliations with organizations such as AARP, Costco, the Make A Wish Foundation, American Express, Fat Boys, and dozens of frequent flyer programs have long been a part of how we market our brands to likely renters, and we’ve taken action to expand our presence in these channels.

As you may recall, we began the year by announcing an exclusive agreement with the largest airline in Canada, Air Canada and a continued expansion of our agreement with their related marketing and loyalty organization, Aeroplan. This international relationship joins the already very successful existing relationship we have with the largest airline in New Zealand, Air New Zealand. Over the last three months, we have signed new, renewed, and expanded partnership agreements with American Airlines, JetBlue, Qantas, and Southwest Airlines. The American Agreement, we are the exclusive media partner in promoting Avis Budget and all of their venues and publications.

With Qantas, which is by far the largest airline in Australia, we will be the exclusive car rental partner in the frequent flyer path effective November 19th. These broader agreements will provide Avis and Budget access to millions of leisure and business travelers. Both domestically and abroad, it should provide incremental volume for years to come. We expect that these four agreements will generate additional revenue next year, best described as in the tens of millions.

In addition to growing our rental volumes, we continue to pursue opportunities to grow our revenue per rental. As we’ve noted previously, a key element of our earnings growth strategy has been growth in ancillary revenue. Our ancillary product and service revenue continue to expand in the third quarter, up to 2% on a per rental day basis compared to last year and up 15% over the last two years, all in a period of otherwise anemic economic growth. The improvement was driven by increased penetration of our product portfolio, in particular, emergency roadside assistance products and our eToll payment service as well the launch of XM Blast, a portable satellite radio offering.

We also had a good quarter in customer upsells, which not only improves the customer’s rental experience but enhances our margins in the process.

Ancillary product offerings were in a priority for us on two fronts, continued innovations in the products themselves and continued sharpening of the sales effort by our customer facing employees. We believe there remains more opportunity on both fronts. The launch of our company-wide CRM initiative this year is part of our customer-led service driven initiative. We will be able to personalize the rental transaction and target more closely the revenue opportunity of each customer by offering the right product to the right person at the right time, all with the desire effect of improving the customer experience in enhancing our close rate.

Moving to truck, our truck rental operations have directly benefited from the year-over-year improvement in the global economy and our efforts to control costs. One-way business, which approximates the third of our third of our truck revenue stream is the most profitable continues to grow. It is now in its eighth consecutive quarter of the year-over-year revenue growth.

Revenue, price and length of rental all showed single digit gains in the quarter. As long as unemployment remains high, we believe this segment will be driven by people moving to find jobs. The other standout performer in truck was commercial; also for accounting for about a third of the business, revenues were up 25% during the quarter as the business remains the beneficiary of the reluctance of companies large and small to invest in new fleet given the uncertainty of the recovery.

The soft performer in this group was our third segment, consumer rental or local market. This business tends to be correlated with the real estate market. So understandably, it is not performing as well as the other segments. But for truck in total, while our rental day volume is up year-to-date, our average fleet is down 9%, driving our utilization up 12% than the prior year.

With the business cycle turning and our year-to-date adjusted EBITDA margin exceeding 10%, we are reinvesting modestly, modestly with a capital M in truck rental, purchasing about 1,000 cargo vans in the second half of 2010, all of which are already committed to a few large commercial accounts.

We will also need to refresh a portion of our truck fleet next year. In the process, we will simply replace older trucks but we will continue our focus on reducing the overall fleet size to improve the utilization. This strategy should yield both brand and profitability benefits as demand continues to strengthen.

A word on international. Our international business, which represents 35% of our year-to-date EBITDA continues to perform well. Margins in north of 18%, we have leading positions in our core markets as we derived a significant amount of licensee revenue in the more than 60 countries where we don’t operate directly.

Our game plan is to fortify our strong position in countries like Australia, New Zealand and Canada where we operate directly. In each of these territories, we have significant if not exclusive agreements with the largest airline carriers in each market, which is an important marketing advantage. These markets also tend to have larger inbound volumes, which generate higher levels of ancillary revenue and in turn drives higher margins.

We are focusing on investing and reinvesting in initiatives to grow these businesses in a variety of ways by acquiring licensees where it makes economic sense, acquiring new customers through affiliation and marketing agreements, developing new markets, and strengthening our customer service and reducing costs.

I want to spend just a few minutes on fleet and the used car market. As we discussed in our last call, our fleet was tighter than ideal entering the third quarter, which caused us some profitable commercial volume and share of non-affiliated accounts. This was evident in the competitive comps in the first half and exacerbated by the fact that commercial was the largest component of market growth in the same period. And as we began the course correct over the summer and judiciously add fleet in late August in certain market, we saw marked improvement in net week and weekly volume, which contributed to the strong commercial growth we saw in September.

Going forward, we have to balance the trade-offs between utilization and revenue per unit to make sure we have the fleet capacity to capture all of the profitable volume available to us. In the growing market, we found that a singular focus on utilization tends to understate demand, the risks fleet being too tight. In this market, a balance between the two will drive the appropriate fleet levels.

We also began taking deliveries of model year 2011 vehicles and expect to have a much richer mix of cars. We are the first and currently the only major domestic car rental company to offer the new Chevrolet Cruise, which is not only very well pointed but has a high way fuel economy near 40 miles per gallon. We are also adding more hybrid vehicles to our fleet including the Toyota Prius and Nissan Altima. We will add BMWs and Mini Coopers in our fleet for the first time in 2011, we are looking forward to taking delivery of the full redesigned Ford Explorer. We have already started taking delivery of the brand new Jeep Cherokee. The Chevrolet Camaro and Corvette will also be back in the fleet again this year as part of our lineup with cool (ph) cars.

Several of these fleet commitments reflect the attractive trade-off of revenue per unit utilization. As we reported last quarter, we do expect our model year ‘11 unit fleet price to be flat to slightly down next year, despite having a richer mix of cars, which should deliver higher pricing.

Staying with fleet for a minute, the used car market was stable and strong throughout the third quarter, enabling us to achieve our normal seasonal defleeting while pocketing some modest car sale gains.

Our car sales continue to outperform our peer group at traditional auction (ph) channels including (inaudible) and we have expanded our use of alternative wholesales channels. We also recently partnered with the number of large multisite dealer groups, enabling (ph) them to source cars directly from our used car fleet. The one we are already active in the arena of online sales with over 30% of our cars sold online year-to-date, continue to look for new opportunities to reduce the number of days it takes us to sell cars as well as lower the expenses associated with the traditional sales channel.

As we mentioned in the past, we believe the generally strong used car market is likely to persist for some time. With a significant decline in new vehicle leasing and the sizeable defleeting of the rental car industry over the past two years, the supply of late model used vehicles remains lower than demand and we expect this imbalance to remain for the foreseeable future. This should support continued strength the lake model used car pricing over the next few years.

The car manufacturers seem to see the market the way we do. There is no doubt what’s causing the cost to program cars for model year ‘11 scenario (ph) relative to risk cars. This has enabled us to renew our fleet of attractive rates while modestly increasing our mix of program cars and maintaining the youngest fleet in the industry.

Just a few comments on non-cancellation fees before moving to our outlet. We continue to be pleased with the results of our tests and plan to expand the implementation albeit carefully and prudently. We conduct the unlimited test of non-cancellation fees on avis.com last quarter. We’ll continue to expand the test of this program in other channels to assess consumer and competitive reaction. For us, this is really more about efficient fleet management and being able to deliver exactly what the customer orders rather than viewing it as an additional profit opportunity.

Also, a word about a program that we had at Budget for some time that is now coming to Avis. Specifically, we’ll be launching the functionality to accept prepaid reservations on Avis.com later this month. We launched Budget prepay in 2009 and the results have been favorable, not only because we get paid earlier but because of the significant cost savings and utilization benefits associated with reduced no shows. In an era of consumer cost consciousness, we believe providing these pricing schemes for an absolute essential to capture the full range of consumer demand and we do expect this initiative will drive incremental volume at Avis.

To wrap up, we remain optimistic about the prospects for our industry and our company. Volume growth is positive and we continue to hold on to most of last year’s pricing gains. We have strengthened our fleet and customer mix and have intensified our focus on the rental experience to our customer led service driven initiative.

Preliminary October results are in line with our expectations. October has traditionally been a good month for both the commercial and leisure travel and this year held through the pattern. (Inaudible) volume was up 6% with pricing essentially unchanged from the September pattern though it did show improvement as the month progressed. And the (inaudible) points to continued good volume growth in both Avis and Budget in November.

It’s also important to highlight the cumulative effect of our cost reduction and process improvement initiatives, our focus on profitable transactions and now, the strengthening of demand.

Our adjusted EBITDA margin excluding items over the last 12 months is 7.2%, up over 400 basis points putting us clearly within striking distance of the 8% average we’ve spoken about. We are excited to be well on the path to returning closer to historical margins as we said we would.

More importantly, as we look ahead, we are increasingly confident that the difficult decisions we have made to reduce costs and focus on profitable volume as well as strengthening our customer relationships and growing ancillary revenues give us an opportunity for stronger margins and earnings than our historical averages.

The airline capacity data suggested employment (ph) growth should be around 3% over the next six months with commercial travelers leading the recovery. We certainly expect to capture our fair share of the available demand. We believe we’re still in the early stages of a multi-year upswing in the business, particularly since travel demand is still well below 2007 levels and only marginally above 2,000 levels.

As a result, we currently expect our results will continue to reflect the continued improved travel environment, lower fleet costs and the leverage of a dramatically lower cost infrastructure.

With that, let me turn the call over to David to provide some more details on the quarter and our full year outlook.

David Wyshner

Thanks Ron and good morning everyone. Today, I’d like to discuss our third quarter results, our fleet and our capitalization and liquidity as well as expand on some of Ron’s comments regarding our outlook. My comments will focus on our results excluding certain items. As Neal mentioned, these results are reconciled to our GAAP numbers in our press release.

In the third quarter, revenue increased 3% to more than $1.5 billion. Adjusted EBITDA grew by 33% to $219 million and margin expanded over 300 basis points. Net income increased 41% to $97 million and diluted earnings per share increased 20% in $0.78. For the fourth consecutive quarter, all three of our operating segments reported double digit adjusted EBITDA growth.

In our domestic car rental segment, our top line grew 2% reflecting a year over year increase in ancillary revenues. We kept most of last year’s increased pricing and also grew our rental volumes. Adjusted EBITDA was up $40 million for the quarter driven by higher revenue, ancillary revenue growth, the benefit of cost saving initiatives and a 7% decline in per unit vehicle cost. Fleet cost declined despite the fact that we recorded $23 million of car sale gains in the third quarter of 2009.

The decline in fleet cost in 2010 was driven by lower cost per model year of 2010 vehicles as well as the stability of the used car market. International revenue grew 10% year over year driven by a 4% increase in pricing and 3% volume growth. Excluding the impact of foreign exchange, revenue grew 3%, pricing declined 2% and ancillary revenues were up 7% per rental day. Adjusted EBITDA grew 11% year over year with half of the increase being organic and half due to a favorable impact from foreign currency. Operationally, we benefited from the growth in rental volumes and cost savings.

Truck rental revenue increased 5% versus last year due to a 1% increase in pricing and a 5% increase in volume. Importantly, pricing for one-way transactions was up 7% but overall pricing was negatively impacted by mix as we grew our commercial volumes significantly as part of our strategy to increase utilization.

Adjusted EBITDA increased 46% and margins expanded nearly 500 basis points, the sixth consecutive quarter of year over year margin growth primarily due to increased revenue, lower fleet cost, increased utilization, and our cost saving initiatives.

Regarding fleet, we have completed our negotiations with substantially all of our vehicle suppliers for the purchase of model year 2011 vehicles and we are pleased with both the pricing and availability of cars. We expect no single manufacturer to account for more than around 30% of our U.S. rental car fleet next year. And as Ron mentioned, our model year ‘11 per unit vehicle cost should be in line with or modestly lower than our model year ‘10 car. We expect to maintain a balance of risk in program cars with program cars continuing to represent approximately half of our fleet.

As we’ve said previously, program cars give us the flexibility to adjust our fleet quickly without the potential negative consequence of trying to sell a large number of vehicles in a short time period. It also enabled us to offer new and specialty vehicle such as large SUVs and convertibles without taking on the residual value rates of these models.

Turning to the balance sheet, our liquidity position remained strong. We ended the quarter with $623 million of cash and we had no borrowings under our $1.2 billion corporate revolver. We also had $1.4 billion of capacity under our vehicle-backed financing programs. So clearly, we have substantial liquidity.

Our results put us well within our covenant requirement. Our leverage ratio at September 30 was 3.6 times compared to a permitted maximum of 5.75 times. This also means that we have achieved our articulated target of less than four times corporate leverage sooner than we had planned. Our coverage ratio was 2.9 times more than double the requirement of at least 1.3 times.

In early October, we sold $400 million of high-yield bonds at an attractive 8.25% yield. We intend to use the proceeds of the offering to help fund our proposed acquisition of Dollar Thrifty, order repay outstanding corporate debt. We’ve also been active in the ABS markets. We renewed our Canadian bank facility for another year and in, Australia, we renewed our bank facility for two years. Domestically, we renewed our $2 billion vehicle-backed conduit facility and upsized it by $100 million, extending the maturity on half of the facility to two years while lowering the interest rate by about 100 basis points.

Also, as we announced last week, we closed a $700 million asset-backed bond offering, which effectively refinances the $600 million of firm ABS debt maturities that occur in 2011. The 3.2% weighted average interest rate on the new debt is more than 200 basis points below the rate of the debt it’s replacing, about a similar advance rate of more than 75%. Combined, we expect the lower cost conduit facility and the ABS debt offering to save us at least $20 million in vehicle interest expense in 2011.

Capital expenditures totaled just $16 million in the third quarter, and $39 million year-to-date. CapEx is expected to be $60 million to $70 million for full-year 2010.

We finalized the audit of the company’s 2003 through 2006 Federal tax returns during the quarter as expected and made payments to the IRS in conjunction with the audit, all of which were funded by our former Realogy and Wyndham subsidiaries. In connection with the conclusion of the audit, Wyndham reimbursed us $86 million in cash for certain tax attributes which we had not expected to be able to utilize until at least 2014. In clear, this was a significant positive outcome for Avis Budget.

Let me now review our outlook. The key elements of our strategy remain the same, striving for revenue growth, and intense focus on cost controls and profits improvement, a persistent drive for improved profitability, keeping fleet levels in line with demand, aggressively pursuing ancillary revenue growth opportunities, and refining and improving the vehicle rental experience we offer to our customers. We’ve seen a modest economic recovery this year which we believe is driving increased vehicle rental demand and volumes with a rebound in both commercial and leisure demand.

Based on our October results and reservation trends for the rest of the year, we expect year-over-year volume increases to continue in the fourth quarter. We also expect year-over-year pricing comparisons to remain challenging in the fourth quarter due to double-digit leisure price increases achieved last year. Just to remind you, we reported an overall price increase of 9% in domestic car rental in fourth quarter of 2009.

On the expense side, we now expect a 9% to 11% reduction in domestic per unit, depreciation cost for the current year a point better than our prior guidance. We have also narrowed the estimated range of incremental benefits in 2010 from our cost saving initiatives. We now expect these actions to provide an incremental $60 million to $70 million in savings for 2010 compared to 2009, much of which was realized in the first half of the year.

A cumulative benefit of the actions we’ve taken over the last several years is now approaching $1 billion, including about $480 million in savings in 2010. Of course, some of the cost savings benefits are offset by inflation on our approximately $2 billion non-vehicle related cost base. Finally, our 2010 GAAP tax rate is expected to be less than 40%. We expect full-year cash taxes to be $30 million to $35 million. We will likely become a partial Federal cash taxpayer in 2011.

We continue to be intensely focused on and excited about growing earnings and margins this year and beyond. The car rental industry is recovering from a cyclical drop. Volume is growing, company’s cost structure is significantly leaner than just two years ago, and our continued emphasis on profitable rental transactions, ancillary revenue growth, and fleet diversity, provides the opportunity to move margin levels above those achieved during previous economic cycles.

With that, Ron and I would be pleased to take your questions.

Question-and-Answer Session


Thank you. At this time, we are ready for the question-and-answer session. (Operator Instructions). Our first question; John Healy with North Coast Research, you may ask a question.

John Healy – North Coast Research

Question about I guess 2011, as we move into 2012, Ron, if you see vehicle financing coming down pretty dramatically as we’ve seen over the last couple of months with some of the deals that you’ve done, how do you feel about the industry’s commitment to discipline and commitment to maintaining tight fleets? I mean if I think about your comments, a couple of things I think that I pulled out of there is financing is cheaper, the OEMs are looking to give you some attractive terms on program cars. Do you think the industry has really learned its lesson and will continue to remain as disciplined as we’ve seen over the last 12 months?

Ron Nelson

I don’t think much has changed, John. If you look at fleets over the course of the summer and frankly into September and October where people tend to be over fleeted, virtually everyone was posting LOR restrictions sometime during the course of the week, which tells me that everyone is rightsizing their fleet, and that’s really the key to sort of keeping pricing in sync.

I think as volume comes back into the market, there’s probably going be a little jostling of price back and forth. But I think for the most part over the long run, as long as fleets continue to stay in sync with demand and pricing should be relatively stable. Maybe I’m an optimist about this, but I do think the last 24 months has changed the industry’s view of pricing in relation – I don’t see anything, frankly, in the last three months or nine months that would change that.

John Healy – North Coast Research

Okay, great. And Ron, I thought you mentioned that you said the Budget business did a little bit better than the Avis business this quarter. Would there be any ways if you could kind of give us some color on how each of those businesses performed from a transaction based standpoint?

Ron Nelson

Yes, we really don’t get into individual volumes by brand, John, but I will say that over the course of the summer the Budget brand did perform a couple of hundred basis points better in terms of transaction volume.

And actually days was probably a little more because Budget during the course of August and September was booking a lot of weekly business, really in the mid-teens in terms of a year-over-year gain. And I think that’s why you see the sort of the impact of pricing during the quarter as if we were getting a lot of weekly business.

John Healy – North Coast Research

Okay, fair enough. And then, just kind of a housekeeping question, I might’ve missed it. But did you mention what you expected overall company vehicle depreciation expense to decline this year, not just the domestic piece, but what you expected for all the business units?

Ron Nelson

We don’t. I do think the trends that you’ve seen so far this year will be there on a full-year basis, though, driven on the truck side primarily by a decline in the average fleet there.

John Healy – North Coast Research

Okay, thank you.


Our next question, Emily Shanks with Barclays Capital. You may ask your question.

Emily Shanks – Barclays Capital

Hi, good morning. I had a question about the cash balance. Is any of that posted as collateral under the vehicle-related debt?

David Wyshner

No, the cash balance is free and clear as of quarter-end. Sometimes during the quarter if we have a cash balance, we will use it to replace collateral as an interim use of cash that’ll save us some LC cost, but all of the $623 million of cash was free and clear and not posted as of September 30.

Emily Shanks – Barclays Capital

Okay, great. And then in terms of the pricing, I know that you said that you’re up against difficult comps, but can you give us a little bit more color on how we should think about that particularly versus some of your competitors that posted positive pricing during the quarter?

David Wyshner

Sure. I think it’s very important to look at the two-year pricing comps using 2008 as a starting point rather than just focusing on the year-over-year comps. And that’s why Ron highlighted the fact that on a two-year basis we were up five points, whereas others in the industry were sort of flat or down a bit.

And so I do think the two-year numbers are a very useful way of looking at things in the context of where our pricing is going to go. As I mentioned last year, our pricing in Q4 was up 9% versus fourth quarter of 2008, and that means that we do again have a difficult pricing comparison coming up in the fourth quarter.

Emily Shanks – Barclays Capital

Okay. And then my last question is just around the debt rates that you did subsequent to quarter-end. Is there a potential that you would come back to the debt markets to raise more funds for potential Dollar Thrifty acquisition or does that take care of it?

David Wyshner

The Dollar Thrifty acquisition probably would require additional funding compared to the $400 million we’ve already raised, and we have not yet decided what form that would take. But we would need additional funding to complete the Dollar Thrifty transaction.

Emily Shanks – Barclays Capital

Okay, so visiting the debt markets is still on the table then. Is that a fair assumption?

David Wyshner

That would be fair.

Emily Shanks – Barclays Capital

Okay, great. Thanks. Good luck.


Our next question, Chris Agnew with MKM Partners. You may ask your question.

Chris Agnew – MKM Partners

Thank you. Good morning. First question, I wonder if you’d be willing to break out domestic pricing that you saw in the quarter month-by-month. And then can you repeat the comments you made – I just want to make sure I took them correctly – on the pricing in October. I think you mentioned a sort of improvement at the end of October over September. Thanks.

David Wyshner

Yes, Chris, we’re not going to get in the month-by-month pricing. I think you’ve got the pricing for the quarter. And I think our comment was that the pricing trends that we saw in the third quarter and in September continued into October. And actually October got better as the month got longer, because as you know, October is traditionally a fairly strong month for us, because there’s both commercial and leisure volumes, and until fleets got tighter as the month went on and volumes grew.

Chris Agnew – MKM Partners

And just – I mean did you say anything on November? I mean does that – the October trend, does that continue into November, December, or how do they differ from?

David Wyshner

Well, it’s a little early for December. Just what we’re seeing, quite honestly, is commercial volume comes back into our mix, but the booking curve is pretty close in. And December is always kind of a screwy month, because of the Christmas holiday, and Thanksgiving, and more on all flow. So if I look at the res build right now, I think we’re seeing with maybe 8% or 10% of December reservations relative to last year in-house, so you really can’t draw any conclusions.

But November, the res build in November which I think actually is pretty good at least up through the Thanksgiving period is strong as it continues the patterns from September and October. And the pricing actually seems to be holding and really continuing the third quarter trends in terms of year-over-year.

Chris Agnew – MKM Partners

Okay, thanks. And then changing tack, can I ask about ancillary revenues? I know you had tough comp. I think last year you reported 13% growth at 2% this year. But I mean are we starting to see that max out on a day that you mention that you’re aggressively pursuing ancillary revenue growth. I mean can you just put a little bit of color around that, and what, and some examples of what the aggressive actions are? Thanks.

Ron Nelson

Well, I think part of it has to do to with the fact that, we started this initiative about 18 months ago and we went through the top 50 airports and did sales training, and then as we anniversaried the training issues, you don’t see the same kinds of increases that you did. We’re now moving in the markets 50 to 100. We have an initiative going on in the local markets to visit sales training.

And the things – every product in the portfolio has a life cycle, and while GPS is starting to sort of even out, roadside safety net is growing pretty nicely, XM is going to grow pretty nicely as we rollout more units, and we’re always thinking about some new innovations and products that we can introduce.

So I think the – until you see – until we come out with the another product that has the penetration potential as GPS’s, I don’t think we’re going to see the mid-teens kind of gains that we got last year. But we do think that we’re going to be able to continue to grow this particularly as we enhance the training smaller markets and –


Our next question, Neil Portus with Goldman Sachs. You may ask your question.

Neil Portus – Goldman Sachs

Thanks. Good morning. You talked about not pursuing unprofitable business. I just want to ask how we should expect that to flow through the volume and pricing results in the coming quarters. This quarter, for example, volumes were up and pricing was down. Should that trend start to reverse somewhat going forward, given your increased focus on profitable business?

David Wyshner

Neil, I think the really way to think about the focus on profitable volumes is a continuation of the discipline we put in place. A lot of the actions we took to step away from unprofitable transactions were taken in the 2009 timeframe. We’ve anniversaried substantially all of them. And as a result, we are expecting our volume trends to return back to being more aligned with the market. And I think that is actually what – which is on our third quarter numbers as well, as we have now anniversaried most of the actions to step away from unprofitable business.

We continue to focus on this area though and refine our analyses, because I do think there are opportunities for us continue to prune it little bit, as well as to look at areas where we were perhaps too aggressive and ended up losing some profitable transactions when we stepped away from unprofitable transactions.

And so as we become more and more knowledgeable and sophisticated in this space, we’ll have opportunities I think to step away from certain pieces of unprofitable business and grow our presence in more profitable areas. But I think net the two are going to have, shouldn’t have much of an impact on volume. But it is going to be continue to be an area strategic focus for us.

Neil Portus – Goldman Sachs

Okay. And just one more. As you’ve increased your announced cost savings programs throughout the year, what are some of the operational areas where you’ve been able to sort of drive that increase, and is there more room to go and beyond what you guys have announced?

David Wyshner

Let me work backward. I do think there are additional opportunities, and as we put together are 2011plans for performance excellence process improvement initiative, we’re actually excited about the opportunities that continue to exist. Most of our savings end up being tied to our field locations and I think that’s simply a factor of the math associated with that being where most of the costs are. And when we find ways to save money at a given airport or off airport location, we can replicate those savings hundreds of times over.

The savings tends to be in the productivity and efficiency areas, particularly related to people and staffing, and how we utilize our folks, and that continues to be a big area of what we’re looking at, and particularly for how we move vehicles around both cars that need to be moved as well as items such as busing that we provide in certain airports. How we manage the efficiency and staffing levels for those sorts of activity has continued to be a key source of savings for us.

But it really runs throughout our entire P&L and we continue to look for savings in the maintenance and damage areas which have been a big source of savings so far this year. But between staffing levels, and maintenance damage, and fleet maintenance, we see a significant amount of savings.

Neil Portus – Goldman Sachs

Okay, great. Great, thank you.


Our next question, Chris Dougherty with Oppenheimer & Co. You may ask your question.

Chris Dougherty – Oppenheimer & Co.

I just wanted to follow up a little bit on a non-T&M revenue. I think you answered a lot of it. But if I look at the international one, you’re actually down quarter-over-quarter. Is that seasonality or FX rates?

David Wyshner

Just give us a second to look at something. And in international, excluding the impact of foreign exchange, as I mentioned, ancillary revenues were up 7% per rental day. The focus continues to be there across all three of our business segments. Domestic truck and international, on finding opportunities to grow international – grow ancillary revenues and to train our folks to be more effective at counter sales, sales, and sales through all of our reservation channels as well. And that as Ron mention will continue to be the case.

Ron Nelson

Yes, the big opportunity internationally, frankly is up sales. The penetration of insurance products is actually pretty good. If you look at the rental day of dollars that we generate from ancillary revenue internationally, it’s about 20% to 30% higher on average that is domestically, because of the insurance penetration.

Where they don’t match the domestic achievement is in up sales. And so, we’ve put up particular focus this year on pushing the 3MDs of those big territories to focus on up sales and get their numbers up approximately in the domestic, so there is a good opportunity there. But again, it’s on a relative basis. It’s going to be about a third of the size of domestic just given the absolute size of the markets were.

Chris Dougherty – Oppenheimer & Co.

And when you think about, I guess, the actual penetration, have you seen a shift in ancillary products from commercial account? Are there – I had heard that there were some restrictions in terms of what was allowed for some commercial account. So I was wondering whether that’s come back and if you’re willing to spend for the commercial side.

David Wyshner

I don’t think we’ve seen any change frankly in commercial accounts willingness to purchase ancillaries. It’s either – for the most part, it’s either in their profile and it’s been approved by the travel manager (inaudible) it’s not, and I would say that’s really what drives the penetration rates in those accounts. But I haven’t seen a lot of changes in the commercial accounts willingness to the volume.

Chris Dougherty – Oppenheimer & Co.

Okay, thank you.


We have time for one final question. Michael Millman with Millman Research Associates, you may ask your question.

Michael Millman – Millman Research Associates

Thank you. I guess some related fleet questions. Maybe you could discuss the economics that you’re seeing in program versus risk, and do you think that you reach a different conclusion because of different mix possibly? And regarding fleet, just gives us what the year-over-year ending September 30th fleet was regarding fleet? And is fleet savings part of your cost savings numbers that you give us? Thank you.

David Wyshner

The answer to the last question Mike is no. The savings on fleet are not part of the cost savings preview. I don’t know that anybody in the industry sees any difference in fleet costing. We look at the – it really comes down to a tolerance for risk and flexibility. I don’t think our mix is a lot different than – versus they actually have more leisure than we do.

We tend to be a little more commercially oriented which tends to be more peaky. But more leisure would just suggest that you’re actually going to have more of a total fleet peak over the summer months, so the flexibility would be just as important to them as it is to us. But we’ve seen the pricing spread narrow between program and risk particularly in the model year ‘11 fleet prices.

We actually went into the year thinking that we were going to up our risk car mix into the 60% or plus risk and balance program. But with the improvement in pricing, we just felt that there wasn’t enough incentive to give up the flexibility. So we essentially kept our risk in program next to same for most to the model year ‘11 – for all of the model year ‘11 buy that we’ve done this far.

And then, lastly, with respect to the September fleet, it was – the fleet in September was generally consistent with the up 5% that we had for the quarter as a whole give or take a point of two.


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

Ron Nelson

Thanks, operator. And then, thanks to all of you for your support of the Avis Budget Group. We do feel very good about our business. Volume growth has returned, we’re holding most to last year’s pricing gains, we continue to find new opportunities for cost savings, and our model year ‘11 fleet costs look good.

We’re focusing our efforts on improving our customer’s rental experience, building brand loyalty with our customer led service driven initiative, and we’ve bolstered our revenue generation and customer acquisition capabilities, assigning several significant co-marketing affiliations.

As a result, we remain optimistic about where we’re headed. David, Neal and I will be presenting at a number of investor conferences this month, we hope to see you there. We also look forward to speaking with you in February about our fourth quarter progress in 2011 initiatives. Thanks again and we’ll talk to you soon.


This concludes today’s conference. You may disconnect.

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