Greetings, and welcome to the Avis Budget Group’s Second Quarter 2019 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce your host, David Calabria. Please go ahead, sir.

Good morning, everyone, and thank you for joining us. On the call with me are Larry De Shon, our Chief Executive Officer; and John North, our Chief Financial Officer. Before we begin, I would like to remind everyone that we will be discussing forward-looking information that involves risks, uncertainties and assumptions that could cause actual results to differ materially from such forward-looking statements and information. Such risks, assumptions, uncertainties and other factors are identified in our earnings release and other periodic filings with the SEC as well as the Investor Relations section of our company website. We undertake no obligation to update or revise our forward-looking statements. Our comments today will focus on our adjusted results. We believe that our financial performance is better demonstrated using these non-GAAP financial measures, which are reconciled from the GAAP numbers in our press release and in the new investor presentation also available on our website. With that, I’d like to turn the call over to Avis Budget Group’s Chief Executive Officer, Larry De Shon.

Thank you, David, and good morning, everyone. Yesterday, we reported a record second quarter revenues of $2.3 billion, driven by a 2% increase in rental days, a 2% increase in U.S. rental car pricing and a $6 million increase in ancillary revenue year-over-year. Along with higher revenues, we had an 8% reduction in per-unit fleet cost and a 70 basis point improvement in fleet utilization. We generated adjusted EBITDA of $175 million, a 9% improvement over the second quarter of last year or 16% improvement in constant currency. We achieved all of this while still improving our Net Promoter Scores by 990 basis points in the Americas and 650 basis points in International for the quarter compared to prior year. We continued our strategy to grow profitable revenue, while investing in mobility initiatives to spur innovation and to unlock incremental profit opportunities. This morning, I will provide an overview of our results in the Americas and International segments, discuss some of the progress we have made with innovation and mobility initiatives and then give an update on our outlook for the summer and the remainder of 2019. Continuing the trend we have experienced for the last several quarters, the Americas delivered strong results with margin expanding more than 250 basis points and adjusted EBITDA growing $45 million compared to the prior year. The biggest contributor to the outperformance was a 10% reduction in per-unit fleet cost due to robust used vehicle values, our growing development and use of alternative disposition channels and the effectiveness of our proprietary fleet management system that optimizes vehicle purchase and disposal decisions. We are beginning to operationalize our mileage optimization initiative using technology and vehicle connectivity to more effectively manage vehicle usage, reduce fleet cost and deploy our Right Car, Right Customer rental experience. We…

Thanks, Larry, and good morning, everyone. My comments today discussing changes in revenue per day, pricing and per-unit fleet cost will all refer to changes in constant currency or excluding exchange rate effects. My comments will also focus on our adjusted results, which are reconciled from the GAAP numbers in both our press release and investor presentation. I’d like to start with an overview of the second quarter for the total company. As Larry mentioned, we had a strong quarter. We ended with a record $2.3 billion of revenue, which included a $46 million headwind from currency and 2% higher volume. Our overall per-unit fleet cost were 8%, while our vehicle interest expense increased by $10 million. This resulted in our adjusted EBITDA increasing by $14 million to $175 million in the quarter after a $13 million adverse impact from foreign exchange movements. Moving to the Americas and excluding exchange rate effects. Revenue per day was up 1% compared to the prior year with a 2% increase in volume leading to an overall positive revenue impact. As Larry mentioned, ancillary revenue had a $6 million increase, which was attributable to growth in small business rentals and our revised Rental Sales Agent Incentive Program. With the eighth straight quarter of year-over-year growth, leisure pricing continues to grow with help of our revenue management system. Along with strong ancillary performance, leisure pricing help increase U.S. rental car pricing by 2% in the quarter. We saw growth in both volume and pricing within our marketing and association partner channels with our major partnerships performing well. Per-unit fleet cost decreased by 10% as we continue to utilize alternative disposition channels to take advantage of strong residual values. We continue to be focused on the growth of our alternative disposition channels, particularly our direct-to-consumer sales.…

[Operator Instructions] Our first question today is coming from Chris Woronka from Deutsche Bank. Your line is now live.

Hey, good morning guys. I was hoping maybe talk a little bit about the opportunities you see on the delivery front using your fleet. I know you still have the budget truck fleet and you’ve done some acquisitions overseas. Can you talk about how big of an opportunity that can be for you?

Hi, Chris, it’s Larry. I think it’s actually going to be a pretty significant opportunity for us since we’re going forward. As you can see, we’re developing a lot of other use cases and new partnerships to take advantage of our fleet, particularly our Connected Car fleet. We have a Fetch pilot going on with Budget Truck, which allows people to rent trucks seamlessly in a self-service mode. We have in a few locations for the pilot test, but it’s an indication of how different use cases are developing out there, particularly for this last mile delivery as well. So, as we look at some of the partners that we’re working with and others that we’re discussing opportunities, but I do think that there’s a potential for significant amount of business in the future as it relates to this kind of delivery activity both on the car side as well as the truck side.

Okay. And just as a follow-up. As you look at the different possibilities for capital allocation between, I guess, share repurchase, deleveraging, acquisitions and kind of reinvesting in the business or growth initiatives, how do you look at those different buckets right now? What would make you potentially pivot towards one or the other?

Hey, it’s John. Good morning. I think our philosophy to capital allocation has been pretty consistent. It’s a balanced approach. Over the past four years, we’ve split our capital allocation between CapEx or investment in the business. We bought back a significant amount of stock, like almost $1.5 billion worth. And then we’ve done a number of acquisitions, especially internationally and then also picking up a number of our licensees in the Americas. So, we’re capitalists at heart. We’re looking for the best return at all times and that’s where we’re going to direct the capital. So – and I would say that it continues to be in flux. I would also point out that this morning, we increased our share repurchase authorization by $100 million. We now have over $250 million available to repurchase shares and we’re prepared to come in and buy stock, and we think that’s the highest return or if there’s a compelling acquisition, we’ll look at that. But I think first and foremost, we’re going to continue to invest in the business, and these mobility use cases, we think are just really the tip of the iceberg get started here.

Thank you. Our next question today is coming from Brian Johnson from Barclays. Your line is now live.

Hi, this is Jason Stuhldreher on for Brian. Just a quick question around the guidance. So vis-à-vis the top-line guidance you reiterated, as we lowered the RPD outlook in the Americas, I was just wondering, is there any other offset either in International or maybe that you’re seeing in volume and maybe it wasn’t implied in the – in those other revised metrics that might cause an offset to revenue, allowing you to reiterate the range? Or should we just assume maybe the midpoint of that range might be a little lower?

Yes. This is John again, good morning. I think we’re comfortable that we’re within the range. Maybe, I guess to your plan, I don’t want to call out anything else specifically. I think the two areas we thought were probably worth adjusting was just a slight decrease in RPD and then, obviously, a pretty significant change in our per-unit fleet cost per month based on what we’ve seen so far year-to-date. So I think – we still think we’re going to fall revenue range we gave within your own estimates or modeling work. If you wanted to bring down your revenue estimate, I think, that’s your call. But I think we don’t see anything that indicates we’re going to have a big departure from where we expected to be in overall.

Okay, thank you. And then just one follow-up, maybe a longer-term question, I think it was a very exciting announcement around the Otonomo partnership. Should investors be thinking in the next, call it two or three years, any material incremental benefits from revenue through data monetization efforts? And if so, is there any way to sort of frame up what the potential revenue benefit could be?

Jason, I think it’s early stages yet with our Otonomo partnership. We are getting revenue stream coming in now from them. We have signed with – they have signed with a couple of customers that will be using our data. Obviously, as our Connected Car fleet grows, that will provide even more data opportunities into Otonomo that they can aggregate with other car data that they’re getting from other suppliers of this data. So I do believe that there is a lot of upside potential here. How much at this point, I’m not really willing to go out and say, but I think we just need to let the partnership develop, get the cars connected and then, over time, we can see the demand for that kind of data. But I do think it will be – over time, it should be fairly significant.

Understood, thank you.

Thank you. Our next question today is coming from Derek Glynn from Consumer Edge Research. Your line is now live.

Yes, good morning and thanks for taking my questions. Can you provide additional details around the Uber partnership? Are there any material differences with the Lyft partnership program? And your expectations for how large that ride-hailing fleet and the expected contribution from that program in 2019 are looking out to 2020?

Yes. This is Larry. First of all, I say that, now that we’ve had some experience with Lyft and we’ve got over 3,000 cars now on rent. We’re pleased with what we’re seeing, so we have taken some time to take a look at the profitability of this business and how mileage and damage and so forth has been performing. We do use connected fleet so that we do monitor the fleet, and we have the ability to make sure that we can monitor the mileage on it and so forth to protect the asset value of the fleet. We only do weekly rentals, so we have an opportunity to review it at the end of every week. So I think we put it in the right kind of parameters around it to make sure that we are pleased with the results of it. So far, we’re pleased with the results. We want to continue growing it and we’re planning to continue to grow with Lyft on a number of airports – or a number of STD locations now with Lyft and we’ll continue to grow with them. And the Uber business will be, I think, we’ll follow pretty much the same parameters, the same guidelines as we go forward. So over time, between both of them, I don’t see any reason why this wouldn’t be in the tens of thousands of cars over time as we continue to roll out the network for both companies.

Okay, Great. And then as it relates to the recent $400 million notes offering and the subsequent redemption of a portion of those 20-23s. John, can you just speak to the rationale behind those transactions? And then also how are you thinking about the ideal leverage ratio for the company going forward?

Thanks. This is John. I think what we saw was a nice opportunity to take out a piece of the $675 million notes that were due in 2023. One of the things that was most exciting for me when I joined the company about four months ago was that we really had a very well-thought-out capital structure and I think the company’s historically done a really good job of managing maturities and making sure that we’re not sort of sitting there with a gun to our head, having to do something. And then I think this is a great example of us opportunistically paying about 1/4 point more on that $400 million relative to what we retired by getting an additional four years of duration, which I think is a pretty good trade, particularly where kind of rate environment is today. I think the other thing it accomplished is it really knocked down the size of that one tower. So $675 million, I think, frankly, was from David Calabria and my perspective, a little bit higher than we would like. We would like to keep them just a little bit more manageable, and so this gives us the ability to put $400 million out there and then leave the $275 million, which is a much more manageable size for the 20-23s. So overall, I think, the execution was good and we were just able to take advantage of that, a little blip in kind of the rate environment and put together a pretty compelling transaction. And we’ve been waiting about a month or so to get that done and when rates finally came in, we launched in at the same day close. So it was all pretty easy. In terms of your question around leverage, we’ve talked a lot about…

Thank you. Our next question today is coming from David Tamberrino from Goldman Sachs. Your line is now live.

Yes, great. Good morning, Larry. Good morning, John. Utilization looks like it improved pretty nicely year-over-year in Americas and then also within International segment. How much of that can be driven by just improved turning of the vehicles and operations versus the Connected Car fleet?

It’s a – this is Larry De Shon, David. Good morning. It’s a combination of a lot of initiatives that are going on in the business to kind of drive utilization. First of all, there’s a number of use cases that we’re developing in the business that really go for a longer length of rental type of transaction. So, it’s a revenue per transaction play versus the revenue per day play. And as those use cases grow in numbers, that will continue to help utilization. Also the Connected Car fleet is helping us shave time off of – idle time off of the fleet, and that’s whether it’s just an overdue – getting an overdue back faster, a couple days faster than we normally would if it wasn’t connected I think really matters. Also our alternative channels is really helping us shorten the length of time to sell for our fleet. And the team has been really aggressive in managing the utilization this past first quarter and into the summer and taking advantage of opportunities to whether it’s in the retail market to sell cars where they think it’s the right thing to do based on the data analytics that are coming out of the company at this stage. So, there’s a number of initiatives going on that continue to really, really make the fleet work harder and I think Connected Car will be the ongoing technology that will allow us to continue to find opportunities in the business to drive some efficiency that we’ll continue to improve that as well. So I’m pretty excited about what Connected Cars enabled yield for us so far in this area.

Got it. And then as a follow-up, there has been a couple of questions on ride-hailing, want to get your view on the profitability per unit of one of those vehicles being cascaded down versus your typical on-rent to leisure first 18 months vehicle versus, I guess this 18 to 36-month year-old vehicle that’s going to the ride-hail side.

Yes. This is John. I think a couple of things and you touched on the key. The first is, that this is really about extending the length of the vehicle that we’re going own, right? So this is taking a car that would be at the point of being de-fleeted and really coming up with an alternative use for it. And it’s the flatter part of the depreciation curve. So I think we’re pleased with where the rates are. I think we mentioned in the prepared remarks that we’ve going to look at both utilization, mileage accrual and also damage, and everything seems to be within tolerances. And we saw a business case where, you know, this was profitable, and we think, as Larry mentioned, a couple of questions ago, we think this can grow into the tens of thousands. And so I think it’s just another opportunity for us to use our fleet in different ways. And really this was the underpinnings of what I saw when I joined the company, which I think that there are multiple use cases and those use cases are changing and this is a great example of how we’re going to go and pivot our fleet to unlock new opportunities to grow revenue and I think the financial econometrics make sense for us.

[Operator Instructions] Our next question is coming from John Healy from Northcoast Research. Your line is now live.

Thank you. I wanted to ask a little bit more about what about the bright spot was in the quarter on fleet cost. The initiatives that you guys have been working on for a while there. How much more tailwind is there on those initiatives? I think you said 61% of the cars you sold in the quarter were through alternative channels. Where do you think that number can get to ultimately and you’d be comfortable with? And can these tailwinds potentially cause 2020 fleet cost to maybe not that different than what you’re experiencing this year in 2019?

I think, look I think we’ve got a lot of headway – a lot of runways still in front of us John, on the alternative disposition channels. So we’re at 61% and that’s up from 52% same quarter last year. Still a significant amount of that is direct-to-dealer, which is giving us about $450 benefit per car that we sell direct-to-dealer versus auction. And we have grown direct-to-consumer significantly, but we have a long ways to go direct-to-consumer. So even within that 61% of alternative channels penetration, we can change the balance of how we’re selling within those channels, within the alternative channels. So the more that we can continue to sell direct-to-consumer, which we more than doubled what we saw in the quarter where we sold direct-to-consumers last year, and the more that we can continue to grow that, that will give us over $1,500 benefit for the car versus $450. So, not like and you take a 61% higher on every single month we continue to grow that penetration of alternative channels. You can change the mix inside the channels. Those benefits are still significant that are out in front of us. So, I’m not sure exactly what number the alternative channels could be. I’m sure we’ll always be in the auction market at some percentage, but I think we have a long ways to go overall for the 61% to grow and then we have a big opportunity in the mix as we continue to roll out more retail locations and develop each one of those retail lots.

Great. And then just any perspective that you might have, Larry, just in terms of how the July season seems in terms of just leisure travel in the U.S. and have the competitive dynamics been more stable or rather unstable?

Yes. I would not characterize it unstable at all. In fact, July will be our largest leisure volume month ever in the history of the company. So we have very strong volume in the month of July, which we’re very pleased at. Northeast seems to be a bit weak. So we are seeing just overall the industry revenue to the airports as we’ve been watching the Northeast pretty much all year, continues to be a little sluggish. We feel like there’s not as many yielding opportunities in the month of July that we would normally want to see, but it’s nothing critical, but it is something that we did notice as we went through the month. So, volume is really strong, leisure volume is particularly strong. We are seeing corporate volume turnaround. We had a good corporate volume month and it’s nice to see corporate coming back and particularly small business is up significantly that in the second quarter, and we continue to see that from a volume perspective. So, I would say yielding opportunity side is much, but overall volumes very strong and leisure, just booming.

And I hate the pinpoint on those questions, but when you say the yield opportunity was inside of the range you gave for revenue per day for Americas or would it be softer year-over-year?

Yes. This is John. We brought down the RPDs. You saw about half a point on the low end. So from up 1.5 to a flat basically and then on the upper end, I think, were up 2.5, we rounded in the 1.5 and we were within the range.

Thank you. We’ve reached the end of our question-and-answer session. I would like to turn the floor back over to management for any further or closing comments.

Thanks. To summarize, I’d say we had a strong second quarter despite the competitive pressures we’re facing internationally, continued higher leisure pricing in the Americas, lower per-unit fleet cost, combined with the shift in rentals through our dot-com channel have enabled us to expand our margins by more than 90 basis points in constant currency. We have made significant progress in key strategic initiatives in the second quarter and remain focused on improving our profitability. With that, I want to thank you for your interest in our company.

Thank you. We reached end of our question – we reached end of this teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.