Avis Budget Group Inc (CAR) 2007 Q2 法說會逐字稿

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 conference over to Mr.

David Crowther, Vice President of Investor Relations.

Please go ahead, Sir.

Thank you, Kimberly.

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.avisbugetgroup.com or on the [first call system].

Before we discuss our results for the quarter, I would like to remind everyone 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 could cause actual results to differ materially from those in the forward-looking statements and projections are specified in our 10-K 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 5% to a record $1.5 billion for the quarter.

We generated $87 million of EBITDA bringing our first half total to $155 million which was in line with our 2007 business plan.

We reiterated our expectations for pro forma revenue, EBITDA and pre-tax income growth in 2007, and have provided our current estimates for the full year results.

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

Thanks, Dave.

And good morning to everyone.

It's been an interesting two weeks to say the least.

I generally check our stock price every afternoon, but I found myself slightly more preoccupied with it over the last few days, wondering what we had missed in the market place or what we were or weren't doing in our business to precipitate a decline on the order of magnitude we experienced.

Clearly, with the private equity funding being severely cur-- curtailed we had anticipated some pull back in our share price, but even considering that, we still believe there is an overreaction to the current climate being reflected in our stock price.

As you'll hear today, business is good.

Our results have been in line with our plan, our metrics are improving and our access to funding is solid.

We've heard anecdotally that access to credit may be the broad brush that our stock is getting painted with, but as you'll hear from David that really isn't an issue given our lending commitments and balance sheet.

In fact, other than [ABS] rollovers, we have no maturities until 2-thous-- 2012 and have over $1 billion of undrawn credit capacity on our revolver.

Truthfully, I don't pretend to be smart enough to have figured out what drives the volatility on any given day.

As many others before me have concluded, all you can do is run your business in the smartest way possible to deliver sustainable long term results.

And if the things you are doing are right, the stock will eventually respond accordingly.

That's what we're doing and, in the long run, we all feel strongly that our shareholders will be rewarded for it.

So this morning, I want-- I do want to spend a little bit of time talking about how we see the business longer term, what we're doing about it and then follow-up with a little bit about some of the near market dynamics.

First, in a general sense, there is no question the industry is consolidating.

From our own acquisition of Budget, to Enterprise's acquisition of Vanguard, it is clear that the larger players are getting larger.

Second, competition is getting more intense.

In a period where our primary cost element, Fleet, has gone up nominally some 40%, we are struggling to get price increases that simply cover our fleet, let alone the cost of operation.

But this reinforces that what we all learned in Econ 101: with a quasi-commodity product, the market is always going to set the price.

What it also clearly suggests, though, is that you have to manage what you can directly control, your operating costs, as tightly as you possibly can.

So it's no surprise that Hertz has embarked on a cost cutting campaign or that Dollar has announced further cost reductions, or that Enterprise is going to enjoy significant cost reductions with the integration of Vanguard.

Our own experience with Budget certainly bears the latter point out.

That is the natural response to the environment we find ourselves in.

We're no exception and while we have always managed our costs very tightly, there is always more that you can do and in our case, we-believe- [ that was true].

The other mandate that this new world order imposes is optimizing our pricing and fleet management to grow revenue and profitability.

Even the slightest inefficiency is a competitive disadvantage.

Pricing and fleet management have to become more dynamic and more tailored to the local market and channel dynamics.

It is no longer sufficient to manage it on a regional, let alone national basis, or manage it across the different channels without understanding the unique cost implications.

So over the course of the next year, you will hear from us about two important initiatives we launched this quarter, one which we call Performance Excellence and the other, for lack of a better term, Optimization.

In the case of our Performance Excellence initiative, we have taken some of the best and brightest from each discipline in the company and assigned them the task of examining every process throughout our operations.

First, to be sure we're doing it as efficiently as it can possibly be done and second, to ensure that every location does it exactly the same way.

It may sound elementary, but we are in several hundred different locations.

Each one of them doing almost many of the same repetitive tasks, and I promise you not all of them are doing them the same way.

For this initiative we are targeting $100 to $150 million of cost reduction to be realized over the next three years.

Our Optimization initiative is certainly about more sophisticated and integrated fleet and pricing systems, but it's also about creating specifically tailored decision rules to act more quickly and more locally than we have in the past.

In addition, there is a wealth of knowledge about CRM and booking curve management from other industries that we can apply to ours that will drive an additional contribution from this initiative.

These two projects, along with our primary strategic initiatives, will be the foundation for earnings and margin growth in the future that should help us insulate our earnings no matter what pricing does.

Let me turn to more immediate issues, starting with the quarter's pricing environment, which in a word was challenging.

While contracted commercial pricing was up right around 2% in the quarter, other commercial business and insurance replacement growth brought our overall commercial pricing to flat year-over-year.

Leisure pricing was soft in Q2, so our blended time and mileage per rental day was down 3% versus the second quarter of 2006, although we still are up 7% versus 2005 levels.

The second quarter displayed some interesting dynamics, which we believe reflects, to a degree, the industry's shift toward a smaller percentage of short-term program cars.

In particular, this change in our and our competitors' fleet composition altered the decision we, and presumably our competition, would have previously made to de-fleet following spring-break and Easter: With fewer short-term program cars, the cars that would otherwise have been turned back to the manufacturers now need to be retained and meet the summer peak.

As a consequence, the industry was probably somewhat over-fleeted from mid-April to mid-June.

And as you know, when the industry is over-fleeted, price often declines as it did in the second quarter as we all tried to drive volume and utilization given the extra cars.

The alternative would have been to de-fleet and risk having too few cars to capture the premium price demand during the summer months.

It would appear some of this occurred anyway as industry fleet levels seem to be relatively tight during the summer peak.

Our experience in July and our forward [res build] for August suggest that this in fact was the right decision with year-over-year third quarter pricing currently tracking well ahead of what we experienced second quarter.

As we discussed on our last few calls, the commercial pricing environment remains mixed as the price increases we achieved on commercial renewals in the second quarter, once again, were typically between 2% and 4%.

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

Surprisingly the biggest disappointment this year has been leisure pricing.

We're seeing intense competition for transactions and for affiliate relationships that generate reservation volumes.

As David will discuss, second quarter results and current trends for leisure pricing have caused us to reduce our outlook for full year 2007 pricing growth.

However, because of cost reduction initiatives, we are still forecasting growth in earnings in 2007, and in particular, a strong domestic car rental result in the third quarter.

That doesn't stop us from continuing to look for opportunities to achieve higher pricing and last week, we initiated a leisure price increase of $5 per day and $20 per week, beginning in mid-September.

Early indications are that our competitors are following our lead in most markets.

Overall, preliminary data for the quarter suggests that enplanements were up 2% year-over-year which we outpaced with our rental day volume up 6%.

Average fleet was up 5% so utilization ticked up slightly.

So, if you recall last quarter's call, the profitability equation is three-dimensional among rate, volume and utilization, and while rate was soft and utilization held we closed much of the gap through volume growth.

We also continue to contain our costs, which have been and will continue to be an area of intense focus for us.

As a result, Domestic EBITDA was consistent with last year if you exclude the $13 million of insurance benefits [we] recorded last year.

International, particularly in Australia where we are the market leader, continues to perform well with EBITDA growth of 11% year-over-year, even with the negative impact of the mark-to-market requirements of our foreign exchange hedges.

Our Truck business continues to be challenged on the revenue line.

The continued softness in the self-moving market, in particular one-way, is overshadowing the operational improvements that we are making each month.

In the last six months, we have reduced SG&A costs, built local sales capabilities, down-sized the fleet to reflect the reality of weak demand, and moved aggressively to open corporate-owned stores to capture ancillary revenue opportunities.

These are all improvements that will lay the groundwork for higher margins when demand strengthens.

We continue to believe in this business and we are making progress, but we simply need a better market environment to drive total profitability back to acceptable levels.

[Looking at our business in total], let me remind everyone that we are tracking on target with the guidance that we provided at the start of the year.

The first half would reflect tougher comparisons, and the back half would show year-over-year improvements.

And just as importantly, we are very encouraged about how the business is operating and the strides we are making on our strategic initiatives.

[On] the ancillary revenue front, our Where2 navigation unit continues to hit our aggressive targets with the take rate over 7% at available locations.

We ended the quarter with about 32,000 units in the field and currently have about 38,000 today in the market, including Canada and Puerto Rico.

We also increased the price by $1 a day in many locations with no take rate impact.

In the second quarter, we continued to add products and services to enhance the productivity of the business traveler and increase the convenience to the leisure traveller as well.

Avis Connect, our portable Wi-Fi product, has expanded its pilot program.

Based on the reception it received at NBTA last week, we continue to be encouraged about the prospects for this product.

We have electronic toll collection services available at all major east coast airports, Chicago and Houston with Florida and Colorado coming online in the next 60 days.

And we announced Avis Chauffeur Drive, which combines the ease and reliability of an Avis rental with a professional, fully insured driver.

Each of these represents not only an incremental profit opportunity for us, but also a way to enhance the vehicle rental experience we provide to our customers.

In the off-airport market-- we're continuing to expand our geographic footprint.

We have opened 73 stores through June, have 74 more in the pipeline and additional locations identified, so we remain on track to open our target of 200 stores this year.

We went live with our insurance replacement software at three companies in the second quarter and saw insurance replacement revenues increase 22% in the quarter.

We have six more implementations scheduled for the third quarter.

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

So while still early, we're excited about the growth we are seeing and the potential in this market.

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

So in summary our message is the following: We are meeting the challenge of an evolving consolidated marketplace head on.

We are making good progress toward our strategic initiatives.

In total our first half earnings were consistent with our expectations; with Domestic car rental EBITDA up 5% and international EBITDA up 7% year-to-date.

We achieved those earnings through cost savings in a tougher pricing environment than we anticipated.

We don't think that pricing in second quarter is a proxy for the summer months, both based on our experience to date and dynamics caused by changing fleet composition in the industry.

We expect, as we have all along, that the second half of 2007 will be considerably stronger than the first half.

And we continue to project pro forma revenue, EBITDA and pre-tax income to increase in 2007, compared to 2006.

With that, let me turn it over to Bob to discuss fleet purchases and some of our online marketing.

Thanks, Ron.

Another area that should and does attract investor attention is fleet.

We have begun accepting model year 2008 vehicles and have reached conceptual agreement on terms with manufacturers representing the substantial majority of our expected buy.

Three themes have been apparent in this year's fleet negotiations.

First, on a per unit basis fleet costs will again out pace inflation, but not nearly to the extent that they have in the past two years.

Secondly, changes in manufacturer repurchase program terms are making risk cars generally more economical than program vehicles.

And lastly, the domestic manufacturers' decision to reduce sales to the car rental industry, combined with the higher cost of short-term program vehicles will cause us to hold cars modestly longer but it is not impacting our ability to obtain the supply we need.

Let me discuss each of these in turn.

First, beginning with our fleet costs.

We currently estimate that our fleet costs will rise between 4% and 6% on a per-unit basis, which is higher than inflation but lower than previous years' significant increases.

Some type of cars, particularly program cars are carrying higher increases than we are willing to pay.

Fortunately we are able to manage the cost down by increasing the risk or non-program portion of our model year '08 purchases.

Our expectation is that risk cars will compry-- comprise right around half of our model year '08 purchases, more than double our split in the model year '07.

We are continually looking at the fleet mix and vehicle sizes in order to bar-- provide our customers with quality products that fit our needs while minimizing our costs.

We will also have about a 7% increase in smaller units in our inventory in '08 versus '07.

Our domestic fleet continues to be highly diversified: includes Hyundais, Kias, Mitsubishis, Nissans, Subarus, Suzukis and Toyotas, in addition to GM, Ford and Chrysler cars.

And, this year we are also adding Volkswagens.

Additionally we have added three hybrid models this year: the Toyota Prius, Nissan Altima and the Ford Escape, which will come into the fleet later this year.

In fact, our fleet is becoming increasingly "green".

We will be increasing our number of both hybrid and E85 capable vehicles.

We currently have over 35,000 vehicles in service that are either hybrid-powered or E85 capable.

We anticipate that this number will grow to nearly 39,000 vehicles by January, '08.

And, in addition to the current number of hybrid/ E85 vehicles we have another 175,000 vehicles in the fleet that get better than 28 miles-per-gallon.

Turning to the second theme, the incentives offered by the OEM's clearly make risk cars more attractive.

For the third year in a row the price increase for program cars will be significantly higher than for risk cars.

Our migration to risk cars is also supported by lower Cap costs.

And with interest rates up and the Cap cost of a program car typically being higher than for a risk car, the carrying cost for risks cars has decreased.

Additionally, the used car market has been solid, and in the future, risk car values should benefit from reduced fleet sales.

These factors are what is leading us, along with others in the car rental industry, to further increase the non-program component of our fleet.

Lastly, among the key themes, fleet availability is something that has generated a fair amount of investor questions over the quarter.

I'm happy to continue to report we are not having any issue obtaining the quantity of fleet we need to operate our business.

Please remember that yes, the OEM's are going to report lower fleet sales for two reasons.

One, it's something they said they would do and second, we, in the industry, have lengthened our holding period, thus reducing our need to purchase as many vehicles in order to have the same or even greater fleet coverage.

As we have said before, probably didn't make sense to the OEM's to incentivize us to take three cars for four months each when having one car for 12 months still allows us to put our customers in quality-- quality, relatively low mileage vehicles.

We view the increase in our average hold period - to a bit over 10 months - as the pendulum swinging back to a more normal level by historical standards.

Before turning it over to David, let me touch briefly on our website performance.

We generate more car rental reservations online than anyone else.

Our largest source of internet reservations comes through our own branded websites, which at the end of Q2 was nearly 30% of our reservations, up 16% versus last year.

This is a significant factor in our business because of the low cost associated with this channel.

In the long run, this will help us control our total reservation costs.

According to Media Metrix, visit-- visitors to car rental sites increased 6% in May.

Avis Budget was up 19% and had the largest number of visitors.

Our online strategy continues to focus on the growth of our other internet channels including direct connect, online travel agencies and our partnerships with Southwest Airlines as we continue to look for the most efficient way to find renters and have them book their reservations.

Today over 30% of Avis' and 50% of Budget's reservations are booked online in some manner.

We leverage the investment and assets of our two dot-coms by building technology from one brand that can also be used by the other.

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

Thanks, Bob.

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

In the second quarter of 2007, we grew revenue by 4%, to a record $1.5 billion, generated pro forma EBITDA of $90 million, and had pre-tax income of $38 million.

The results of our domestic operations were consistent with 2006, excluding the $13 million of insurance benefits recorded last year.

International grew 11%, and truck declined as expected.

Also, as promised, the further we move from the separation, the easier our financial statements are to understand; with $3 million of expenses as the only separation-related adjustment in our second quarter P&L.

Turning to our domestic car rental operations, revenue increased 6%, reflecting a 6% increase in rental days, and an 18% increase in ancillary revenues, offset by a 3% decrease in time and mileage revenue per day and increased fleet costs.

Our average fleet size increased 5%, in-line with rental day growth, and our fleet costs were up 5% on a per-unit basis as we continued to take actions to reduce our per-unit fleet costs and our risk cars performed better than expected.

Domestic results did include a $4 million mark-to-market gain from our fuel hedging activities.

2006 results included a $10 million benefit from lower reserve requirements on our self-insured liability and damage claims, and about $3 million of insurance recoveries related to the 2005 hurricanes.

We continued to see improvements on the expense side with our operating and overhead expenses down on a per-transaction basis versus last year.

We are achieving savings in maintenance and damage, insurance, vehicle license and registration and personnel expenses.

Our operating expenses as a percentage of revenue remain flat at 51%, despite the weak pricing environment, and SG&A improved as percent-of-revenue.

Moving to international car operations, revenue increased 13%, driven by a 3% increase in rental days, and a 9% 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 increased 11%, generally in-line with the revenue increase.

Because we hedge most of our earnings exposure to foreign exchange rate moves at the beginning of the year; The rate changes that are benefiting revenues have a more limited effect on current year EBITDA.

Finally, turning to truck rental, revenue declined due to a 9% decline in rental days and a 4% decline in time and mileage revenue per day.

The rental day drop was driven by reduced demand across all rental segments, as well as our fleet being 9% smaller than in second quarter 2006.

The decline in T&M revenue 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 and not helped by historically high fuel prices.

You are just now anniversarying the weakness in this business that began last summer, and our second quarter results reflect this with EBITDA declining by $8 million year-over-year.

We expect quarter-over-quarter comparisons to be stronger during the remainder of the year, both as a result of easier comps and due to the actions we've taken to reposition this business.

In particular, we have increased the size of our dedicated local sales force by 50% and are seeing the benefits of their efforts.

So in total, we had EBITDA of $90 million, excluding the $3 million of separation-related expenses, depreciation and amortization of $20 million, net corporate interest expense of $32 million, and pro forma pre-tax income of $38 million.

On the tax line, we are still expecting our GAAP provision to be in the 40% range for the full year.

We have paid approximately $10 million in cash taxes in the first half.

We expect full year cash taxes to be $20 to $30 million, and our diluted share account is approximately 105 million.

We continue to invest in our brands and our infrastructure.

Capital spending totaled $31 million in the second quarter, primarily for rental site renovations and information technology assets.

We currently estimate that full year CapEx will be in the $90 million range as we are finding it economically attractive to tackle some infrastructure and development projects sooner rather than later.

Finally, our pre-cash flow year-to-date was $35 million.

At the risk of repeating myself, while pre-tax income is a good proxy for pre-cash flow on a full year basis, there can, and will be timing differences from quarter to quarter, which the first and second quarter clearly demonstrate.

Year-to-date our pro forma pre-tax income is $44 million and our free cash flow is $35 million, which includes separation impacts.

Let me make a few quick comments regarding our debt structure.

As some investors have been concerned with the potential impacts of recent happenings in the credit markets.

First, we fix the rates on just about as much of our floating rate debt as possible, thus limiting our exposure to rate moves.

Second, our access to funding remains strong.

We completed $650 million asset-backed financing in the second quarter, the tightest borrowing spreads we have ever achieved.

We ended the quarter with more than $1.7 billion of available capacity, under our vehicle financing programs, and more than $1 billion of undrawn capacity under our revolving credit facility.

Third, we do not foresee the need to be in the debt markets for the remainder of 2007.

Our first corporate debt maturity is in 2012, so we do not expect to be impacted by the recent turbulence in the high-yield market.

We had planned, and still plan, to tap the AAA asset-backed debt market in the first half of 2008.

If current conditions persist in that market, our borrowing spreads on new paper could be about a 0.25 point higher than what we're paying on our most recently issued ABS debt.

Turning to our outlook, we have provided full year ranges for revenue, EBITDA and pre-tax income.

Our forecast calls for revenue growth of 7% to 8%, driven primarily by domestic rental day growth.

On a pro forma basis, EBITDA and pre-tax income are forecast to grow 1% to 6% and 13% to 25%, respectively.

Now that we have two quarters in the books and have seen how the leisure pricing environment has developed in 2007, we are adjusting our domestic rental day and T&M per day forecast.

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, and we expect off- airport volumes to exceed that rate, bringing our overall increase in domestic car rental days to 4% to 5% year-over-year.

In 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.

In the area of pricing, we expect to continue to achieve modest increases as we renew commercial business.

We foresee leisure pricing remaining competitive, but likely without the added pressure caused by some industry over-fleeting that impacted the second quarter.

Where summer leisure rates land will obviously be an important part of this.

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

Importantly, we now estimate that our fleet costs will increase about 6% to 7% on a per unit basis versus 2006 - about 3 to 4 points less than our prior estimate.

In truck rental, which represents about 8% of our revenues and EBITDA, we expect comparisons will improve over the course of the year.

We are still 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.

In the third quarter, we expect to see significant margin improvement with Domestic EBITDA forecast to increase greater than 25%.

Increase will be driven by top line growth in pricing and rental days, ancillary revenue growth and continued expense management.

Now I'd like to discuss one of our principal margin improvement initiatives.

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

We, as a company, have always had a culture that is cost conscious and we are not changing that culture.

Historically, we have found numerous ways to strengthen the car rental experience we offer, while reducing costs or otherwise increasing the productivity of our resources.

Counter bypass programs are probably the best example ever.

Internet bookings, where we have been a clear industry leader are another.

And our taking of reservations for specific "cool car" models and our pilot program to reduce the amount of gasoline in disposed vehicles are process improvements happening real-time.

Our plan is to examine processes throughout the company: from rental check outs to procurement; from vehicle turnbacks to the allocation of our marketing spending; from reservations to information technology; from administrative functions to customer check-ins - to identify additional opportunities for improvement.

We are devoting high potential internal resources, some on a part-time basis and some on a full-time basis, as well as investing in systems and training to drive this effort.

We will take advantage of analytical and process improvement tools, such as Six Sigma and Lean, as appropriate, without trying to make any single co-- any single approach a company-wide panacea.

We are approaching the issue of resource productivity, not-- not as an opportunity for incremental profitability, although it is that, but rather as a strategic necessity.

We need to have a cost structure that is competitively and comparatively low for the product we offer to customers.

This process improvement initiative is designed to achieve a sustainable step change in our cost structure.

Our target is to remove more than $100 million of expenses over the next couple of years.

We expect to see some benefits from this later this year, with more occurring throughout 2008.

As a result, we continue to be excited about our prospects for the back half of 2007 and into 2008.

Our plan to return margins to normalized levels is unchanged and is supported by three avenues.

First is price, which can do-- which can do this all by itself, but is market-driven.

We will continue to look for opportunities to raise prices, and as Ron mentioned just last week, initiated a price increase for the fall.

The second area is revenue optimization.

Finding other ways to make our nearly 30 million rental transactions more profitable.

We are focused on customer segmentation and adding high margin, value-added ancillary revenues, such as those from Where2 GPS rentals, electronic toll collection and gas and insurance products.

The third area is cost reduction and optimization.

We are managing our fleet costs through the use of risk versus program cars, a diverse group of manufacturers, longer hold periods, and careful disposition planning.

We are managing costs down in a number of areas, particularly insurance costs and maintenance and damage expenses.

Our performance excellence program is identifying significant additional opportunities.

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

We will now begin the q-and-a session.

(OPERATOR INSTRUCTIONS).

Our first question comes from Jeffrey Kessler with Lehman Brothers.

Thank you.

If you were to combine your-- your ancillary revenues, with your pure time and mileage revenues-- and I know you can already see where I'm going here -- can you give some idea of what your-- of what your domestic-- your domestic revenue growth was when you combined both together?

Yes, Jeff.

The growth in ancillary revenues as we talked about was in the range of 18% in the quarter.

Right.

Typically, ancillary revenues are about roughly 20% in total.

So with that growing 18%, that would ad-- contribute about 3.6% over and above what you're seeing from-- from time and mileage revenue.

Okay.

That helps.

One question about the holding-- of about the fleet -- with regard to the-- with regard to the guaranteed buy back program cars, with their pricing getting down to what should be at or at this point in time below the market price for used cars or what we'll call at-risk cars, it is not surprising that you're taking your percentage up as high as it's going-- I'm surprised you['ve been] able to get it up there.

But it's clear that -- is-- is-- is the-- is the guarantee buy back program market going to be even competitive?

Or a con-- a consideration for yo-- companies in the next couple of years, given where the-- where the-- where the put is at this point?

Hi Jeff.

Well, I think the answer's still yes.

I mean, the reason we're at 50%-- others talk about higher percentages, we like the 50%-- .

It really -- the buy back program still provides a-- a good amount of flexibility to make a fleet go up and down.

Now you saw in the second quarter, we talked a little bit about what happened as we all held cars.

We still want to trim the fleets in some places.

And, so it's-- we say now it's [50-- half of 50/50].

We think that's a good mix for us right now.

It actually could go up a little bit higher as years go on.

But right for now, I think having the flexibility to move the fleet up and down is worth it and is worth the-- the additional costs.

So, I think that the buy back cars will be around for awhile, albeit at a higher

Okay.

With regard to the mix again-- with the mix of the fleet: domestic and foreign, we've seen some articles in some of the trade press and-- and-- and some of the consulting studies showing that there actually are some Japanese and actually other Far Eastern manufacturers whose fleet manufacturing has gone up more than 10%.

Somewhere between-- a number of them 10% to 20% increases year over year in the amount of cars they're providing to fleets, mainly U.S.

fleets.

Has the percentage of non-U.S.

cars increased dramatically?

I know it has in the last three years, but has that-- has that percentage accelerated this year?

Yes, Jeff, it has gone up in-- [further than in the past--].

And really it's just a [excuse me] a reaction to us looking to put the most economic fleet on the road.

And to increase our numbers of small cars, both-- both of which the-- the Asian manufacturers hope us to do.

The same is true with branching out into Volkswagen-- interesting product for us and it allows us to put a little more diversity out there and-- and manage our overall fleet costs.

That's really what it's doing for us.

All right.

One question that's been put to me by several clients.

And-- and that is specifically, do you believe that the-- the-- the expansion, if you want to call it-- of Enterprise, through its acquisitions, into the on-airport market and the need for more cars in that market, is going to put pressure on your ability to get cars-- to get cars, simply put?

Or cars at a decent price?

Jeff, I-- if you think about it, that there is a-- there is a universe of business out there that is being served today.

There is a new entrant into the marketplace and they have-- they have a percentage of the market.

We-- I don't think that because somebody else came on, that there's going to be more business on the airport.

I mean, there's only-- the universe is kind of set.

So-- it may shift from company to company along with market share.

But I will tell you, overall so far, we see nothing this year for model year '08 and nothing in the future that would tell us that we're going to have a problem in obtaining enough cars to run our business.

Okay.

And for model '08 year, are you expecting the level of pricing-- of fleet cost increases to be less than in 2007?

Yes.

I think if you listen to our text, we're probably a couple of points lower [than] what we are forecasting for '08 [than what we were for] '07.

The other thing I would just add to what Bob said on Enterprise coming up on-airport-- there's a new owner, not a new entrant.

And we really need to look at the-- the marketplace, cause that's going to determine how many cars are [needed] on-airport.

Right.

Historically, shares just don't move around that much other than when companies [inaudible missing audio] Okay.

[inaudible]

Okay.

Final question-- that is on your truck business.

You are probably-- -- looks like you're about a quarter behind on your truck business, although you did meet our EBITDA estimate, thank goodness.

Not the revenue estimate but at least our-- our cost-- our cost model seems to be in place.

At what point-- at what point are you willing to -- are you going-- are you hoping that you are going to have some, let's just say it, good news on the truck business?

Because I'm-- at the margin, it probably could help the stock.

Not having to talk about the drag of the truck business.

Well, I-- I agree with you.

I think the truth of the matter is, and I don't mean to be flip, we have good news now.

And I think that-- that-- that the progress of the management team is making on the cost structure-- really all good news and is really setting the business up for a nice turn around when revenue improves.

So-- I do think that-- that-- on the commercial side, as we are trying to build our commercial business accounts come in [$500,000 and $600,000] clips-- they don't come in $5 and $10 million per rental, so it's hard to make meaningful significant [quick] improvements.

And I do think, Jeff, that we're indirectly tied to the real estate market.

That's-- when that business starts to turn around I think self-moving business will turn around and the truck business will turn around a lot.

Look, I think the direct answer to your question is we really hope that on a-- on an earnings basis we've bottomed out this quarter.

But I think we are going to bounce a little bit until we start to see some more demand on self-moving.

Okay.

Thank you very much.

Our next question from Chris Agnew with Goldman Sachs.

Thank you, good morning.

The first question, I would like to go back and touch on what you are seeing mid-April to June.

And you are talking about industry was overfleeted because of change in the amount of risk vehicles.

Is this something that's going to be potentially more of an issue going forward?

Cause, I assume you're increasing your risk mix?

[There's potential for Vanguard, Enterprise will move in to more risk mix or Thrifty group are--].

So is this going to be the same issue next year?

And are there other-- other particular times in the year that-- that concern you?

Well I mean, I can't speak for others.

But I mean, logically, as you think about it, as the percentage of risk cars increases in the industry, it will return to what you had years ago, when it was at these levels.

You can't make the fleet go up and down as easily as you can with the program cars.

Now, you can say well, okay.

So there is a cost to that and depreciation.

You're going to hold the cars and there is an overfleeting.

There is also a cost of having a whole lot more program cars now.

So-- does it balance out?

I don't know.

I think we're all going to get a little smarter about it as it goes on.

I mean, this is our-- been the early foray into it.

But you can think about it in terms of-- in times of the year when normally there is a dip-- as we come out of the summer, in some places, there is a dip other places it continues on for a couple of months.

And in the spring, after-- after the winter holidays, there certainly is a dip.

Chris-- I would-- I would add to that.

I-- I-- I would not think of the second quarter actions as an inability to dispose of cars.

It was really a conscious decision to hold cars, to go after what we thought was going to be some fairly significant demand, [tight] fleet over the summer to capture pricing.

And as it's turned out, that has been the right decision.

Okay.

That-- that pricing in July and thus far through August.

So-- I wouldn't-- I wouldn't put a whole lot of weight on the disposition issues, really.

Particularly related to the second quarter, I think it was really-- [audio fades away].

Okay.

Okay.

That's useful.

But then, I guess follow-up to that.

Because I think you had your conference call when you set your pricing volume guidance for the year.

I think it was the end of April, early May.

Which was in this period-- you're saying of weak pricing.

And-- and as you just mentioned summer pricing's strong now.

So, can--can you help me understand a little bit better what has changed for you to lower your sort of full year pricing?

And volume targets?

Good morning, Chris.

The key development has been-- has been on the leisure side.

Commercial pricing, particularly among the large accounts, is behaving in line with, albeit, at the low end of what we had expected, commercial business other than the large commercial accounts has been a little bit weaker and the leisure pricing environment has been softer.

And-- and the period of time when that really developed was-- following-- following mid-April as we moved through May and June.

And-- and the combination of what we experienced in May and June as well as the outlook for leisure pricing.

As we moved into the summer months and even into the-- the back quarter of the year is-- is really what caused us to reduce our outlook.

Okay.

And-- and with-- you talked about September-- $5 increase per day.

Is that included in your guidance?

Or will that be upside if-- if-- if yo-- if that can stick?

The-- what is included in our guidance is-- is an assumption that a fair amount of that does indeed stick.

Okay.

And then one final question.

If I could touch on your performance excellence initiatives.

You can just help me.

Can you, first of all, confirm, did you mention $100 to $150 [million] and is that on a per annum basis, but it will take several years to build up to that, and how do we monitor this?

You've talked before about normalized margins of 10% to 12% EBITDA historically, Should we now be thinking about 13 to 14% EBITDA margins?

Cause I think, David, you mentioned that there will be some incremental profitability from this-- from this initiatives.

Thanks.

The answers are yes, yes, per transaction and no.

Let me go back through those.

The-- the-- we did mention 100 to $150 million.

And that will be on an annual basis.

Although it'll take a little bit of time for us to get there.

The best way I think to measure-- measure these items is looking at our costs on either a per rental day or a per transaction basis.

Since that way the cost figures won't really be impacted by pricing.

And that's the way we're going to track some of our-- track our progress on these initiatives, as well as by looking at-- at sub-lines-- that aren't on the-- the face of our income statement.

But I'd really encourage you to look at it on-- on a per transaction or per rental day basis.

And then with respect to the return to normalized margins, we continue to look at-- at 10 to-- 10% to 11% EBITDA margins as being the right, normalized number.

And what we're doing is giving ourselves multiple opportunities or multiple ways of getting from the [seven-ish percent] where we're running now up to 10% or 11%.

One way to do it would be all with price.

But we're also going to try to get there through-- through the optimization activities that are going on and through the performance excellence initiative.

In theory, if we-- if all three of them work in our favor, normalized margins could be a bit higher.

But we're continuing to look at 10% to 11% as being where-- where we want to get to.

And-- and just giving ourselves multiple ways of achieving that, particularly since can't control price.

Great.

Thanks very much.

I'll get back in the queue.

Our next question comes from Christina [Woo] with Morgan Stanley.

Hi.

Good morning.

I was hoping you could provide a little more information on how you arrived at the $100 to $150 million estimate from your performance optimization measures?

Sure.

We've triangulated there a few ways.

Number one, we-- we've gone back and looked at some of our-- at some of our sub-line items-- within our internal income statements and-- and where we've been in the past and use that as an opportunity.

The second is that we've identified a number of areas where we think we have inefficiencies and-- and opportunities and optimization opportunities and built up on that basis to numbers that are north of $100 million and then third, we've looked at what-- what other-- other folks have been able to -- to achieve in a-- in a range of industries as a result of deploying some of the source of techniques that we're-- we're looking at.

And in all three of those-- of those exercises, looking at-- at-- at things we've done in the past, looking at opportunities that we see out there, and looking at-- at-- at benchmarks, indicate that $100 million plus is-- is something we certainly should be able to achieve.

Okay.

You've mentioned, too,that timing may take a little while.

I was wondering if you could quantify what impact we might see in 2008?

And also provide us with some guidance in terms of how to distribute that cost savings between SG&A and direct [opex].

We're-- we're not ready to talk about 2008 at this point.

We're just getting our-- our-- our-- our budgeting and planning process for full year 2008 underway.

And working both here at headquarters and with our field folks to-- to think long and hard about 2008.

So I don't want to-- I don't want to-- to do that.

I think with respect to the split between operating and administrative costs, there should be significant savings in both areas.

The larger portion of our costs is in -- is in operation.

So that -- that's going to be the larger source of opportunity.

But we are going to be looking throughout our operations, including every-- everything we do on a-- on a shared service or corporate overhead basis to try to achieve savings.

Okay.

And switching gears somewhat, looking at your guidance, in terms of domestic pricing for the second half of the year-- it still seems like you're-- you're expecting about a 5% price increase from non-corporate.

If corporate is flowing in at 2% to 3% year-over-year increases, what gives you comfort with that expectation?

We-- the first thing that gives us comfort is what we're-- what we're seeing in-- in our results for the first 30-- 39 days of the third quarter, as well as our reservation build into August and September.

So I think we have pretty good visibility for our-- our peak season.

In addition to that, we also look not only at year-over-year changes, but at changes over the last two and the last three years.

And that can-- that can often be very helpful as well.

Okay.

Thank you so much.

Thank you.

Our next question comes from Zafar Nazim with JPMorgan.

Yes.

Good morning.

Just another question on-- on your guidance.

You talk about third quarter domestic current EBITDA being more than 25%.

And if you back out the numbers [it] seems like your fourth quarter expectations are somewhere more guarded and cautious compared to what you're expecting for the third quarter.

And I was just wondering, are you just being cautious over there in terms of what your pricing expectation is?

Because, I would imagine the fleet costs in the fourth quarter of this year should probably be more benign than what you saw a year back.

Good morning, Zafar, it's David.

The-- the issue -- I think your read is correct.

The issue with respect to the fourth quarter is that the comp is-- is a bit tougher in the fourth quarter as we've said throughout-- we think the enplanement comps are easiest in the second and third quarters, particularly in the third quarter in light of the terrorism scare that we had in August of 2006.

And-- and that's-- that's what's giving us-- the comps are a big factor in why we're looking at-- at the third quarter as potentially being a bit stronger on a year-over-year basis.

But I think your read is correct.

Okay.

Thank you.

And then the-- the GPS rollout.

Is that any significant contributor to your '07 guidance?

Or is that still pretty immaterial?

It absolutely is.

Ancillary revenues, particularly the to Where2 GPS rentals are-- are significant.

They're going to contribute more than $30 million of EBITDA this year and that's virtually all incremental on a year-over-year basis, given that we introduced Where2 very late in 2006.

Again, most of the $30 is Where2?

Yes.

Where2 itself is more than $30 million.

Okay.

And-- and the insurance benefits that you had in the second quarter of last year, are there any of the similar items in the back half of last year?

There are-- there are some-- some small items.

But the magnitude is-- is not nearly the same as what we had in the second quarter.

And the second quarter is also the last quarter where we're comparing to having published results as part of Cendant, and so you'll be able-- going forward, after this quarter, there will be clean comparisons, and you can more easily look at each of our current segments: domestic, international and truck, and what went on there in-- in prior years.

Okay.

And just a couple of questions on cash flow.

One-- cash flow generation in the back half of the year-- would that be used primarily to pay down debt?

Let me take that one.

I think we've said since-- since the beginning that our first priority was to pay down debt.

And-- and as a-- as a new public company and we've done that.

I think you-- you look at each and every quarter since then, we've paid down some debt.

I think at some point in time, and the time may be now, we need to relook at how we allocate our free cash flow and certainly with where our stock price is.

Some things on the table that we've talked about is share repurchase.

I think the challenge that you need to think about is that in the immediate environment that we find ourselves in today, it's-- it's-- it's my view that our long-term shareholders are going to want us to be particularly sensitive [to rating agents].

So those-- that's one of the considerations.

And, I think generally, you ought to think about-- how we're going to manage our capital structure long-term that's-- in a way that's appropriate to [inaudible - fades out].

[Okay].

Should I assume that in the near term there may be some share buy backs I guess?

Possibly.

[We don't want to say]-- we have consistently said that once we have paid down some debt and established our credit that repurchases would be on the table.

Okay.

And then finally, the -- your -- your-- your ABS facility for the fleet, is that the -- is your equity contribution or your equity portion of-- in that ABS facility-- is that going to be a source of cash for this year?

Given the fact that you are moving more from program cars into risk cars?

Is that going to be a benefit for you until the free cash flow at the corporate level?

No.

It really should be neither a benefit nor a-- a use.

The rating agencies for the most part are looking at risk cars similar to how they look at program cars from Ford and GM and-- and now Chrysler.

So there isn't much of a difference or distinction there.

And-- and a result the move to risk cars shouldn't really impact our-- our requirements for equity in the fleet structures very much.

Great.

Thank you.

Last question from Emily Shanks of Lehman Brothers.

Hi.

Good morning.

Just on that questions around the debt.

Do you have a goal for the amount of debt you'd like to pay down?

And then specifically, and/or in conjunction with that what your target leverage level is?

As-- as-- as Ron mentioned, Emily, we're going to continue to look at how we deploy our free cash flow.

We're comfortable with the-- with the amount of-- of debt that we have right now.

And-- and I think we-- we should have some flexibility.

But we're going to-- to look at-- at-- at alternatives for how we use our free cash flow going forward.

From a leverage perspective there are a number of metrics we-- we look at.

Both on a-- a corporate basis as well as on a gross basis.

And-- and we're operating generally in line with-- with levels that we're comfortable with, but given the opportunity, I think we would like to-- we certainly want to generate free cash flow and bring that down a bit over time.

Great.

That--

I would add to that.

I don't generally think-- [inaudible - Audio difficulty].

I'm sorry.

You are cutting out a little bit, Ron.

What was that?

I'm not-- I'm not sure that we aspire to be investment grade.

I don't think the return on capital is going to be [sufficient] Or the return on capital that would fall out of an investment grade rating is going to be sufficient in the marketplace.

On the other hand-- our competitors operate very nicely with lower debt ratings than we do.

So to me it's all about-- managing what's appropriate for the long-term and I think we're comfortable where we are.

Okay.

Great.

That-- that's helpful.

And then one other-- just follow-up question?

Will we be getting the LLC data for this quarter on your website?

Yes.

That-- We will be posting that on our website.

Great.

For everyone.

That's the information about Avis Budget Car Rental, LLC which is the debt-issuing subsidiary.

Terrific.

Thank you.

Okay.

I thank everyone for joining the call today and we look forward to talking to you in October about the third quarter.

Thanks very much.

And that concludes today's teleconference.

Have a great day.

You may disconnect.