Avis Budget Group, Inc. (NASDAQ:CAR) Q4 2022 Earnings Call Transcript

Avis Budget Group, Inc. (NASDAQ:CAR) Q4 2022 Earnings Call Transcript February 14, 2023

Operator: Greetings, and welcome to the Avis Budget Group’s Fourth Quarter 2022 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host David Calabria, Treasurer and Senior Vice President of Corporate Finance. Thank you, please go ahead.

David Calabria: Good morning, everyone, and thank you for joining us. On the call with me are Joe Ferraro, our Chief Executive Officer; and Brian Choi, 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 is 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 other periodic filings with the SEC, as well as the Investor Relations section of 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 can make no guarantees 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 Joe.

Joe Ferraro: Thank you, David. Good morning everyone, and thank you for joining us today. Yesterday, we reported the best annual results in our company’s history. We delivered over $4.1 billion of adjusted EBITDA in fiscal year 2022 and set a new standard for what excellence means at this company. I want to thank our 24,000 employees for the work they put in last year to achieve this milestone. When it comes to our business, our operators focus on one checkout at a time, but it’s worth stepping back and reflecting on what’s possible when an entire organization brings their best day in and day out. This focus and dedication is ingrained in how our team operates and it doesn’t stop at the end of the calendar year. We’re bringing the same level of intensity to 2023, and I’m looking forward to showing everyone what we can accomplish this coming year.

But before we get into that, let’s review our fourth quarter and as usual, let’s start with our America’s segment. On our last call, I spoke about a stabilization happening within the industry where we’re seeing a return of normal demand seasonality. We saw this continue into the fourth quarter and the business metrics reflect what we typically see in the last three months of the year. The quarter showed strong commercial demand. In fact, it was the highest amount of commercial volume we have seen during the fourth quarter in company history and well above levels we achieved in 2019. It’s apparent that the commercial customer is traveling and using our brands at an elevated level. Our commercial resignings for the year are approximately a 100% and on average coming in at an increased price.

Leisure followed the traditional patterns that exist in the fourth quarter, which is mostly around holiday periods with Christmas being the largest. While there were challenges surrounding travel late into December, we were able to offset air travel disruptions with robust one-way rentals as customers in need of reaching their destinations used our cars to get where they were going. We have great airline partners and work well together for the best possible outcome for our customers in times of need. The fourth quarter always represents a pullback from the height of the third quarter, and this year was no different. Like I said, we’re seeing a return to more normal seasonal trends, which allows for better forecasting and matching of supply to demand.

Pricing in the quarter was up 1% from 2022 and rebounded from the 3% decline we saw in the third quarter. Peak period pricing and improved ancillary sales helped to fuel this growth. We are supported by great technology with proprietary demand fleet pricing system, which forecasts demand down to the car level by location, by day of the week, and time of day, and prices accordingly. This technology, combined with our experienced team of operators, both in our headquarters and our field, allow us to capture this opportunity. While it may be early to say whether the industry has found an equilibrium between supply and demand, what we saw in the last quarter is encouraging. The holiday travel disruptions combined with supply chain challenges and a desire to rotate older units so as to position us better heading into January, had a slight impact this quarter to utilization.

But as usual, our teams didn’t abdicate responsibilities due to factors out of their control. Instead, we continued to focus on cost discipline and deliver results that showcase the streamlined and lean operating structures we built during the pandemic. We are keenly aware of the inflationary pressures we face in 2023 and will continue to combat rising costs with sustainable productivity gains driven by technology and data. Moving on to the income statement, results of these metrics, in the Americas revenue increased by $104 million year-over-year; however, Americas adjusted EBITDA during the same period decreased by $46 million, primarily due to a $68 million headwind in vehicle depreciation and interest. If you compare our most recent results to the fourth quarter of 2019, America’s revenue increased by $674 million while adjusted EBITDA increased by $480 million for an incremental margin of 71%.

Gain on dispositions contributed $163 million to our results this quarter. As I said on our previous call, we were nimble and proactive when it comes to complete dispositions if we see an opportunity in the market. I’ll get into more detail during the fleet portion of our prepared remarks, but again, this quarter we ensured proper fleet rotation by exiting high mileage vehicles at favorable prices as we brought in new fleet. Overall, the Americas had a great quarter and a terrific year, and we see positive trends going into January and February. Demand is strong and forward-looking reservations show this and our price discipline we saw in the fourth quarter is continuing into the first. Lastly, there’s improved demand for our car sales and the prices have shown improvement, which is encouraging.

With that, let’s move over to our International segment, which had an historic fourth quarter and full year. Our International story and playbook for the fourth quarter is consistent with what you’ve seen out of the team the entire year. A strong rate and volume environment was met with stringent cost discipline in order to maximize the results to adjusted EBITDA. Rental days in the fourth quarter were 15% higher than the fourth quarter of 2021, but still 22% below the fourth quarter of 2019, which signals a lengthy runway for volume recovery. RPD in the fourth quarter of 2022 was 5% higher year-over-year, or a significant 18% excluding exchange rate effects. Similarly to the Americas, we are seeing normal seasonality return to much of EBITDA as well.

Adjusted EBITDA in the fourth quarter of 2022 was a record $63 million on a reported basis including $16 million negative impact from currency exchange rate movements. This brought a full year adjusted EBITDA to $560 million on a reported basis, including a $79 million negative impact from currency exchange rate movements and marks the highest full year adjusted EBITDA achieved by our International segment. We’re proud of what this team achieved in 2022 and expect continued excellence out of this segment in the coming year. Moving on to fleet, we are consistent with last quarter and will focus more on the Americas segment. Our fleet disposition teams maintained busy this quarter and continued to rotate the fleet exiting high mileage vehicles to make room for our new 2023 model year vehicles.

In fact, we sold more cars this fourth quarter than any fourth quarter prior, which shows the elevated demand for our products. The selling price of our disposed vehicles remains above network value, but as discussed on earlier calls, we are seeing a moderation in the used car market and do not expect gains at these same levels in 2023. Moderating gains on sales combined with higher straight line depreciation resulted in a higher monthly depreciation cost than we recently experienced. We reported monthly per unit in the Americas of 175 versus 170 per month in the fourth quarter of 2021. However, due to rising interest rate environment, our vehicle interest per month per unit went from 50 in the fourth quarter of 2021 to 73 in the fourth quarter of 2022.

Our ESOP facilities include a pooling rate conduit facility, which impact our vehicle interest negatively in a rising rate environment. As we pointed out on our last call, we expect this to continue into the full year of 2023 with rising interest costs and moderating used car values, making sure that we have the optimal fleet size where utilization is more important than ever. This fleet cost environment severely penalizes excess fleet capacity and will not risk putting ourselves in that position. Our discipline fleet disposition this quarter illustrates how we’re constantly trying to match our supply to industry demand. We are demonstrating that same discipline to taking on new vehicles as well. As I mentioned on our last call, fleet purchases are the largest use of capital in our business and we realize that optimizing for return on that capital is our responsibility as stewards of this business.

Therefore, we are being very conscious with both the number of vehicles and the purchase price of those vehicles for our 2023 buy. On the margin, we’d rather run out of an incremental vehicle than have it unutilized vehicle on our lot. Our fleet plan for 2023 reflects this stance. We’re not trying to maximize the number of units we can absorb. Instead, we’re optimizing the overall health of our fleet, which means younger and lower mileage cars. We’re also optimizing the overall vehicle mix of our fleet, which means having a product portfolio that our renters demand. Thankfully, our key OEM partners are coming out with exciting new launches in 2023, and we secured key allocations for both traditional internal combustion vehicles and of course electric vehicles.

So going into the first quarter, we’ve seen continued demand for our used cars and prices have continued to improve. Our fleet size is currently just under demand levels, showing improved utilization and a continued rationalized approach to fleet levels in our industry. While we’re on the subject of these, let me reference the press release we issued on January 26th jointly with SK Group’s EverCharge. Those who haven’t seen it, allow me to recap the key takeaways as I believe this partnership clearly represents our vision and strategy around rental fleet electrification. Electric vehicle share is increasing as a percentage of new car sales, a macro industry trend that nobody disputes. However, how to take advantage of this trend specifically when in the car rental industry is less obvious.

At Avis, we believe the road to electrification rests on a foundation of charging infrastructure. An optimal charging framework is a necessary condition to support an electrified fleet. Our approach to creating this infrastructure at scale and follows four key pillars that build upon each other. The first is power availability. This means coordinating with the appropriate utilities and airport municipalities to secure access to enough power to support a large rental fleet. The second pillar is hardware. Each site has own specific needs, both in terms of fiscal footprint and customer composition. A covered garage will have different hardware requirements versus an open air one. The check in, check out dynamics can vary dramatically from leisure heavy airport versus a commercial heavy airport.

Photo by Grahame Jenkins on Unsplash

These factors, along with many others, need to be considered before developing a thoughtful portfolio of L2 chargers, DC fast chargers, and energy storage solutions. Having unified hardware that can dynamically manage electrical loads is necessary to optimize the power availability. The third pillar is software. The majority of residual value in electric vehicle resides in its battery. Therefore, it’s necessary to monitor and optimize charging history while meeting the turnaround time for our customers’ demands. We need software solutions to draw on the grid at off peak times, store for peak times and load manage throughout the day to minimize cost per kilowatt. The daily movement and life cycle of a rental car is fundamentally different from a retail-owned personal vehicle, which is why we require purpose-built software that offers visibility and guidance around the unique challenges we face.

Comprehensive data capture that powers the right software is the only way you’ll get the most out of your hardware portfolio. The fourth and last pillar is operations process. Normal ICE vehicle can be gassed in three minutes and any pump can be used for any car. That’s not the case for an EV fleet. The operations flow changes based on the state of charge of the vehicle. There’s an optimal charging port for certain vehicles based on when it’s expected to be rented next, and variables change as new vehicles enter the lot or charging thresholds are met. The legacy methods in our handbooks won’t work for this. We require new tools and better real-time connection with technology for the vehicle journey to adapt an electrified world. Without the right operational process, all the kilowatts, charging stations and dashboards in the world won’t help you.

These are daunting challenges, but we at Avis have been working quietly through them for years. We’ve engaged the formal subject matter experts on developing airport specific roadmaps and we’ve been in constant dialogue with our OEM partners to forecast our upcoming EV mix, which in my opinion is extremely diverse and a fleet that our customers will enjoy. While we’ve waited to show what we’ve been working on until we felt confident that the product was reflective the meticulous consideration and substantial effort given by our internal team and external partners, we believe what we’ve installed in Houston together with SK Group and EverCharge represents the most advanced large scale charging system in the fleet ecosystem. It addresses all our four of our key EV pillars and serves as proof point of what we’ve been developing as an example of what’s yet to come.

I want to thank the SK Group and the EverCharge teams for helping us achieve this milestone and convey how excited I am for the additional airports we have slated to launch this year. I’ll pause here and wrap up my prepared remarks by once again saying how proud I am of our team and the results of 2022. It’s definitely one for the record books and marks an incredible turnaround from the challenges we’ve faced just two years ago and I’m excited what we can still accomplish in 2023. Demand is strong. Industry fleets are rationalized. Prices started the year performing well, and there continues to be demand for our used vehicles and improved prices. With that, I’ll turn it over to Brian to discuss our liquidity and outlook.

Brian Choi: Thank you, Joe, and good morning everyone. I’ll now discuss our liquidity and near-term outlook. My comments today will focus on our adjusted results, which are reconciled from our GAAP numbers in our press release. I’d like to start off by addressing capital allocation. In conjunction with our earnings release yesterday, we also announced the authorization of an additional $1 billion to our share repurchase program, which brings our total available authorization for buybacks to $1.7 billion. Last quarter, we bought nearly $4 million shares for roughly $750 million, which comes to an average purchase price of $192 per share. Avis’ share repurchase program has led to substantial value creation over time for its long-term shareholders.

Since the program began in 2013, Avis has retired 96 million shares and converts at an average price of $71. That’s over 70% of the original shares outstanding, retired at a 67% discount to the closing share price as a February 10th. However, we firmly believe that our share price today does not fully reflect the fair value of the company we’ve transformed into post pandemic, which is why we believe it’s our fiduciary responsibility to ensure that our repurchase program continues unimpeded for the benefit of all shareholders. I’m pleased to announce that along with the $1 billion increase in authorization, we also clarified language in our credit agreement to ensure we could do just that. But let me point out that this new authorization and amendment simply gives us the option to deploy cash towards share repurchases.

As I’ve said in the past, we will be nimble with how we allocate capital at Avis. Just because we viewed share of purchase as the best use of capital in 2022 does not mean we will formulaically allocate a similar amount of capital to this area in 2023. We will opportunistically allocate capital to those areas that best benefit all stakeholders of Avis Budget Group. We continue to find ourselves in the privileged position of being in the strongest financial standing in the history of our company. Our adjusted EBITDA has grown from $2.4 billion in 2021 to $4.1 billion in 2022. During the year, we’ve repurchased $3.3 billion of shares, invested nearly $1 billion back into our vehicle programs, deployed over $300 million into investments in our systems and operations, customer experience and electrical vehicle capabilities, all while having a net leverage ratio of less than one time.

As of December 31st, we had available liquidity of approximately $1.6 billion with additional borrowing capacity of $1.9 billion in our ABS facilities. Our corporate debt is well laddered with approximately 86% of our corporate debt having maturities in 2026 or beyond, and we are in compliance with all of our secured financing facilities around the world with significant headroom on our maintenance covenant test as of the end of December. Let’s move on to outlook. As you know, we’ve made the decision as a management team to forego giving formal annual guidance to allow ourselves the flexibility to make agile decisions as the business environment changes, but I do want to provide a bit of color on what we’re currently seeing for the first quarter.

As Joe mentioned earlier on the call, we are seeing a return to normal seasonality in the business, which means that for the first quarter of 2023, we believe RPD will see a seasonal decline from four Q 2022 As we enter a shoulder period in our Leisure segment and commercial rates make up a greater portion of our business mix. Our best estimate at this point is that RPD in 1Q 2023will be in between 1Q 2022 and 1Q 2021. However, due to the commercial accounts we signed in the Americas throughout 2022, we believe sequential rental days and average week size will be close to flat for a consolidated company. Depreciation costs in the first quarter will see a sequential increase as our fleet mix continues to weigh more heavily to model year 2023 vehicles.

Our straight line depreciation in the fourth quarter was in the high 200s, and we expect this figure to settle in the 300 to 320 range for 2023. As Joe mentioned, while the used car market is currently healthy, we do not expect to realize anywhere near the gains we realized in 2022. Therefore, you should expect a convergence in reported depreciation net of gains, and our straight line depreciation as the year progresses. Let me shift over to vehicle interest expense, which I touched on during our last call. I’ll focus more on the Americas segment. In the Americas vehicle interest sequentially rose from $62 per month in 3Q 2022 to $73 per month in 4Q 2022. Due to rising interest rates and increased cap costs of incoming vehicles, we expect monthly per unit interest expense in the Americas to be approximately $100 in 2023.

Increases to straight line depreciation and interest expense means that the cost to deliver a rental day will be going up in 2023. Therefore, we must be prudent with how much capital we allocate towards fleet growth and carefully evaluate the appropriate return we require on the capital we deploy. I’ll reiterate something that Joe said in his prepared for remarks. On the margin we’d rather run out of the incremental vehicle than have an unutilized vehicle on the lot. This reflects the ROI driven rigor we hold ourselves to when making fleet decisions. We apply that same rigor towards price optimization, cost discipline, and asset utilization every day across every location in our business, which is what gives us confidence that despite certain macroeconomic headwinds, we will continue to deliver strong EBITDA and free cash flow throughout 2023 and beyond.

With that, let’s open it up for questions.

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Q&A Session

Operator: Thank you. The first question today is coming from Chris Woronka of Deutsche Bank. Please go ahead.

Chris Woronka: Hey, good morning guys, and congratulations on the fabulous year. So question is, I guess, Joe, you know, when we look back to the 20 teens, you guys were always in this kind of $100-ish million range of EBITDA, much smaller numbers, of course, and if we look at what you did in 2022 and then we strip out the gains, which we can figure out, do you think you go back to being in a range of a $100 or $200 million of EBITDA whatever that might be? I mean, is that a realist way to just think about it at the highest level?

Joe Ferraro: Yes, hi Chris and thank you. You know, we’re a structurally different company than we were back in, I think you said in the teens. I was the president of Americas then, so I could tell you that’s for a fact. The way we look at our business, how we use our — how we manage our fleets, how we look at our demand, how we use data and technology for some of our decisions is completely different than we had in the past. And if you recall, during the height of the pandemic, we had to take a good amount of cost out of this business. Well, some comes back over time, yes, but we’ve managed to have stringent cost controls to drive our output. And what we’re seeing is, in the — if you go back to those teen years, we didn’t quite see the demand that we see, that we have today.

You know, as I reported, we have high commercial demand and in this period, which I would call a shoulder period for travel as you come off the busy fourth quarter and holiday season, it started off really well. If you look at TSA volume compared to 19, which is interesting. In the month of January, the first week actually started off relatively flat compared to 2019, and the last week finished flat compared to 2019. And over the last couple of years, you’ve seen that we’ve run our volume as a little bit higher than TSA volume as it stands. So yes, I think we’re in a different place than we were back in the teens, Chris, and that’s the way I would think about it.

Chris Woronka: Okay. Thanks Joe. And then as a follow up and I appreciate all the detail you guys gave on the approach to bringing EVs into the fleet. But the question would be, as those do become more significant and you are prepared to bring on a larger number, how do you think about the economics of those in terms of lower maintenance costs, but maybe longer hold periods and depreciation and it’s not necessarily a specific number, but just high level thoughts on the economics?

Joe Ferraro: Yes, I think the best way to categorize it is we’re learning. There’s every indication that these cars should perform better from a maintenance standpoint, less moving parts and things of that nature. As far as life, in mileage, we’re going to get into that as time goes on, but my early indications are probably the cars would, should run a little bit longer as we see it. I’ll tell you, as we go forward we’re going to most likely learn a little bit more about what the maintenance costs are. We haven’t seen hardly any so far right yet. But I do say it’s kind of early to tell on that. We will start increasing our fleet sizes over the year. We have a good array of new models coming in, and like I said earlier in my preferred remarks, I think the infrastructure designs that we have and the layouts will ultimately determine our success.