Avis Budget Group Inc (CAR) 2007 Q1 法說會逐字稿

Please stand by.

The call will begin momentarily.

Again, please stand by.

Thank you.

Good morning and welcome to the Avis Budget Group conference call.

Today's call is being recorded.

At this time for opening remarks and introductions I would like to turn the call over to Mr.

David Crowther, Vice President of Investor Relations.

Please go ahead, sir.

Thank you [Shirley].

Good morning everyone, and thank you all for joining.

On the call with me today are our Chairman and Chief Executive officer Ron Nelson, our President and Chief Operating Officer Bob Salerno, and our Executive Vice President and Chief Financial Officer David Wyshner.

If you did not receive a copy of our press release it's available on our website at www.avisbudgetgroup.com or on the First Call system.

Before we discuss our results for the quarter I would like to remind everyone that the Company will be making statements about its future results which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements are based on current expectations and the current economic environment and are inherently subject to significant economic, competitive and other uncertainties and contingencies which are beyond the control of management.

The Company cautions 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 can cause actual results to differ materially from those in the forward-looking statements and projections are specified in our 10K and in our earnings release issued last night.

Before I turn the call over to our CEO let me briefly review the headlines of yesterday's press release.

Our revenue from vehicle rental operations increased to a record $1.4 billion for the quarter.

On a pro forma basis excluding separation related items EBITDA from our international car rental operations increased 4% compared to first quarter 2006, and EBITDA from our domestic car rental operations increased 30%.

We reiterated our forecast of revenue and EBITDA growth in 2007.

Now I'd like to turn the call over to Avis Budget Group's Chairman and CEO, Ron Nelson.

Thanks, Dave, and good morning to everyone.

Having had the benefit of reading the transcripts of our competitors' conference calls I thought I would start this morning by addressing those issues that seem to generate the most interest among analysts and investors in our sector.

Let me start with the quarter's pricing environment.

Our domestic time and mileage revenue per day increased over 2% in the first quarter of 2007 versus first quarter of 2006.

Both commercial and leisure pricing were up right around 2% in the quarter, and I would point out that the commercial increase includes the impact of insurance replacement growth.

As I indicated in our last conference call, we pushed pricing fairly hard in the fourth quarter and continued on into the first.

Our leisure pricing increases in the fourth quarter and early in the first were averaging around 5% to 7%, and as a result, we were giving up a modest amount of share across both brands and were looking as res builds that had fairly tepid demand.

Faced with the prospect of cutting fleets to coincide with soft demand and, therefore, potentially leaving high margin opportunities on the table in the spring and early summer, we elected to scale back our price growth on the leisure side in favor of fleet and volume.

We made this decision in mid-February, and the impact on our first quarter was proportional.

Behind our pricing decision was a view that the market-pricing gap between us and other car rental companies, especially for Budget, had widened outside of the normal competitive balance.

Importantly, this scaling back only returned Budget to the pricing gap it had with other value brands the first quarter of 2006.

It had the desired effect.

Walk-up volumes began to increase in March, and the res build for April, May and June strengthened.

None of this should be too surprising.

Leisure pricing has always been market driven with only temporary dislocations driven by short-term market imbalances in fleet levels.

Commercial has been a slightly different story.

While also market-driven, it has the opportunity to re-price only as individual contracts come up for renewal, which is usually annually.

At the time of the renewal competitive pricing dynamics are important, but other variables also play a role in the purchasing decision including service, availability, the quality of the car rental experience, and ancillary offerings to make the business travelers more productive.

As we discussed in our last call, the commercial environment remains mixed in terms of our ability to garner price increases.

There are times we are able to achieve the increases we desire and other times when competitive actions cause us to renew price increases lower than we would like to achieve or lower than the market is willing to accept.

That said, unless an account is unprofitable we can almost always find a way to retain existing commercial contracts, in large part due to service and the productivity enhancement our investments offer the business traveler.

Price increases we achieved on commercial renewals in the first quarter were typically between 2% and 4%, at the low end of what we need to offset increasing fleet costs.

And our corporate account retention rate continued to be in the high 90's.

Overall, preliminary data for the quarter suggests that enplanements were flat year-over-year in Q1, which is what we experienced in volume as well.

However, I would note that our volume was up 12% versus 2005 levels, so we didn't exactly face easy comps.

And while volume was flat for the quarter, our average fleet was down 1% with utilization increasing about 50 basis points.

In short, if you recall last quarter's conversation, we said that the profitability equation is three-dimensional among rate, volume and utilization.

We used a slightly different formula over the course of the first quarter.

Looking forward into the year we have reasonably good visibility on commercial pricing and believe it will trend in the same ranges in the first quarter if not slightly higher.

We are encouraged with respect to the leisure side of the business as we move into the summer travel months, as enplanement comps should get easier throughout the second and third quarters.

This should bode well for leisure pricing, as does the fact that the normal seasonality of daily rates at this point appears to be as strong, if not stronger, than usual.

And while the industry seemed to take a pause from leisure price increases in the first quarter, the price increase was instituted in late March for the second quarter, which met with general industry acceptance.

Taken as a whole, the highly competitive pricing dynamic in our industry is why one tenet of our strategy revolves around expanding our revenue sources, both in the off-airport market and through ancillary revenue sources.

Our off-airport business had a good, not great, quarter financially, but directionally we're ecstatic.

We signed four major insurance companies on a co-sourcing basis since implementation of our insurance replacement technology.

Frankly, the ramp-up in volume has been temporarily slowed by the need to adapt our interfaces to each company's processes.

But while we were only up 8% on the revenue line, we expect that number to grow significantly as we become fully operational with each new client.

Our market footprint continues to expand as we opened 35 new locations through April, 65 scheduled for the remainder of the second quarter.

The combination of our brands, our geographic footprint, our systems, and our sales efforts should give us a compound annual growth and the insurance replacement revenues of more than 30% in each of 2007 and 2008.

As I've noted previously, we have a 32% airport share, but only a 1% share in insurance replacement.

We're reasonably confident that our loyal customer base is being underserved in insurance replacement, and our leading position on airport has taught us how to compete successfully when we're side-by-side with other car rental companies.

Furthermore, we now have relationships with most of the top 50 auto insurance carriers in the United States.

Where2, our GPS navigation unit, is also a revenue expansion priority.

In the first quarter, we rolled out national media advertising to support Where2, again offering the units at Budget, and expanded availability to include Canada.

Demand continues to accelerate each week, and in the first quarter we met our aggressive revenue targets.

We ended the quarter with 20,000 units and are continuing to deploy additional units in the face of growing demand.

The take rate, which has been increasing each week, is now averaging north of 6%.

With our rental rates of $10 a day and $50 a week our Where2 margins exceed 70%.

We believe that the attractive customer demographics and large transaction volumes that we enjoy should allow us to earn incremental profits by providing ancillary products and services.

Where2 is proving that out.

Looking forward through the second quarter we expect to expand our WiFi test beyond the original markets with a larger rollout expected in the third quarter.

WiFi should have the same margin dynamics as Where2.

We are excited about the possibilities it presents.

In addition, we expect to roll out further new service and product offerings by the end of the second quarter in both the leisure and commercial traveler.

Second general area that seemed to receive a lot of attention in the competitors' calls was cost containment, which was really just another element of margin improvement.

Cost containment has been and will be a part of our business plan forever, largely because we are in an industry that requires us to improve productivity year in and year out to maintain competitiveness.

This need is only heightened by the consolidation that continues to take place in our sector.

Let me give a brief historical look at how we've contained cost in the past and David will later comment on our 2007 initiatives.

We are fortunate to have a long-standing and deep-seeded emphasis on cost controls and operational efficiencies, so much so that it has become part of our culture.

Beginning with the outsourcing of our data center operations to IBM in 2002, we have outsourced almost every function that has commonality with other industries and can be leveraged by volume.

Following the acquisition of Budget in 2003 and 2004 we implemented a program to consolidate both brands' back office, management, fleet, fleet management, pricing and yield management, insurance, and information technology activities into a single organization, which eliminated more than $100 million per year in manpower and other costs.

In 2005 we consolidated the Avis and Budget airport and city management in many areas generating further incremental savings.

Since 2005 we've also outsourced accounts payable, payroll, management of the IT network operations, certain application development activities and a significant portion of our contact center operations.

Cost savings associated with these outsourcing programs are estimated to exceed $12 million annually, and we continue to evaluate similar opportunities to reduce costs and improve service levels.

Also during the second quarter of 2006, we initiated a review of all overhead departments to decrease costs.

We reduced headcount by some 70 positions, generated an annualized cost savings of approximately $5 million, and have continued to identify additional cost-saving opportunities as we have transitioned to operating as an independent company.

Over the last two years alone, the impact of these cost reductions and other process improvements have increased the productivity of our domestic workforce by more than 6% without compromising our commitment to outstanding customer service.

And then finally we have completed the truck back office integration which provides some savings this year and $4 million annually thereafter.

Certainly all this makes great copy, but where the proof of the pudding is, putting aside some of the non-comparability issues that we all live with, is in our direct operating cost percentage, 52% in the first quarter of '07.

Given the higher service level requirements for the commercial part of our business which constitutes approximately 50% of our revenues, we're pleased with our progress, both on an absolute and competitive basis.

As you can see, we have been extremely focused on cost control in the past and will continue to rigorously contain costs going forward.

Our organization is lean, not fat.

We are confident that we can still find ways to do more for less.

Our history of innovation, our investment in automation and the energy of our employees should help us drive even greater efficiencies as we continue to grow.

This focus was a driver in first quarter results, and David will spend some time discussing further initiatives later in the call.

Before I turn the call over to Bob Salerno, our President and COO, to address fleet costs and some important marketing positioning issues, let me also comment on the announcement of Enterprise's acquisition of Vanguard.

First, we're not surprised by the consolidation in the industry as we certainly understand synergies and cost take-outs available in this kind of transaction as we demonstrated in our acquisition of Budget in 2002.

We believe that removing a pricing decision-maker is good for the industry and consolidation tends to elevate utilization across all the remaining companies assuming they move to a common fleet management protocol.

In the end, all companies benefit from each of these dynamics.

With that being said, it's really too early in the process to estimate what impact this is going to have.

We're in the process of evaluating different scenarios depending on what Enterprise ultimately decides for the National and Alamo brands.

We had fully expected Enterprise to make a push into the commercial account sector of the market in the coming years, and by purchasing National they've made that move.

So while we have been preparing for a fourth competitor in the large commercial segment, there actually will still be three players there, not four.

We would not, however, be surprised to see Enterprise pursue the same strategy we have adopted, a common sales force calling on corporate America, offering a premium and a value brand differentiated by service levels and product offerings.

We do expect pricing to be rational in the commercial segment for a number of reasons.

First and foremost, we expect that Enterprise is going to want to earn a return on their significant investment in Vanguard, and reduce debt associated with the acquisition as they have been historically been conservatively managed on this front.

More importantly, given the new scale of Enterprise's, or [ENAMO's], on-airport revenue we would not expect them to continue to subsidize on-airport expansion with low on-airport pricing which we believe they have been doing over the past two years to build share.

It simply will become too expensive given the financial requirements of integrating and supporting a multi-billion dollar acquisition and the fact that Enterprise's pricing decisions impact National and Alamo's profitability.

The corollary is that we think Enterprise will now have more incentive to achieve higher on-airport pricing than they ever have before.

While a lot of speculation is going on about the combination, let's not make this out to be anymore than it is.

It will harvest incremental synergy benefits and they will have bought their way into a new market by acquiring an existing competitor.

With all due humility, this is what we have done with our entry into the off-airport market and our acquisition of Budget.

Both companies made intelligent moves.

Both companies have succeeded or will succeed, but, importantly, neither company has or will upset the competitive balance of the industry.

With that, let me turn it over to Bob to discuss fleet costs and the operating environment.

Thanks, Ron.

Another area that should and does attract investor attention is model year 2008 fleet purchases.

Just as others have commented, we have begun our discussions with manufacturers and expect that these will conclude sometime during the next few months.

While it is premature to telegraph any sort of outcome, what I am confident in reporting is that we will be no worse off, and probably not a lot better, than any other purchaser of approximately 400,000 vehicles.

In other words, I don't think the deals among the car rental companies, either on program or risk cars, are going to be all that different.

So per unit fleet costs will not be a differentiator in performance.

As most of you know, there are a few levers that we still can pull regarding 2008 fleet costs that will allow us to generate incremental improvement no matter what price increases are ultimately agreed between us and the manufacturers.

In particular, we intend to increase the risk or non-program component of our fleet to an even greater level than we have in the past.

Our expectation is that risk cars will comprise between 40% and 45% of our model year '08 purchases, double our split in model year '07.

So while moving our non-program fleet to these levels may only be approaching the levels of our competitors, this more than 20-point change should allow us proportionately greater year-over-year improvement.

We are also looking hard at our mix of car types and sizes, including hybrids, and at further extending the life of the fleet which results in fewer purchases being needed.

We also believe that in certain select markets used cars are an alternative.

Our domestic fleet continues to be highly diversified.

It included Hyundais, Kias, Mitsubishis, Nissans, Subarus, Suzukis and Toyotas in addition to the domestic OEMs -- Chrysler, Ford and GM.

Vehicle availability does not appear to be an issue.

We are comfortable we are going to get all the fleet we need and want.

What is possible, however, is we may slow down our move to balance fleet among the suppliers in order to optimize price and availability.

Ron talked about two of the three legs of our strategy this year -- expanding our revenue sources and capturing incremental profit through cost containment, and I want to briefly address the third -- optimizing our two-brand strategy.

Having two separate and distinct brands allows us to segment market demand, effectively target potential customers, and win the loyalty of new and existing customers.

In the first quarter, our two-brand strategy permitted us to launch or significantly expand our marketing relationships with Delta Airlines, Carlson Wagonlit Travel, four insurance companies, Skybus and Grouple.com, a leader in online group travel bookings.

In aggregate, these new and expanded relationships should add $50 million or more of incremental revenue annually.

Our ability to offer partners a leading premium brand and a leading value brand in order to address different segments of their customer base distinguishes us from our competitors and improves conversion on partner websites.

In fact, our two-brand strategy allows us to be recognized as having the brand, Avis, that is top-ranked in the industry for customer loyalty as well as the brand, Budget, that has been recognized as the leading provider of outstanding car rental deals.

Another way we differentiate ourselves is online.

We generate more car rental reservations online than anyone else.

Even more impressive is that our largest source of internet reservations is our own brand sites, which is great because these sites are also our cheapest form of reservations.

In the first quarter, 24% of Avis's reservations came through Avis.com.

On March 5, Avis.com set a single-day record for reservations with the help of our iTunes marketing campaign.

At Budget over 50% of all their reservations come over the internet, with over 60% of these coming through Budget.com.

Volume growth on the sites is up 14% year-over-year.

We leverage our investment in Avis.com and Budget.com off of each other, and as internet marketing continues to evolve, we apply our learning to benefit both brands.

We believe we've only scratched the surface of how two leading brands can generate more than their natural share of revenue through thoughtful and aggressive marketing.

In a highly competitive marketplace, brands and marketing can make a difference, but it has to be fresh, and we have to continuously develop new ideas.

Our iTunes and Dunkin' Donuts promotions, by way of example, generate significant incremental business, but more importantly, help us build customer lists for future targeted marketing.

These groups of new satisfied customers are highly valuable as they give us opportunities to make highly competitive offerings without affecting the competitive balance of pricing in the market.

With that I'll turn the call over the David Wyshner.

Thanks, Bob.

This morning I would like to discuss our recent results, our cost containment initiative and our outlook.

In the first quarter of 2007 we grew Avis Budget Car Rental revenue by 3% to a record $1.4 billion, and generated pro forma EBIDTA of $62 million and pretax income of $5 million in our seasonally weakest quarter.

On a pro forma basis, our EBITDA and pretax income were consistent with the first quarter of 2006, slightly ahead of our plan.

We achieved significant earnings growth in our car rental operations, with pro forma EBITDA from our domestic and international car rental segments up 21% year-over-year and $76 million in aggregate.

As expected, this strength in car rental was offset by negative comparison in truck rental.

Also as expected, the further we move from the Cendant separation, the easier our financial statements are to understand, with a $6 million net separation related credit, the only nonrecurring P&L adjustment to our first quarter numbers.

Turning to our domestic car rental operations, revenue increased 4%, reflecting a 2% increase in time and mileage revenue per day, rental days in line with the prior year.

Domestic EBITDA increased significantly in the quarter to $50 million.

Our average fleet size decreased 1%, and our fleet costs were up 11% on a per unit basis as we took model year 2007 cars into inventory.

For operating and overhead expenses, excluding fleet related costs, were the real story behind our strong results in the first quarter.

We are seeing benefits from our focus on maintenance and damage expenses.

Those costs were down $4 million versus last year.

Our SG&A costs declined by some $5 million.

Finally, I should note that domestic results included an approximately $4 million mark-to-market gain for fuel hedging activities.

Our operating expenses as a percentage of revenue declined to 52%, representing a 100 basis point improvement.

SG&A also improved by 100 basis points to 11.2% of revenue.

Moving to international car rental operations, revenue increased 10%, driven by a 3% increase in rental days, and a 6% increase in time and mileage revenue per day partly due to foreign exchange rates.

Australia is leading the way, reporting strong results so far this year.

EBITDA also increased, albeit by about $1 million less than the revenue increase would have implied due to increased fleet costs and the impact of foreign exchange hedges.

Finally, turning to truck rental, revenue declined due to a 17% decline in rental days and a 5% decline in mileage revenue per day.

The rental day drop was driven by reduced demand across all rental segments and was also reflected in our fleet being 7% smaller than in first quarter 2006.

Decline in T&M per day reflected a decrease in one-way rental rates, which we believe is consistent with market trends.

We believe the volume decline reflects softness in consumer demand in line with the decline in housing sales.

Commercial volume was principally impacted by some Fortune 100 accounts that reduced their rentals for a variety of reasons including increasing their own fleet size.

We have yet to anniversary the weakness in this business that began last summer.

Our results reflect this, with EBITDA for the quarter declining by $11 million year-over-year.

Expect quarter over quarter comparisons to be stronger during the remainder of the year, both as a result of easier comps due to the actions we've taken with respect to this business.

In particular, we have a three-phase restructuring plan for truck.

We've completed the first phase with the closing of the Denver headquarters.

Phase two is moving forward with our expanded local sales force helping us better capture demand, and additional lift gate trucks and cargo vans entering the fleet this quarter.

While still early, we are pleased with the sales activity being generated.

In addition, we continue to look to identify attractive co-marketing or co-location opportunities like our recent addition of trucks at Sears Appliance Outlets in ten states.

Phase three of the restructuring, the opening of more corporate operated locations, is a longer-term proposition also underway.

So, looking at Avis Budget Group in total, we had EBITDA at $62 million, excluding the $6 million separation related credit, depreciation and amortization of $24 million, net corporate interest expense of $33 million, and pro forma pretax income of $5 million.

We paid approximately $3 million in cash taxes in Q1.

We expect full year cash taxes to be $20 to $30 million.

Our diluted share count was approximately 103 million for the quarter.

We continue to invest in our brands and our infrastructure.

Capital spending totaled $20 million in the first quarter, primarily for rental site renovations, and information technology assets.

Finally, our free cash flow for the quarter was $97 million.

While pretax income is a good proxy for free cash flow on a full year basis, there can and will be timing differences from quarter to quarter.

Now I would like to spend some time discussing our cost-cutting initiatives.

Ron, Bob and I have launched a company-wide, cross-functional program to reduce costs and boost resource productivity.

Given Avis Budget's historical emphasis on cost control, which Ron discussed, we're not sure that there's a lot of low-hanging fruit, but we do expect to find significant opportunities elsewhere on the tree.

Let me provide a few examples.

First is the multi-pronged approach we're taking to reduce vehicle damage expense.

It includes better identifying high-risk renters, increasing collection of damage related costs from responsible parties, and preventing fraudulent insurance claims.

This is a key area for us because whether it's a damage avoidance or a collection increase, it has a nearly 100% drop through to the bottom line.

We're rolling out programs to identify high-risk drivers, principally among debit card renters with whom we have no corporate or affinity affiliation or history.

We will reduce our DMV license check costs in the process.

We have a fraud detection department that pays for itself many times over, modified our rental terms and conditions last year to allow us to better recover the true costs associated with an accident this year and we are working on ways to more consistently identify the party responsible for damage while still providing the high level of checkout and check-in speed and service our customers expect.

As I mentioned earlier, we are beginning to see some results from these with first quarter expenses down $4 million from the prior year.

Second, we have initiated a broad-based review of field operations, shared services and overhead functions to seek out best practices and cost savings to be implemented across the organization.

We expect to reduce our manpower planning, shuttling, turn-back and overhead costs as a result of this.

Third, while we currently outsource a significant portion of our call center activity, we're going to look for additional savings in this area, most likely with home-based agents.

This will, not only provide benefit cost savings, but also reduce turnover and recruiting costs.

Fourth, we're working on an environmentally sound and safe way to reclaim fuel from cars we are disposing of.

We are typically required to have only a quarter tank of gas in vehicles returned to the manufacturer or sold at auction.

We do not get paid for amounts in excess of that.

If a car has half a tank of gas and it only requires one quarter for turn-back we're leaving four to five gallons there today.

At $3 a gallon, that's $12 to $15 a car.

It might not seem like much until you consider we turn back or sell almost 400,000 cars annually.

Fifth, we're using virtual audits in addition to our regular onsite audits to reduce costs and protect and enhance our royalty revenue licensees on a real-time basis.

We are improving our customer recovery audits andenhancing our recoveries on this front as well.

Sixth, we're investing in systems and processes to better optimize yield and fleet efficiency.

This will take some time, but every point of improvement in utilization is worth about $25 million to us, other things being equal.

There are other areas we are looking at, but these six provide a good snapshot of how we are attacking our cost structure.

While we're not going to try to quantify what these items will mean to our bottom line, it will contribute to our 2007 results and could benefit 2008 significantly.

At this point we're not contemplating any restructuring charges to accomplish this, but we will consider incurring such costs if the payback is compelling.

Our outlook for 2007 remains basically unchanged since February.

We continue to expect to grow our revenues, EBITDA and pretax income on a pro forma basis versus 2006.

Now that we have one quarter in the books we are adjusting our domestic rental day and T&M per day forecast by reducing the high end.

Our current plan still assumes modest economic growth with no major travel interruptions, domestic enplanement growth of 2% to 3%.

We expect our on-airport rental day growth will approximate enplanement growth.

We expect off-airport volumes to grow rapidly bringing our overall increase in domestic car rental days to 6% to 7% year-over-year.

Comparing domestic enplanements with last year, the second and third quarters should be more favorable while the first and fourth quarters will be tougher comps.

Turning to pricing, our domestic price assumptions call for an increase of 3% to 4% in daily time and mileage rates, where summer leisure rates land will obviously be an important part of this.

Also, our growth off-airport, where length of rental is longer and the daily rate is typically lower, will drag the average down.

We expect our fleet costs will increase about 10% on a per unit basis versus 2006.

Truck rental which represents about 10% of our revenues and EBITDA, we expect comparisons [will] improve over the course of the year.

We'll be facing some earnings headwind as we cycle out of the final portion of the trucks we acquired when we purchased Budget in late 2002.

We expect an increase of about 15% in our per unit truck fleet costs, and therefore expect that truck rental EBITDA will bottom out in 2007 at a level lower than 2006 results excluding restructuring costs.

As an aside, it appeared that some of our comments last quarter were interpreted to suggest that we had under invested in our truck fleet over the last few years.

That is not the case.

We believe we have a young fleet by industry standards with an average age of less than 30 months.

As we look at these dynamics on our 2006 results on a quarterly basis we expect first-half comparisons to be tougher than back-half comparisons.

Most importantly, although our first quarter results were a bit stronger than we had expected and ended up in line with 2006 on a pro forma basis.

We still think that Q2 comparisons may be negative due to insurance and other one-time benefits in the second quarter of 2006.

By the third quarter we expect to see significant margin improvement.

In fact, we continue to be excited about our prospects for the back-half of 2007 and 2008.

Business strategies are having a positive effect, we expect fleet cost increases to normalize, and the lower risk component of our fleet gives us more of a lever for 2008 than our competitors have.

We expect T&M revenue per day and rental day volumes to grow.

We are expanding our high-margin ancillary revenues.

We see significant cost-savings opportunities.

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

Thank you.

We will now begin the question and answer session.

[OPERATOR INSTRUCTIONS]

Our first question comes from Jeff Kessler.

You may ask your question.

Thank you.

Quick question on your off-airport -- your off-airport integration or the need to integrate -- put interfaces to each client.

Is this going to be an ongoing client by client cost increase, or are you going to be able to -- now that you've got four off-airport signings under your belt, are you going to be able to put those -- put the integrations that you have into more of a cookie cutter or, let's call it, centralized base as opposed to having to go client by client?

Hey, Jeff.

This is Ron.

Hi, Ron.

I think our expectation is that as we do more and more of these there will certainly be a lot of commonality amongst the various insurance companies and it will get easier and cheaper as time goes on.

I don't think from a cost standpoint it's going to affect any of the numbers that we have in our current cost structure.

But I think in this early stage of ramping up everybody's a little bit different, everybody's got a little bit of a different process, and it just, frankly, took a lot more time than we expected it to.

But I think you're right.

I think after we get half a dozen or more under our belt it will go a lot smoother and a lot quicker.

Okay.

You mentioned after Where2 and WiFi there might be some further services and products being introduced in Q2.

Obviously you're not going to give me exactly what's going on, but if you could give perhaps the type of things that you're going to be going to do to increase ancillary revenues.

I think what it is -- you're right.

I'm not going to give you detail.

We're just in the process of finalizing the agreement.

We think we're going to finalize it, and I think it's more of an enhancement to the service offering that we have across the board, and it's a way of driving incremental revenues and at the same time providing enhanced service for everybody.

One of the questions I get a lot from clients is with regard to your dramatic increase in online reservations.

Granted your costs of your online reservations are lower, but probably what people are worried about is what can you generate off those online reservations.

Bottom line is what is the margin on those online reservations as they grow as a percentage of your total reservations.

Jeff, all I can tell you -- I can't tell you that we track it by channel -- profitability by channel, but what we do track is ancillary revenue by channel, and I will tell you from our proprietary dot coms, it is second only to walk-up business people who don't have a reservation and come to the counter, and the person at the counter sells them a car and the other services.

So in this regard, in terms of ancillary revenue and in terms of length of rental, both are very good at the dot coms.

So without having the actual profitability numbers by channel in front of me, I will tell you that it's going to be very good.

Okay.

One other question on the forward booking.

Number one, you've obviously given us some color on how you feel the summer season is shaping up; if you could get into that a little bit more.

And also, if you could just give some more detail on those one-time gains that you got last year for the second quarter so that no one is surprised or has any consternation when the numbers are compared when you report the second quarter.

Okay.

Let me start out with thoughts on the summer, and it really has to do with last year.

Capacity in the airlines was pretty tight last year, and yet, right at the peak of the summer you had problems in London, as you recall, which precipitated a change in the security procedures here.

I think you can recall some of the long lines that were being featured on the news, people trying to get through the airports, learning how to deal with clear plastic bags and etc., etc.

All the things that are necessary that you have to do but really deterred the summer.

So for a lot of reasons I think last summer was pretty well depressed.

What we believe coming up is that this summer will be better and we are seeing that in some of the early bills now.

That's how we're focusing the fleet.

Now I'll turn it over to Ron for the --

Jeff, as you, I'm certain, recall the car-rental results were consolidated with Cendant during the second quarter of last year so the level of materiality on disclosure was significantly different than it currently is today.

I think one of these we did disclose in the second quarter of last year which was a PLPD reserve adjustment.

The smaller ones that we didn't there was a Katrina reserve that we had up for lost cars that reversed into income.

Then there was a gas-in-tanks accounting issue that changed the way we accounted for gas in tanks.

When you add all those up, they aggregate about $24 to $25 million, and the biggest -- by far and away, the biggest chunk of it was PLPD.

Okay.

As you know there's been an ongoing favorable adjustment for all the car rental companies because of the elimination of the vicarious liability statutes in the big states.

Everybody is having an experience adjustment benefit from that so they actually are real gains.

They're not sort of accounting issues or reserve reversals.

They're actual real gains and they've proven in experience.

Right.

The final question and that is in pricing since everybody's been talking about pricing the last couple weeks.

And I guess are you comfortable, at this point, in time where you are?

I mean, you've given a lot of detail as to where you are on the commercial side.

On the leisure side, are you comfortable that you are -- that the industry itself -- because it is an industry dynamic -- is going to get the type of pricing that will be needed to cover the fleet costs?

I believe so, Jeff.

I think that what we did in the first quarter was just to adjust back.

We were really -- our two brands were really out of position in the marketplace and we just tried to move back to what we thought our real position is.

And I think as Ron talked about, those kind of leisure pricing increases at the top of the quarter were a little sluggish but then a market-price increase did come along and it did move rather well throughout the industry.

So as we start to look at the summer, and if others also believe as I do that the summer could be pretty good, I would expect to see continued buoyancy in the pricing -- leisure pricing across the rest of the year.

So it's fair to characterize the first quarter -- and I realize the first quarter is the most insignificant quarter of the year, and we try to stress that in our notes.

The first quarter -- pricing in the first part of the quarter was somewhat affected by you folks but you did get through a pricing increase in the latter part of the quarter.

That's correct.

Okay.

Thank you very much.

Thank you.

Our next question comes from Chris Agnew.

You may ask your question.

Hi.

Good morning, gentleman.

Hello?

Good morning.

Good morning.

Sorry.

I just continue on that theme of pricing.

I think Hertz talked about a little bit of improvement in commercial pricing and you still talked about competitive pressures.

Is there a subtle difference that I'm missing there?

I don't think so, Chris.

If you recall our remarks, commercial pricing is up.

We're getting increases between 2% and 4%.

They're averaging probably right square in the middle.

We think that there's room for more pricing increases but it is the competitive situation that's probably holding them down to the 2% to 4% level.

The frustrating thing is that we felt coming out of MBTA last year that the industry was ready for much bigger increases on the order of 5% to 6%, but I think as others tried to go after share in that market it's dampened it.

We're clearly getting price increases.

Do you think, given that this was the year of the fleet cost increases, that you've missed that window of opportunity to get more pricing in commercial or do you think that if there's a more rational environment next year maybe you can still head towards that sort of pricing?

I think the answer is that it all depends on what the competitive climate is and how everybody plays the game.

Now, I think if you simply step back and look at it on a macro basis, car rental is cheap relative to any of the other options that somebody has when they get to an airport so there's a lot of room to move prices.

So it really is only the competitive dynamics in the marketplace that holds car rental pricing down where it is.

You know, that's always going to be the case and that's why I think you hear us and Hertz, and I'm certain you'll hear it from Enterprise, that everyone's focused on improving productivity because if you can't get it on the top line then do whatever you can to get as much as you can on the bottom line.

And when you tap that out, everybody's going to move to increase prices.

So I'm not sure I can give you a rifle-shot answer to that but I think those are the dynamics.

Okay.

Thank you.

And then changing tact slightly and thinking about your growth and rental days, what are the margins caused you to sort of lower the top of the end of the range, so now looking for 6% to 7%?

And given you are looking for that sort of growth, would it be fair to assume that you'll need to start growing your fleet 5, 6 or even perhaps 7% and starting in the second quarter this year?

And does that make it difficult for you to get pricing perhaps in leisure, particularly if you have very tough comps in the second quarter of this year?

I guess there are three questions in there, right, Chris.

The middle one is that will we need to grow the fleet in order to accommodate the additional volume.

Generally speaking, the answer is yes.

We do hope to have some improvement in utilization, particularly in the third quarter but we will grow the fleet to accommodate that demand.

With respect to the change in the high-end of our volume-growth projection, that really reflects where we ended up in the first quarter as well as the fact that in the first month and a half of the first quarter we were still pushing price fairly hard.

That had a little bit more of a -- realized.

The issues with respect to price and how it relates to our volume growth, I think we are optimistic and hopeful that the two can move together upward as we move into the summer months.

It's a different dynamic in the summer where there is just a higher level of demand and greater utilization of the fleet, even with the fleet growing.

I think that should be what allows us to get rates to move up at the same time the volume strengthens.

That's particularly true given the weakness in volume that we had last year during the month of August.

Okay.

Thanks.

And then a final question.

If you execute the plan this year you'll generate some significant cash flows and that's obviously going to grow nicely with that if you get good EBITDA growth next year.

Can you sort of run through the priority for your use of cash?

Sure.

Near term, we're continuing to look to use some of our cash flow to pay down debt and make some progress in reducing our corporate debt.

The other thing we continue to look at are licensee acquisitions.

Those tend to be relatively small but are also a very attractive use of capital -- when we can acquire them.

Often, they'll tend to be $1 to $5 million deals.

We're hopeful that we can find some that are attractive.

As we move later into the year, and ideally, our credit metrics improve both as a result of making progress on the corporate debt as well as growing our EBITDA, the expectation is that we would have an opportunity to re-look at alternatives and make a decision based on what the best use of capital is at that point in time.

And that would include share buybacks?

That would be one of the alternatives we would analyze; that's correct.

Okay.

Thank you very much, gentleman.

Thank you.

Thank you.

Our next question comes from Christina Woo.

You may ask your question.

Great.

I've seen a lot of Where2 ads.

I was wondering if you had increased your marketing spending in the first quarter versus last year?

Hi, Christina.

No.

This was built into the marketing budget for the year and the marketing budget for the year is fairly flat year-over-year; just nominal inflationary increase.

Okay.

And then what percent of locations is the Where2 GPS system now available?

Right now it's about 84% of rentals are at locations where it's available.

Would you say that the unit was primarily responsible for the strong performance in other revenues that you had in the quarter?

Well, I think Where2 did very well and there's no doubt about it, especially when it's something over zero.

But I will tell you that our other revenue opportunities also did very well.

If you take out Where2 it's about a 9% improvement.

That's helpful.

And you also mentioned on the call that you've had a 6% pick-up rate on the Where2 unit.

Would you consider that to be what you're anticipating on a run-rate basis?

Do you think that there was a lot of initial trial and that'll fall off?

Can you just give us a little bit more thinking on how we should think about that business?

I think that this -- the take rate increases week to week to week.

Every week it goes up.

It's now actually pushing through 6 at Avis; and Budget, because we started a little later, is just right behind it.

I think the -- this is Ron, Christina.

Actually, the real acid test is going to come in June and July when we get into the summer travel months and we see the take rate is on the leisure side of the business.

We actually expect that it'll probably -- our expectation is that it will ramp up from there.

And then the other thing that we're doing is getting Where2 coded into the profiles for each of our renters so that it becomes an automatic take when somebody comes up to the desk and you don't have to expressly offer it to them.

We think all of those things taken together are going to drive the take rate over the summer.

But until we get through the summer months and we see how it reacts to the leisure travel we're not going to have a definitive answer.

Right.

And then on the Budget Truck business, which was surprisingly weak based on my expectations; do you have any anticipation for when you'll turn the business around?

And by turning it around, I don't necessarily mean having better comps but even just reaching a point of profitability.

Well, I think our expectation is -- and I would say our cautious expectation is that first quarter was really the bottom of the business.

We do think that over the course of this year and the back three quarters profitability will improve.

When do we think it will get back to -- and the other thing to keep in mind is that the first quarter is always weak in the truck business as it is in the car business.

When it gets back to the sort of normalized margins, I sort of put this on a near term, medium term and long term.

I think in the near term it's going to benefit from the cost savings that we achieved from consolidation.

I think by the end of the third quarter we will have had a sales force out on the street then long enough to be able to build the commercial account midweek business, which should drive some incremental profitability and contribute towards the upswing in profit.

To me, getting back to where we think margins ought to be is a function of how quickly we're able to move to the -- to change our distributor network, to have more corporate owned locations where we can start to get into the ancillary revenue business, selling boxes and tape and packing materials and dollies and the like, which are, as you've heard us say before, the Where2s of the truck business.

And we do very, very little of that kind of revenue [today].

It's largely because it's hard to manage and control when you have an only dealer managed network.

So moving with more corporate owned locations we think is going to give us the ability to move that revenue line pretty significantly which should improve profitability.

And when you look at that, our new head of Truck has got four new locations in place.

As of today, he's in agreement on a half a dozen more.

Our goal is to move out to every major metro area and [inaudible] doors in place.

So you're looking probably at a year to 18 months before [inaudible].

Okay.

This is David.

I just want to reiterate that Truck will be profitable this year.

There is, as Ron mentioned, significant seasonality.

When you look at 2006, Truck, on an EBITDA basis, was roughly break-even for the year but significantly profitable -- it was break-even for the quarter but significantly profitable for the year.

As a result, we're hopeful and expecting that the middle months of the year in Truck, particularly the third quarter, will be a significant [generator] of EBITDA.

Great.

Thanks so much.

Thank you.

Our next question comes from [Emily Shanks].

You may ask your question.

Hi.

Good morning.

Just a quick question about your risk-car mix.

On the fourth quarter conference call you had indicated that you were in the process of evaluating it.

It sounds like based on your comments today, your '08 -- fiscal year '08 you're looking for a 40% to 45% mix of risk cars.

Is that your long-term target?

Do you feel good there or would you look to increase it?

What are your thoughts around that?

Emily, I don't know.

I think that certainly our target for the '08 model year, and then we'll see how things go.

And as we get into the year, depending upon the pricing that comes out of the manufacturers, if there's opportunistic deals out there it may go up a little bit.

I think we will always have a fairly large plug of program cars simply because we want the flexibility to make the fleet go up and down.

This is especially true in seasonal markets.

I think by getting to 40% to 45% next year, that'll give us enough cost-saving opportunity and still give us a nice balance of program cars to do what we want to do with the fleet.

Great.

Thanks.

And then just one other question.

As you start thinking about your revenue mix between off-airport and on-airport this year, and then going into next year and long term, where do you see that mix?

Right now it works out to about 80/20 on-airport and off-airport.

We expect to see somewhat more rapid growth off-airport, so if we can grow off-airport in the 15% to 20% range over time, on-airport's growing probably closer to the 8% range.

The math associated with that will tend to add a point or 2 to the off-airport mix [on an annual] basis.

Great.

That's helpful.

Thank you.

Thank you.

Our next question comes from Zafir Nazim.

You may ask your question.

Yes.

Hi.

On the rate increase that you expect for the year of 3% to 4%, and I guess since you had a 2% increase in the first quarter, that would imply that the rest of the year you're probably looking at 4.5% to 5% increase.

Should we expect this to be fairly evenly spread across the quarters or higher in the second quarter and lower in the second half of the year?

Any guidance you can give us in that respect?

We expect it to build going into the summer.

As we've indicated, the comps are going to be probably the easiest and the market is probably going to be strongest in the third quarter.

Thank you.

Okay.

And then on the fleet cars, your estimate 10% increase during the year, again, how would you divide this between first half and second half given the change in mix that you'll have in the second half from the '08 fleet car?

So I would imagine more in the first half and less increase in the second half, but could you quantify there?

I think that's a fair way of looking at it.

We were up about 11% domestically in the first quarter, and how it plays out in the fourth quarter will depend on where our model-year 2008 negotiations end up.

But even with that potentially moving around a few points, it has a muted impact because most of our fleet this year being model-year 2007 vehicles.

And just in terms of the cost, could you give us some idea about what is the difference -- what's the average difference in the monthly depreciation of a risk car versus a program car?

What's the benefit we're talking about when you move from a risk car to a program car?

On average, it tends to be a little bit north of 10% this year but it is also a challenge to look at averages because on the margins they can be different.

There are certainly times and basis and car types where we very much like having the program cars in the mix.

But a little bit north of 10% is what we're expecting in terms of the difference this year.

Okay.

And then on the Where2 units, you mentioned that you've got 20,000 units in place right now.

Where do you expect this number to be by summer?

I think it's really going to be dictated by the demand.

We've been working very closely with the manufacturer of these units and we have some stored up.

We keep adding them on a weekly basis as demand continues to increase.

I mean, I think we've talked about before that by the end of the year we anticipate doubling the number we have today.

So you can almost follow along with the third quarter being our heaviest quarter where you say we could really start to ramp up there.

And just a couple of housekeeping questions.

One, what's the CAPEX budget for this year?

It's about $80 to $85 million.

Okay.

And then you mentioned in the press release that you had some benefit from insurance and other one-time items in '06.

I was wondering if you could quantify the amount and whether all of that was in the second quarter of last year.

As Ron mentioned, there was a little bit more than $20 million of benefits related to insurance, [gas in tanks] and a reversal related to Hurricane Katrina that impacted the second quarter.

Insurance costs also benefited a bit in the third and fourth quarters from the same favorable experience that began to develop early last year.

Okay.

I guess that's it for me.

Thank you.

Thank you.

And our final question comes from Michael Millman.

You may ask your question.

Thank you.

I just have several questions.

On the price, I thought it was interesting -- maybe you can comment -- that Hertz sort of emphasized that their commercial pricing seemed to be okay at 4% but they were particularly challenged in leisure pricing, and you seem to be saying a little bit of the reverse.

Any color on that?

I don't think we are, Mike.

I think what we said was that our commercial price increases have ranged between 2% and 4%, that early in the quarter on leisure we were in the 5% to 7% range but we were losing share and the res build was softening.

So we dropped price from 5% to 6% which may well be what, at the end of the quarter, Hertz was referring to as a price challenge.

When you look overall at our quarter on average, commercial was up 2 and leisure was up 2.

I guess continuing, when you look sequentially, your average price dropped about 2.5%; Hertz dropped less than 1%.

Yet, you seem to have lost share in the first quarter despite lowering the price further.

Is there anything that we're somehow missing here?

I think it is a challenge given the seasonality of the business to look at pricing on a sequential basis.

But even if you go down that path, remember that we were pushing price in the fourth quarter very aggressively and had a higher-than-market increase in pricing we achieved there.

So that's why you'd probably see more of a drop off sequentially in our numbers than in other folks' numbers.

But it didn't seem to help your relative share.

Yes.

We think our first -- we think shares moved in line with that.

Our first quarter share, we think, will turn out to be stronger than our fourth quarter share on a year-over-year basis.

And the other point I should make is we end up with a little bit different mix as well having the Budget brand, which skews more to the leisure side; whereas Avis is more of a proxy for Hertz.

The OP EX first quarter you said was 52%.

Do you see that as being only getting better as we go through the year and next year or is there something unusual about the 52%?

We are -- as I discussed, we are very excited about the cost-savings opportunities.

There is always going to be some noise in that number from quarter to quarter, but there is nothing particularly unusual or giving rise to what we achieved in Q1.

Can you give us some notion as to where we might expect to see that in '08?

Now, that's a level of detail, Mike, that's beyond where we're comfortable going at this point.

In regard to the Enterprise deal, I guess two questions.

You did talk about very helpful how you see the competitive dynamics but you didn't talk much about the competitive dynamics in the off-airport where Enterprise now may have two more brands to put out there as secondary sources.

How do you see that and how do you see that affecting your initiatives in that connection?

Well, Mike, when you think about off-airport and you think about the share that our two brands have versus Enterprise, if Enterprise wants to add two additional brands to the off-airport mix, Godspeed and good luck.

I think our brand, Avis and Budget, have plenty of room to grow off-airport even if National and Alamo and if Enterprise decides to [inaudible].

And also on the deal, how has that affected the private-equity people, in your opinion, and their thinking about the industry?

You'll have to ask them that question, Mike.

I'm not going to purport to be the arbiter of what goes on in private equities' mind.

Okay.

Thank you.

All right.

Thank you all very much.

We look forward to seeing you on our second quarter call in July.

Thank you.

And this does conclude today's conference.

We thank you for your participation.

At this time you may disconnect your lines.