Greetings, and welcome to Avis Budget Group's Second Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Mr. David Calabria, Senior Vice President, Corporate Finance and Treasurer for Avis Budget Group. Thank you. You may begin.

Good morning, everyone, and thank you for joining us. On the call with me are Brian Choi, our Chief Executive Officer; and Daniel Cunha, our Chief Financial Officer. Before we begin, I would like to remind everyone that we will be discussing forward-looking information, including potential future financial performance, which are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from such forward-looking statements and information. Such risks and assumptions, uncertainties and other factors are identified in our earnings release, and our periodic filings with the SEC as well as the Investor Relations section on our website. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results, and any or all of our forward-looking statements may prove to be inaccurate, and we make no guarantee about our future performance. We undertake no obligation to update or revise our forward-looking statements. On this call, we will discuss certain non-GAAP financial measures. Please refer to our earnings press release, which is available on our website, for how we define these measures and reconciliations to the closest comparable GAAP measures. With that, I'd like to turn the call over to Brian.

Thanks, David, and thank you to everyone joining us today for our second quarter earnings call. It's great to be back and to have the opportunity to regularly connect with our investor community. Let me start by introducing Daniel Cunha, our new Chief Financial Officer, who joined us on July 1. Daniel started his career as a management consultant, became an investment professional in private equity, and finally settled in on the operational side as the CFO for 2 companies prior to joining Avis. He is a strategic thinker with real operating chops, and we're thrilled to have him on the team. Daniel is less than a month in, so for the analysts on this call, please don't scare them off during Q&A. We have high hopes for him here. We're taking a slightly different approach with these calls going forward. You may have noticed; we issued a financial supplement alongside our usual earnings release yesterday. That document includes the key highlights and financial details we would typically cover during this call. You all know the format we followed in the past. This segment grew this much for an x percent increase. That line item moved slightly from here to there. But let's be honest, you can do the math. You don't need me to go through a roll call of data points. There's a better way for us to use this hour. So today, I'd like to elevate the conversation. Let's move beyond the myopic month-to-month trends and instead focus on where we're taking Avis Budget Group. What opportunities are we prioritizing? Where are we investing resources? How does this all fit into our broader strategic vision? These are the questions that truly determine whether a company is expanding its moat or simply treading water. To be clear, we…

[Operator Instructions] Our first question comes from the line of Adam Jonas with Morgan Stanley.

First, Brian, I love the new format. Great job. I wish more companies did it. I really hope they're listening, please do that. Also, I thought the half-eaten granola bar was like a free gift, so I'm going to miss it if you clean it up too much. Two questions, Brian. First, the Dallas Waymo agreement, can you confirm whether this was the result of a competitive process, whereby Waymo considered other fleet and fulfillment partners? And I'm curious who came to who first? And I got a follow-up.

Adam, thanks for the kind words. I really appreciate it. With the Waymo partnership in Dallas, I can't speak for Waymo. We at Avis have been in discussions with multiple AV parties. I can only imagine that Waymo having had previous partnerships before have been in discussions. So I do think that both parties went into this eyes wide open considering the playing field.

Okay. And just, Brian, if you put on your really long-term hat, I'm thinking out 10 to 20 years from now, what's your vision for Avis Budget's business model, how do you -- how would your revenue and operational model have evolved? And just kind of along those lines seeing where you see the surface area evolving and expanding with autonomous machines and your ability to service them and maintain them.

Yes. Sure. I mean this is something that we obviously give a lot of thought to. Today, tomorrow, going forward, I really do think that the beating heart of the business is what we do today. It is actually providing a mega fleet management, which is providing the highest utilization, keeping the lowest number of unrentable cars in our fleet and providing a high-quality service to our customers. That's what we do. We do it today in the rental car space. We're going to continue doing it in the rental car space going forward. But in the future, in this autonomous world, as we kind of utilize the core skill set that we've built across 75 years, over 75 years of history, we think that we can expand our footprint and our sphere of influence in this mobility ecosystem. So it starts here with kind of autonomous ride-hail. Like I said in my prepared remarks, a lot of the core competencies that we do on a day in, day out basis, very transferable to autonomous ride-hail. And as we said in our press release, Dallas, like you said, is the start. We expect to expand this to other cities, and we expand -- we see a good long runway in that. Over time, like I said, autonomous vehicles is touching, like I said, the medius part of the mobility ecosystem, which is vehicle miles driven. That opens up a lot of other areas that we can play in as well in terms of -- in terms of expanding our horizon. So right now, like I said, core of the business is the rental car business. But as the years progress, I think we can expand our footprint.

Our next question comes from the line of Chris Woronka with Deutsche Bank.

Brian, welcome to the seat and also welcome to Daniel. It's a slight follow-up on Adam's question maybe asking it in a slightly different way, which is if you think about this first partnership with Waymo and Brian, I just heard your comments about what you -- longer term, how it might evolve, it kind of shorter term, I'll say, next 3 to 5 years, how do we think about the bandwidth you have to do more partnerships like the one you announced with Waymo, but also potentially other things? And how do you kind of fit your existing infrastructure into that? And what kind of incremental investments are you willing to make? And how do you internally kind of measure the ROI on these businesses? And then I have a follow-up.

Yes, sure. Chris, I think we have a lot of bandwidth to take on future partnerships, like I said, with Waymo. This is the first of what I hope is many cities. And in order to do that, we are going to have to put our balance sheet to work. That's something that we're not shy about doing. What I do want to be careful of is that we are not going to take our eye off the core part of our business, which is rental car. We want to make sure that partnerships that we do are thoughtful, that they're deeply integrated and that they're long-term. We're not here to just put out a bunch of press releases and partner with a bunch of people. We are in discussions with many people, but who we choose to partner with, we're going to make sure that we do it in a thoughtful way, in a true partnership, where a 1 plus 1 equals 3. So that's kind of how we're looking at it.

Okay. And then going back to the Avis First division, which I think is really differentiated for now at least, is there any change to how you think about fleet on that? I mean I know that one of the tenants of it is you're going to have the newest cars in here. Does that -- in terms of your fleet plan for, say, next year, does that make you do more larger and premium vehicles? Or is this just kind of reallocating within what you had planned anyway?

Chris. So with regards to Avis First and the fleet, one thing that I do want to point out that with the difference between Avis First and I think other offerings that have been out there is that it's not just about the car. Yes, the car is an important aspect of it, and we're going to make sure that the right car, a premium car is there for our Avis First customers. But when you think about first-class for an airline, it's not all just about the seat. It's about the whole experience, and I think that's what we're building from soup to nuts, just reimagining the whole customer journey through that lens. But to answer your question, yes, obviously, the car is a big part of that. And how we're in-fleeting cars or how we're participating with in our feet negotiations this year takes that into mind. We are going to consider kind of more premium vehicles, but we already have a lot of these premium vehicles in our fleet. This isn't about just like luxury where it has to be some German engineered Porsche or something like that. For us, I think premium in at Avis First can be a Jeep Cherokee. But we want to make sure that it's the newest model year that it is a very, very low mileage. Right now, it's kind of been a random distribution at times of who gets that like brand-new car. Right now, we're just trying to segment our business a little better to offer that product to the customers that are willing to pay a little bit more for that premium service.

Our next question comes from the line of Dan Levy with Barclays.

Brian, congrats on starting the new seat. Dan, welcome. If we could just -- sorry, go back to perhaps the more myopic part of the results for a second, just the guidance. And maybe we could just unpack some of the different trends. Perhaps, team, if you could just talk to the implied second half, the puts and takes between DPU and RPD, where it seems like DPU is significantly better, but it seems like there's some offsetting effect in the guidance for the second half, whether it's from RPD or whether it's from cost. So maybe you can just talk about the puts and takes there in the implied second half guidance of $900 million to $1 billion?

Sure. Dan, let's start, I'll answer your myopic question with a high level. Let's start with the macro-overview here. So kind of what we're seeing in terms of RPD isn't all that different from what other participants in the travel industry are seeing. I think demand is firming up post the passage of the big, beautiful bill. For us, leisure is stronger than commercial right now, and pricing is more challenged than volume. And this is true in PRASM for airlines. It's true for like RevPAR for hotels and RPD for us. But we do think that there are signs that things are firming up for the summer and then think summer is off to a good start. I think one of the reasons for that and kind of why you're seeing some of these issues on the DPU side, where I think you may have expected slightly stronger DPU maybe this quarter and in guidance is that we're dealing and having to navigate with 2 big issues here. That's tariffs and recalls. So let's just start with tariffs. The uncertainty around auto tariffs, of course, that's lifted the used car market. That's been a clear benefit. And when you look at the asset base, the vehicle asset base that we have on our balance sheet, like it is meaningful. But I want to note, we're not changing how we account for gross depreciation at this time. We just took a write-down at the beginning of the year. So Dan, you better believe we're going to stay conservative on this front. So if you keep that gross depreciation constant, the only way to harvest used car gains is by selling the older model year vehicles. And to do that, you actually have to in-fleet the new model year vehicles, and…

That's very helpful. As a second question, if we could just talk about the AV strategy. And specifically, we see you're playing for a very large TAM. But I think what's maybe unclear to some folks is perhaps the type of revenue model here. So maybe you could just give us the parameters roughly, not just now, but in the future of what the revenue type model looks like? Is this on a per vehicle basis? Are there other services involved? And does this eventually go down the route -- one of your core competencies is acquiring and disposing vehicles. Is that eventually something that gets factored in here? I mean I realize that's way down the line, but just give us a sense of the type of revenue model here on the AV side.

Yes, sure. Dan, I appreciate the question, and it is exactly what I'd be asking if I were in your shoes. So I'd love to get into more detail, but given how tightly integrated this partnership is, Waymo and Avis have agreed to maintain pretty tight messaging at this stage. So I'm going to give you everything that I can share right now. So some of this was already in the press release, initial mapping, the testing. It's already underway. We're going to start offering rides to the public next year. It is a multiyear agreement. We fully expect to expand into additional cities in the near future. And to your question, I think like other markets where Waymo operates, the vehicles that we're going to be starting off with in Dallas is the fully electric Jaguar I-PACE. It's powered by their fifth-generation Waymo driver. At this point, those vehicles are on Waymo's balance sheet. As the landscape evolves, as different vehicles are put into place, I don't think it's unreasonable to say that how that changes and who holds what on the balance sheet that can change as well. So we're not disclosing the financial details of this arrangement, but I do want to say this. It's not like we woke up last month and say, "Hey, like we need to get into this AV game." Like we've been in serious discussions with Waymo and building towards this since January of '24. So we took the time to structure this thoughtfully. We have full alignment on incentives. So the big variables that affect profitability for Waymo, that's the exact same variable. Those are the exact same variables that affect profitability for us. So we're going to win together in Dallas, but the framework is built to scale to future cities.

Our next question comes from the line of Chris Stathoulopoulos with Susquehanna International Group.

Brian, Daniel, welcome. Daniel -- so Brian, excuse me, I appreciate the unveiling of the vision here. It's refreshing. I guess a lot to unpack in 2 or 3 sentences, maybe if you could encapsulize how we should think about Avis of the future. So is this more of a technology-enabled premium rental company with now kind of more discrete pricing around segments, bundling, unbundling? And then also help us think about this move here and these -- and the 2 initiatives announced, how we should conceptualize that, I guess, within the context of normalized earnings here for EBITDA, which has been a core focus for investors since exiting the pandemic. Has this become more of a mid-single, high single-digit story? Just want to tie those 2 pieces together. And again, what's the sort of the -- I guess, the tagline, if you will, as we move forward with this new plan?

Yes. Sure, Chris. I think the way that we're viewing Avis' role in the mobility ecosystem is that we're here to empower mega fleet management. I mean we've been doing it for ourselves in terms of car rental for like I said, 75 years. We think that this is a core competency that others in the mobility space can use. When you think about, like I said, the value chain of autonomous mobility. There is the software and hardware component. And people are sticking to their core competencies over there. And I think the thing that people haven't paid a lot of attention to is the fleet management aspect of it. This isn't pure Internet anymore. It's Internet of Things. It's not an algorithm that you need to maintain with a few software engineers. These are heavy assets that need to be actively managed. And kind of what I said in my prepared remarks, all those aspects of it, yes, cleaning is one of them, but it's one of many. Having a nationwide, having a global footprint of real estate, being able to energize and charge these facilities, having just the employee base to be able to service the vehicles, being able to maintain the vehicles, all of that, I think, goes into mega fleet management, and that's the value that we provide to the value chain. In terms of kind of your question about where we -- like steady-state run rate earnings as this is, like we don't have any changes there. I think we put out there post-pandemic that $1 billion is the very minimum of what we want to do in a normalized year, and that's going to continue going forward. I don't think that this is a particularly normal year given what we're having to deal with, with the tariffs and with the recalls. But our -- our expectation is that's fundamental. Like we need to -- whatever investments we make, whatever partnerships we want to do, that's additive, but we need to be a $1 billion EBITDA business going forward. And like I said in the prepared remarks, I think it's doing that. I think it is by generating substantial free cash flow that we earn the right to go and participate in these other parts of the ecosystem.

Okay. And my second question, so if the secondary or used car market continues to move higher in response to the tariffs, how are you thinking about the 2026 purchases. Is this the -- I guess, the gain or benefit this year around DPU become a headwind next year? Is the plan at this point, just to kind of hold on to these older cars, and I guess, be more opportunistic around the purchases? Just wanted to understand the plans or tactics in place around managing that fleet and DPU given what is likely to be a volatile 6 to 12 months in the secondary?

Yes Chris, we did this whole situation of holding on to the fleet for longer. It didn't work out for us. We're not going to do that. Again, I think from a customer service aspect, from a vehicle maintenance aspect, like that's, that's not our game plan here, tariffs are no tariffs. So right now, fleet discussions are ongoing with all of our OEM partners right now. We are in the thick of it. The recent tariff uncertainty, it slowed the pace. But now that we have a little more clarity around tariffs, like with Japan and the EU, we do expect things to pick up. And we've actually already signed a few deals already. But to your point, we're being cautious like that write-down we took early this year, it is still fresh in my mind, and it was driven largely by purchases made for the model year '23 and model year '24 cycles when we purchased at elevated levels. So despite tariffs coming and that having an impact on used car prices, we can't repeat that same mistake with the model year '26 buy. We have to remain disciplined. So the approach we've taken with the OEMs, like we're being straightforward and like I said, disciplined. What we're trying to do is provide them full transparency to say, this is what the market is right now. This is how we're modeling the residual values on a win-by-win basis. We have a willingness to be flexible. And we need this clear understanding both between us as car rental and the OEMs that these are long-term relationships. The deals have to work for both sides. So I think this position has been appreciated. And while we're not rushing into volume commitments, we're right now, I think we're in a good place heading into this buying cycle.

Our next question comes from the line of Lizzie Dove with Goldman Sachs.

I appreciate all the color, and welcome Brian and Daniel. Just wanted to go back to the RPD side, I'm curious kind of what your kind of seeing there in recent weeks, sorry, to be so myopic. But also, how -- what's kind of factored into your guidance for this year for the second half in terms of any possible RPD improvement given some of the factors you called out?

Lizzie, honestly, like I'm a little surprised by the restraint that it took 5 questions now to get to the week-by-week RPD. It is actually -- it's a fair question, though, because the recalls have happened pretty recently or at least the large recalls of scale, the ones with no fix. We are seeing some green shoots here in terms of RPD because of that. It's not like we're making a call that this is structural at this time. But RPD has been -- you see it in the numbers, pretty challenged all throughout this year. I do think that supply -- industry supply overall tightening up is having an impact and that -- that RPD is getting better because of it. But from our perspective, I've said it before, I'll say it again, like we at Avis do not set rental car prices. We respond to them given consumer demand and industry supply. So like I said, industry supply, that's shrinking a little bit. Industry demand, surprisingly, I know there's a lot of uncertainty around there with the economy, but the demand is out there to be got right now. People are still traveling. So we're doing what we can with our philosophy around RPD, which is we're fleeting slightly inside of demand, making sure that we receive an appropriate ROI on the cars that we do put out there. And from our perspective, we're hoping that has a positive influence on RPD.

Got it. That's helpful. And just one follow-up. I'm curious what you're seeing out there in the competitive environment? It felt like enterprise was pretty competitive last year, then fix maybe set on the gas this year. Anything that you're seeing if things kind of become a little bit more benign? Or how would you kind of characterize that side of things?

I mean, Lizzie, it is a competitive environment. It always has been, and this year is no different. But like I said earlier on the call, what we're trying to do here is to not compete on a commodity product. I feel like that's what's been happening for decades over here. Avis First is a little bit of our answer to that to say, "Hey, how do we differentiate the offering? How do we kind of grow as an industry?" And from our perspective, we think that this is the way out of that to say we don't want to play a zero-sum game where it's competitive. So we're trying to take share here and there, like Avis First isn't about taking share, like we want to be growing the size of the revenue and profit pools of the entire car rental industry. So this is our stake in the ground saying that we're going to do that. So yes, competitive. It's competitive. It's always going to be competitive. I'm just saying what we're trying to do is compete at a higher level and give a little more value back to the customer.

Our next question comes from the line of Stephanie Moore with Jefferies.

Brian, you did delineate in your prepared remarks about the difference between cyclical and structural growth, and you clearly highlighted several initiatives that are starting or in place in terms of driving kind of growth going forward. So as you think about these investments as well as I'm sure others that are in the pipeline here, how do you measure the success of these investments? Are you looking for growth to outpace the cyclical aspects or the industry aspects? Are we looking at KPIs like margin, cash flow? How are you measuring the success? And in the same token, as we look at the business going forward, how should we be measuring the success from a metric standpoint?

Yes. It's a great question, and we take a disciplined approach to everything we do in terms of evaluating new investments. I think I want to start off with like, first, it has to be growing our business. I think we are here to grow as a company, and we think that we're going to pursue opportunities that have a higher structural growth. And that's kind of why we've started out with Avis First and Waymo. We need to combine this with being disciplined on free cash flow, everything we do. Like we are a cash flow machine at this company. And I think that's one of the things that attracted me to this business in the first place. Typically, if you're kind of go and pursue high-growth opportunities, at times, you have to be willing to burn a lot of free cash flow in order to do it. From our perspective, because we have this great base business of car rental that is very free cash flow generative, we think that we can utilize that to invest in things that we're going to add to that and over the long-term, contribute to additional free cash flow. So free cash flow is obviously very important. And the third framework that is very top of mind is how do we service the customer? Like what is the customer experience going to be? Like what are we investing in to make sure that, that is the -- always top of mind because from our perspective, I think, especially given investments, we maybe haven't given that as much thought and as much share of kind of our free cash flow as we should have. I think that's going to change going forward. So across those 3 dimensions, we want to say, hey, we need to be growing as a company, winning share of wallet, being a more relevant company. That's number one. I think that translates into free cash flow. It's not growth at all cost. For us, we are very, very disciplined around free cash flow. So that revenue growth has to translate into free cash flow. And when we take that free cash flow, are we investing it into areas that are benefiting the customer experience? How do we decommodify the business, actually deliver a product that customers are willing to pay more for and earn that pricing power. So it's really across those 3 dimensions that we're evaluating investments.

And then just a follow-up on Avis First. Maybe you can provide a little bit of color based on the pilots of the test that -- where you've already rolled out the service. But what has been the conversion of customers that are upgrading to Avis First? And then what does this mean in terms of labor costs, I guess, needed to provide this concierge like service just to make sure you can meet the demand?

Yes. Sure. As I said earlier, this is a category that we expect others to enter. So I want to be pretty thoughtful about what we disclosed. And by the way, this launched 2 weeks ago at this point. So I think it's early to say. It's in a dozen markets already. We're very excited about the uptake, but I think it's too early to call a trend here in terms of the uptake. But I'll tell you kind of what our thought process here is around this. I see no reason why Avis First, as a percentage of our total rental days, can't be equal to or even greater than the share of premium seats in the airline industry. We've all seen this happen over the course of the last 10 years, like how premiumization has happened in the airline cabin. And that's gone up just to incredibly high numbers for certain airlines. I think that's what we're seeing as a potential from an uptake perspective. And in terms of pricing, like you said, there are additional costs associated with this. There's a concierge, there's the delivery. So we need to price appropriately for this. So we are pricing Avis First to be margin accretive from day 1. But the incremental cost is low enough that it's accessible to almost every traveler. I think I said a couple of Starbucks lattes in the call, but like an upgrade can be as little as $10 a day for Avis First. Now our average length of rental is between 4 and 5 days. So we're just talking $40 to $50 total for a transaction. And that doesn't sound like a lot when you consider the convenience and experience of Avis First. I think a lot of people will be willing to…

Our final question this morning comes from the line of John Healy with Northcoast Research.

Brian, I just wanted to ask just a little bit more about the Waymo plans. Obviously, it sounds like this was a competitive win. I think they're in 5 or 6 markets right now. How do you see the market for this solution kind of evolving? Do you see yourself going with them in future markets likely? Is this going to be an exclusive to the Dallas market? Like how do you think the business model looks as a service provider to these autonomous companies? And my sense is that the revenue model here would be probably something that evolves over time. So any way you could kind of talk to us about your use of partnership rather than just a service provider, how you see that as well?

Yes. John, I think at the -- let's start with the first part of that question. We are starting in Dallas with Waymo. And with Waymo, we expect to expand to future cities, to -- but from our perspective, Waymo is in discussions with other providers in the past that they've announced other cities that they partner with. We're in discussions with other people as well. But it was important for us to start off this business line in terms of like mega fleet management for autonomous. It was important for us to start with Waymo. Because Waymo -- I mean, Waymo has been blazing the trail for autonomous ride-hailing for 20 years now. What they've built and what they've delivered to the public, it is just -- there's no other way to describe it, it's onspiring. So earning the trust of real passengers at real scale with the safety record that they have, like that is changing the world. And we don't take it lightly that Avis has been asked to participate in this space. Where I think this can go in the future, obviously, like I said, with Waymo to many other cities, I hope. It took a long time to get to the commercial terms that we've aligned on, and that was built to scale to future cities. We said this earlier on the call, kind of how -- when assets are on whose balance sheet, that can always evolve over time. And obviously, that has an impact on the share of profit over the long-term. And we're obviously open to those discussions. And like I said, we are not opposed to putting our balance sheet to work. We buy billions of dollars of fleet every single year. We're good at it. So from that perspective, like, yes, we are open to different models. We're talking to different parties, but it was important for us to start with Waymo. We think that given this is a new line for us, it was important that we did it with people that were philosophically aligned with and that took the time to do this in a thoughtful way. And this is not like -- we're not in this to be service providers. We had a stint of that in the past back in 2017, where there was just kind of a -- they pay you on a per you clean the car basis. Like that's not what's exciting to us. Like a real partnership to me is, like I said, when 1 plus 1 equals 3, it's when risk is shared, when value is co-created. And that's the partnership that we have with Waymo, and that's what we plan to kind of expand to future cities.

And then just one question on the numbers. The $900 billion EBITDA number for the year and kind of the fleet cost number that you put out there are helpful. But I was just wondering -- and maybe you mentioned it, I missed it. Was there any sort of gain on the depreciation in this quarter and when you look at that $900 million to $1 billion, are you expecting gains to get to that [ $310 ] million to [ $320 ] million number for the year?

Yes. There were gains. I think our Q is going to be posted shortly. It's -- the gains are smaller than I think the quarter. Daniel, is that right? It was smaller than the quarter before and what we are guiding to is a net depreciation number. So it does include gains. The issue that we're dealing with right now, like I said on a previous question, we're not cycling the fleet fast enough to be able to kind of harvest more of those gains. The delivery of the model year '25 vehicles are being delayed. The model year '26, we're not sure of just yet. And so while there will be gains, it's not going to be as material as kind of it was in the first quarter.

And what I would just add to that, John, is it's an incredibly small percentage of the proceeds of cars that we're selling. So if you think of it from that standpoint, like we're depreciating close to a 0 gain or loss and the gains are minimal.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session, and thus concludes our call today. We thank you for your interest and participation. You may now disconnect your lines.