Avis Budget Group Inc (CAR) 2009 Q1 法說會逐字稿

Good morning and welcome to the Avis Budget Group first-quarter earnings 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, Tonya.

Good morning, everyone.

Thank you all for joining us.

On the call with me 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 is available on our website at avisbudgetgroup.com.

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

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

You should be cautioned 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 are specified in our 10-K and in our earnings release issued last night.

Also certain non-GAAP financial measures will be discussed, and these measures are reconciled to the GAAP numbers in our press release, which is posted on our website.

Now I would like to turn the call over to Avis Budget Group's Chairman and Chief Executive Officer, Ron Nelson.

Thanks, Dave, and good morning to all of you joining us today.

I'm going to start this morning by providing some context for our first-quarter results.

Demand for domestic travel services including car rental was extraordinarily weak in the first quarter.

The year-over-year decline in our domestic volume was greater than it was in the fourth quarter, greater than we had expected, and frankly even greater than it was in the first quarter of 2002, which was of course following 9/11.

Certainly volume is an important data point and I'm going to discuss it more in detail, but we shouldn't let it obscure several other important points about our first quarter.

Demand for us and seemingly for other travel companies appeared to stabilize as the quarter progressed.

Leisure pricing was robust.

Our ancillary revenues on a per transaction basis continued to exhibit strong growth.

The used car market rebounded dramatically and we took full advantage of it.

Headcount and fleet were down significantly as we flexed our business model in the face of declining demand.

Cost savings were even more substantial than we had forecast.

And as a result of all these factors, our EBITDA was in line with our plan and well ahead of our covenant requirements even though the volume drop off resulted in a fairly significant shortfall in expected revenue.

Each of these factors is worth some further discussion and through the course of the call today, Bob, David, or I will provide greater color on each one.

We will also try to give you a sense of what we are seeing so far in the second quarter and then touch upon the recent developments with respect to Chrysler and GM.

Depending on your perspective, the calendar either provided an excuse for our results this quarter or a reason to cheer.

I prefer the latter, but I will leave it to you to decide which is more appropriate.

But it should not go unmentioned that the first quarter is our seasonally slowest quarter even before you account for Easter moving to the second quarter and the fact that last year was a leap year, which resulted in an extra day of results to compare against.

Nevertheless it wasn't just the calendar that drove our domestic rental days down 18% year-over-year, which incidentally was about a 5 point greater decline than we had forecast going into the quarter.

We saw significant declines in almost all segments and channels, commercial and leisure, on and off airport, daily and weekly, GDS, Internet, partnerships, and associations.

About the only area that did not suffer a decline was insurance replacement, which represents a small portion of our volume, and it was up slightly year-over-year.

I don't think our experience is unusual.

The decline in volume that we experienced has been reported by all our competitors and reflects the general weakness in travel demand.

For sure it was not company-specific.

We do look at our competitor's results at Airport Authority Reporting, and other sources such as the 30% decrease in corporate travel sales that American Express reported to provide a variety of perspectives on demand, and they all point to our results being part of the overall trend.

That said, not all of our volume decline was demand or calendar-related.

A few points of the decrease were intentional on our part.

You will recall that as part of our five-point plan we were going to look hard at limiting certain types of business and customers whose rentals do not make a positive earnings contribution.

The way we tried to do this was usually to increase the rate we were quoting in a particular channel for a particular rental.

First prize in that endeavor has been to win the customer at a contribution-positive rate and second prize and still a profit improving outcome was not winning the reservation.

To date, we have identified these sorts of opportunities among commercial accounts, high mileage rentals, opaque bookings, partnerships, and certain transaction types, and we are not done yet.

The last point about volume is that the streak of sequential monthly declines appeared to end in March.

Consistent with others in the travel industry have been saying, we believe volumes both commercial and leisure likely bottomed in February or early March and have stabilized over the last six to eight weeks.

We also had a fairly robust leisure pricing environment throughout the first quarter.

As we discussed in our last call, we began to see some positive developments on the leisure pricing front beginning in December.

These carried through the first quarter.

This translated into a composite increase in leisure pricing and across both brands of 6%, including 9% at Budget, which is a pretty good proxy for leisure pricing.

This contributed to an overall increase of 3% in time and mileage per day across all of our business, which should tell you two things.

Our split between commercial and leisure business remained at around 50-50 and commercial pricing was down around 1% in the first quarter.

If you measure our time and mileage on a per transaction basis, which often is a better proxy for transaction profitability, we were up 7% across both brands, reflecting both price gains and an increase in the average length of rental by a few points.

To us, the relative strength of pricing at Budget continues to highlight the importance of our two-brand strategy.

The Budget brand allows us to participate more fully in the leisure space, lets us take advantage of the modest shift towards value-priced brands that typically occurs in a tougher economic climate, and affords us incremental fleet flexibility.

That said, we remain committed to improving price realization wherever and however we can.

You don't need to look any further than a five-year chart of the average revenue per day and fleet cost to know that as an industry we have been well behind the curve in keeping our price in harmony with our primary cost driver.

Since 2004, our average RPD has increased 1% over the entire five-year period.

By comparison, fleet costs even taking into consideration the dramatic shift from program to risk cars have increased 40%.

If you are wondering where our margin went, don't kill any brain cells trying to look much further.

Nonetheless, we are hopeful we can maintain favorable pricing trend especially in the face of the continued challenges in both cost and capacity in the credit markets.

We continued to see good results from our increased focus on ancillary revenue growth.

This grows directly out of a comprehensive sales training initiative that we have talked about previously and a change to our recruiting strategy to focus on filling customer facing positions with people who have sales experience.

As a direct result, our ancillary revenue was up 18% year-over-year on a per rental day basis.

Moving on, there is no question, though, that the biggest story in our first quarter was the realization of the benefits from our cost reduction initiatives.

Three separate programs together projected to deliver over $300 million of benefits and each one hitting on all cylinders.

The five-point plan that we outlined in November, our ongoing performance excellence process improvement initiative, and the benefits from the reductions we made early on in the third quarter of last year all contributed what they were forecast to in the quarter and then some.

The proof is in our results.

In a quarter where our revenue declined 17%, we were able to reduce both our direct operating expense by 18% over $135 million and our SG&A by 20% with $34 million year-over-year.

This is the payoff from relentless focus, hard work, and sacrifice of our people.

Every layer from top to bottom in our organization has contributed to identifying and executing on cost savings.

We have taken full advantage of the benefit of our business model by adjusting the size of our field organization to stay in alignment with volumes even in a time when volumes were declining at unprecedented rates.

We are also addressing fixed costs in overheads in a manner we have not had to before and we are challenging established ways of managing our business to generate additional savings.

It is in times like this where the sacred cows are let out of the barn.

But early success doesn't mean this is an initiative that we wrapped up and filed away.

We continue to strive for operational and management austerity on a daily basis across our entire organization.

As a management team, we are regularly reviewing our cost-saving efforts project by project and line by line to optimize our execution and identify incremental opportunities.

Just as a reminder, the principal components of our five-point plan are one, reduce costs across the operating fleet and overhead expense areas; two, review and respond to underperforming or unprofitable business segments; three, improve the contribution from sales and marketing initiatives, including our sales of ancillary products and services; four, consolidate procurement; and five, further consolidate back office and customer-facing functions and locations.

We are pleased to be making substantial progress on every one of these.

Just since the start of the year, we have eliminated another 1000 employee positions bringing our total since December to over 3200 with more than 96% of these completed.

If you look at all the options we have taken since last year at this time, we have eliminated nearly 5700 positions or 22% of our headcount.

We signed agreements to outsource several back office functions from damage claims to citation processing.

We have closed our Wichita Falls reservation center and have begun to close our Orlando claims processing facility as we have consolidated these functions into other existing operations.

We have acted on our commitment to identify and reduce unprofitable business segments, as I mentioned earlier.

We have implemented changes within our loyalty programs to reduce expenses.

We have been conducting detailed field operation reviews city by city, expense by expense, looking for opportunities both to reduce costs and enhance our customers' experience.

Some of these reviews actually resulted in our adding people to make sure that we are properly serving customers.

Then finally, we've begun negotiating and signing new purchasing agreements, some covering areas that previously were not under a master agreement that all are expecting to save us millions of dollars a year.

These actions have allowed us to over deliver on our cost-saving goals in the first quarter and to overcome the headwind of weak travel demand and allow us to achieve our EBITDA targets for the quarter.

They've also allowed us to raise our estimate of cost reductions for the full year.

Just by way of example, none of the benefits of our procurement initiatives or detailed field operation reviews were reflected in the first quarter.

These actions were all taken towards the end of the quarter and will be sequentially felt over the balance of the year.

And again while we are very focused on our cost reduction process improvement revenue initiatives, we know we can't lose sight of the fact that in the long run, our principal differentiating element is our service proposition.

We remain steadfast in our commitment to provide customers with a quality rental car experience.

So what does this mean for the rest of the year?

Despite the signs that the worst may be over in terms of the recession, we still expect that 2009 will be a challenging economic environment.

While we don't intend to give specific earnings projections, I do want to mention a few key points, some positive and some negative, that may be important to those of you who model our results.

One, over the course of a year, our five-point plan should deliver in excess of $200 million in savings; our third-quarter 2008 actions another $50 million plus; and our performance excellence program over $100 million for a total savings of more than $300 million.

Two, we expect to see a year-over-year increase in vehicle-related interest of $15 million to $20 million due to higher rates and a similar amount of corporate interest as a result of last year's bank facility amendment.

Three, with the strengthening of the dollar particularly in the fourth quarter of 2008, we expect the negative 18% impact on international EBITDA due to foreign exchange despite results that are only down slightly on a local currency basis.

Four, we won't be immune to cost increases and inflationary pressures.

While salaries and wages will be down overall as a result of the headcount reductions, the remaining personnel covered by collective bargaining agreements and our nonunion hourly employees will be subject to a 2% to 3% wage increase.

Five, fleet costs, our largest expense, is expected to show a middle single-digit increase on a per unit basis in 2009.

And finally and probably most significantly, we don't expect revenues to increase year-over-year in this environment.

So for those reasons our first-quarter results do not change the way we are looking at the year by any measure.

Airline capacity is expected to be down around 10% in the first half and broader economic conditions are also anemic.

We expect rental day volumes in the second quarter will be down year-over-year in the mid teens as the trends we have seen in the first quarter continue.

Although our [res build] does suggest modest improvement from the first quarter, one of the byproducts of the current market is that bookings are occurring closer into checkout date.

So it's difficult to draw any meaningful conclusions more than 30 days out.

Commercial rentals will likely be the weaker segment, but leisure isn't tracking that much ahead that we can offer any meaningful projections at this juncture.

Fleet will continue to have a higher cost per unit increase than we would like due to the various actions we have taken to manage levels versus demand during the first quarter.

On the other hand, pricing and used car sales so far in the second quarter have continued to be bright spots.

On the pricing front, we continue to pursue price initiatives wherever and whenever possible and our principal focus is on profit.

We are continuing to benefit from first-quarter price increases especially in April as fleets have tightened and the Easter effect has reflected itself in pricing.

In April alone, Budget recorded pricing gains north of 15%.

As long as fleet levels remain reasonable, we think pricing trends should continue, although we don't expect year-over-year gains that we experienced in April.

In fact, conditions in the credit markets and at the OEMs probably help discouraged over fleeting, and that is a good thing since price typically follows fleet levels and it is always a key determinant of profitability.

Pricing remains as important as ever given the current macroeconomic environment.

At the risk of repeating myself from last quarter, our industry has not gotten the pricing it should for the capital required, but we have prospered nonetheless because of the amount of leverage that was available in the market and the fleet cost impact of past OEM market share initiatives.

We live in a dramatically different world now and we simply can't look to either of those crutches being available to subsidize pricing in an already underpriced market.

While Bob will discuss fleet in more detail shortly, I do want to reiterate in this environment the art of fleet management and the value of experience is critical.

On an almost daily basis, we are making decisions that balance new car orders with risk car sales opportunities; that trade off residual value risk and risk cars with perceived credit risk program car dispositions.

All in addition to managing longer hold periods that increase mileage and maintenance while sliding down a declining residual value curve.

Throw in some volatile demand patterns and you have a complex, constantly changing optimization exercise.

It is made somewhat easier by our fleet management tools, but it certainly doesn't make it crystal clear.

With all these considerations, we ended the quarter with our fleet down 22% from a year earlier, having opted to take full advantage of the reinvigorated auction market in the first quarter.

Do we think volume will be down 22% in the second quarter?

No.

But in the current environment, we would much rather add or hold fleet to meet known demand or try to push utilization and price than be in a position of guessing wrong and having to accept what we would consider to be brand-dilutive transactions.

Let me say a word or two about our exposure to Chrysler following their Chapter 11 filing.

Chrysler is our fourth-largest vehicle supplier in the United States.

We have payables to them and receivables from them both in the single-digit millions, and Chrysler vehicles subject to guaranteed depreciation programs represent less than 2% of our domestic fleet.

Based on their actions to date and the court rulings last Friday, we expect at this point that our relationship with Chrysler to operate pretty much business as usual.

We also have a number of non-program Chrysler vehicles in our fleets.

We will watch to see how Chrysler has performed at auction over the coming weeks and we will adjust our depreciation rates, hold periods, and disposal plans accordingly.

Our general view is that the auction market for Chrysler cars has probably already discounted the impact of the bankruptcy and that further erosion of residual values other than perhaps on a very temporary near-term basis will not likely be material.

We are also continuing to monitor the developments at General Motors as our relationship, and the car rentals industries total purchase volume, is larger there.

We believe that each of the three largest car rental companies including us sources between 25% and 40% of their US fleet from GM.

To be sure, GM like Chrysler has lived up to each and every commitment it has made to us, including the timely receipt of payments when due.

We have no expectation that the future will dictate otherwise.

While it is never useful to speculate about hypotheticals, under the most likely scenarios for GM over the next few months, we expect that our interactions with GM will also continue to be business as usual.

All that being said, we have worked hard to balance our GM exposure with the realities of the current situation and the need to run our business.

We do have receivables from GM, although at this point in the cycle they are at a low ebb.

We do have payables to GM.

We do have program cars both at auction and in our fleet, and we do have orders pending for cars to be delivered during the second quarter.

In the business as usual scenario, we expect these items all get resolved in the normal course.

In something other than that, it would be speculation, so all I would point out is that our continued purchasing of vehicles is likely to be particularly valuable to GM at this juncture.

So let me conclude my remarks with a brief summary and an observation.

First, our cost-saving initiatives are real, on track, and above target.

Second, we met our debt covenants comfortably and our fleet levels -- I believe this is true for the industry -- are in line if not below demand forecasts.

Third, we are seeing hopefully some game changing dynamics in our industry evolve.

Each of the three largest competitors has a similar profile at this juncture.

We all have far-reaching cost reduction programs in place.

We all have brands in both the premium and value segment.

We all have meaningful revenue streams in the same segments and channels.

All are demonstrating conservative attitudes toward fleet levels.

All are dependent on the same manufacturers.

We all seem to be adopting a new approach to pricing.

If these elements can remain in place, we believe the potential exists for a fairly accelerated and leveraged return to profitability for our industry with even modest amounts of volume recovery.

With that, let me turn the call over to Bob Salerno.

Thanks, Ron.

And good morning.

I'm going to focus my comments this morning on fleet, both the steps we've taken to reduce fleet levels and what we are seeing in the used car market.

As Ron mentioned, we continued to manage the fleet down aggressively as volumes diminished.

Our average domestic fleet for the quarter was down 16% year-over-year, in line with the decline in rental days particularly when you remember that one point of the decline in rental days was due to 2008 being a leap year.

And at the quarter end, our fleet was down 22% year-over-year.

Shifts of this magnitude are not without cost.

Fleet costs, which for us includes depreciation, disposal costs, and any gain or loss on sale, were up 13% on a per unit basis.

This is down from the 22% increase reported last quarter and reflects a sequential decline in absolute per unit fleet costs of 9% from fourth quarter 2008 to first quarter 2009.

The rapid decline in demand from the fourth quarter through Q1 had a negative spillover effect on per unit fleet cost and some of this will continue into Q2 as well.

The real issue is that the least expensive month in a car's life is often the last month.

As a result, demand weakness that causes us to sell or turn back vehicles sooner than we had planned imposes an incremental cost to us.

That has impacted us in the last two quarters and will also have an effect in Q2.

On the flipside, conditions at the auctions improved dramatically in the first quarter.

Our conversion rates increased significantly and we are seeing the same positive trends in the used car market that the auctions have reported perhaps even magnified a bit.

Following a very weak fourth quarter, Manheim reported a 4% increase in used vehicle values at January adjusted for mix, mileage, and seasonality from December.

Dealer supply of used cars was falling due to the lack of trade-ins, providing support to the auctions.

Declining auction inventory and growing demand helped produce another 4% used vehicle value increase in February and an additional 1% in March.

In total for the first three months of 2009, used vehicle values increased more than 8% and the segments of the used car market on which we rely were particularly strong.

By March, Manheim reported risk units sold by rental car industry achieved prices that were nearly equal to a year earlier despite having 26% more mileage on average.

Data from ADESA painted a similar picture, as they are seeing significant pricing strength in the youngest used vehicles, which are typically generated by the car rental industry.

In short, there are many factors that are contributing and that should continue to contribute to the relative strength of the used car market this year.

First, the supply of late model cars will be declining as we as an industry purchase fewer cars.

New vehicle sales into rental fleet were down more than 50% in Q1 and today's new cars become tomorrow's used cars.

So while demand may be decreasing for cars, the supply is also shrinking and will likely continue to shrink as the car rental industry sees lower levels of demand and extends the hold period.

In addition, there were far fewer trade-ins due to the decline in new car sales.

These dynamics particularly the car rental industry's reduced purchases should continue to constrain the supply of late model used vehicles for some time.

Second, declining gasoline prices are having a positive price impact on vehicle classes that have been the weakest performers particularly SUVs.

We chose to hold onto some risk SUVs when gas prices were high and instead sold some incremental small and midsized cars, the prices of which were less volatile.

We are currently benefiting from that strategy.

In fact, prices for certain SUVs are up more than 10% from the fourth quarter and the normalizing of gas prices has certainly helped that component of the used car market stabilize.

The third factor contributing to the health of the used car market is an obvious but important one, the late model used vehicle substitution effect.

Because used cars cost less than new cars, they are becoming a more attractive alternative for many consumers in the current economic environment.

Consumers remain exceptionally value-oriented, which is good for our mix of cars, which appeals to the value-oriented buyer.

So for the remainder of the year, we see access to cars as ample, even with the extended Chrysler plant shutdowns and the potential for a longer than usual shutdown for GM this summer.

Our fleet financing is in place and we should not have any issue obtaining cars to meet our summer peak levels which we expect will be in line with our projected volume.

We are currently forecasting that our per unit fleet costs for all of 2009 will increase in the mid single digits year-over-year.

This will depend on the used car market, the mix of '08, '09, and '10 models we ultimately have, and our model year 10 negotiations with the manufacturers.

We expect that year-over-year fleet cost increases will again be elevated in the second quarter, but will gradually fall over the course of the year.

We expect our risk program mix to be generally similar to last year with our domestic fleet being comprised roughly 50% of each.

Our manufacturer mix will also be generally similar, although Chrysler -- the Chrysler component of our fleet will be down a little bit and the percentage coming from foreign manufacturers will increase as we keep a close eye on developments with the domestic manufacturers.

We are also increasing our vehicle sales through Internet auction channels.

We achieved record online sales in the first quarter with 16% of our vehicles being sold online.

Last year at this time we had sold less than 8% through this channel.

Online channels allow us to reduce our cost of sale.

In Q1, we reduced this cost by 18%.

Much of this is due to reduced transportation charges, which of course are nonexistent with an online sale.

Also this 18% reduction doesn't even include depreciation and interest savings from faster churn of the sale unit.

Online sales have a 57% faster turn time than a regular auction sale.

By faster turn time, I mean from the date of the last revenue movement until sale.

Dealers are able to view our available inventory online, select the vehicles based on the criteria they specify, and then efficiently purchase their vehicles right from our location.

The other very important part of our fleet management work has been actions taken recently to reduce our model year '09 purchases.

As we have talked about previously, we were always planning to purchase fewer model '09s than we did '08s.

But we struck our model '09 deal, which includes volume incentives before the economy went south in the fall.

We have been working very closely with the manufacturers to right size our buy, keep most of our incentive monies, and even reduce our exposure to risk vehicles.

We currently expect to purchase about 30% fewer cars for the total model year '09 than we did roughly in prior year or about 120,000 fewer cars.

As you would expect, we are also taking a very cautious approach to model year '10 purchase commitments.

Most importantly and as I mentioned earlier, we will continue to keep our rental fleet in line with demand even if volumes are weaker than anticipated levels.

With that, let me turn the call over to David Wyshner.

Thanks, Bob, and good morning, everyone.

Today I would like to discuss our recent results, our debt covenants, and our financing strategy.

Turning to our results, excluding unusual items, in the first quarter revenue fell 17% to $1.2 billion.

EBITDA was just below breakeven at negative $3 million, and our pretax loss was $63 million.

EBITDA declined from the $31 million we reported in first quarter 2008 due to domestic and international results that were impacted by lower volume and higher fleet costs as well as foreign exchange in the case of our international segment.

Truck results were modestly better than last year.

We had $7 million of unusual items in the quarter, most of which was severance for the elimination of more than 2200 employee positions in the fourth quarter, and additional reductions in the first quarter.

Our worldwide work force is down more than 22% versus a year ago.

In our domestic segment, EBITDA declined for the quarter due to lower volume and higher fleet costs, the effects of which were partially but not fully offset by our cost savings initiatives.

First-quarter revenue decreased 15%, reflecting an 18% decline in rental days and a 3% increase in time and mileage revenue per day.

The increase in rate was, as Ron mentioned, primarily due to price increases for leisure rentals.

We believe the 3% increase in T&M rates reflects the industry's adjustment of fleet levels in response to weakening demand as a testament to the car rental business model, which has inventory flexibility that makes it quite different from the hospitality industry.

Most of the pricing benefit was in the spot or leisure market due to contract pricing on the commercial side of the business.

Ancillary revenues increased 18% on a per rental day basis reflecting the considerable progress we have made on sales of insurance products and Where2 GPS rentals.

As Bob discussed, year-over-year fleet costs rose 13% on a per unit basis, but declined 5% in total amid a 16% reduction in average fleet.

Direct operating expense declined 50 basis points as a percentage of revenue, despite the decline in revenue, and SG&A declined 80 basis points as a percentage of revenue.

The decline in expenses was primarily from our process improvement in cost reduction initiatives, and demonstrates how we have attacked infrastructure costs in addition to reducing expenses to mirror declining volumes.

In our international car rental operations, revenue decreased 29% year-over-year, driven by an 8% decline in rental days and a 25% decrease in time and mileage rates per day, which was substantially all due to foreign exchange.

Excluding the impact of FX, ancillary revenues increased 10% per rental day, again reflecting our initiatives in this area.

EBITDA declined $11 million, but $6 billion was due to foreign exchange movement.

Fleet costs were at 7% on a per-unit constant currency basis.

Going forward, we expect the global economic slowdown will continue to create conditions for our international business that are challenging, but not as difficult as in our domestic business.

Year-over-year impact from foreign exchange will diminish a bit as the year progresses, unless the dollar strengthens further.

In our truck rental segment, revenue declined 10% in the quarter versus last year, due to a 3% decline in time and mileage revenue per day and a 9% decrease in rental days.

The decline in T&M per day reflected lower pricing across all channels, partially offset by an increase in the proportion of one-way rentals, which typically carry the highest daily rates.

EBITDA was slightly better year-over-year, reflecting lower fleet costs and cost-saving initiatives.

Our cash balance at March 31 was $345 million, and our free cash flow for the quarter was $89 million.

Even excluding cash from vehicle programs, our free cash flow exceeded our pretax income.

We are managing our capital spending judiciously.

Expenditures totaled just $8 million in Q1.

As I noted last quarter, we are aggressively curtailing discretionary items and prioritizing projects based on necessity and those that generate returns in less than one year.

Capital expenditures will be a bit higher in subsequent periods than they were in the first quarter, but the total for the year will be well below 2008 levels.

From a covenant perspective, the Company exceeded the minimum credit agreement EBITDA requirement by more than $20 million or about 18% in the first quarter, despite the challenging demand dynamic that developed.

Please remember that EBITDA as calculated under the credit facility excludes certain unusual items, stock-based compensation, and corporate overhead costs and, therefore, is usually higher than the EBITDA we report for our four segments.

Turning to our financing strategy, as we previously discussed, we started the year with only about $300 million of domestic ABS term debt maturities in 2009, of which only $42 million of maturities are remaining this year, all in the fourth quarter.

We have ample funding to meet peak needs this year as a result of the renewal of our $2.45 billion in conduit facilities in December.

We are even seeing some excess capacity develop as we have reduced our projected fleet levels.

At the end of March, we had $2.3 billion of available liquidity in the form of cash or commitments under our corporate and vehicle-backed facilities.

But perhaps the most important development is that in late March, the Federal Reserve added rental car ABS funding to the list of eligible asset classes under the Fed's Term Asset-Backed Securities Lending Facility known as TALF.

We view our inclusion as a very positive development toward unlocking our access to the term ABS market and toward improving ABS liquidity generally.

We are actively working through the logistics of issuing debt under this program.

We hope to issue TALF-eligible asset-backed securities in the coming months.

Early indications are that costs under this program will be in line with our current conduit facility costs.

We are also actively looking at additional sources of liquidity, including borrowing structures such as operating leases and manufacturer financed vehicles.

But as I said, our peak needs in 2009 are taken care of, and the financing work we are doing is to prepare for 2010.

In particular, our domestic vehicle funding needs for 2010 totaled $3.5 billion, comprised of the annual maturity of our $2.45 billion bank conduit facilities and $1 billion of ABS term debt maturity.

At this point and with the help of TALF, we plan to meet our 2010 needs by issuing $1 billion to $1.5 billion of term ABS debt over the next 12 months and by renewing our bank conduit facilities for around $2 billion.

We will also look at seller financing and operating lease structures, which may also provide a few hundred million dollars of capacity.

Along those lines, we are in negotiation with operating lease providers for several hundred million dollars of financing, which we are hopeful we can conclude before the end of the year.

Stepping back, while we know we face challenges in several areas, including commercial pricing, our domestic suppliers, and the current economic climate, we are excited about progress in leisure pricing, ancillary revenues, TALF eligibility, and cost savings.

As a management team, we remain focused on executing against those opportunities we can control in returning Avis Budget to prosperity.

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

(Operator Instructions) Emily Shanks, Barclays Capital.

Good morning.

I wanted to see if you guys could give me what revolver availability was at the end of the first quarter, corporate revolver availability.

Yes.

At the end of the first quarter, we had no borrowings under the revolver and I believe roughly $800 million of letters of credit outstanding, which would give us about $350 million of capacity.

And we will get an exact number for you as well.

Okay, that works.

Again, $765 million of LCs outstanding, should give us availability of $385 million.

$385 million, okay, great.

Thank you.

I appreciate all the details you gave us around your outlook for the back half of the '09.

I just wanted to make sure I think I caught everything, but in the press release, you do indicate that you expect the second half of '09 to be up year-over-year on the -- on airport rental volume if I am reading it correctly.

And I just want to understand what the drivers are that you think are going to be doing that?

Emily, I think the way to read our comments is that we expect the comparisons year-over-year to be stronger or better than they are in the first half of the year and than they were the first quarter, not necessarily that they will be up year-over-year.

Okay, all right, then that clarifies it.

And then in terms of the dollar amount per cost savings that you went through the different buckets, is there a portion of that that reflects the shrinking of the operating model to reflect the lower demand levels, i.e., when you quote the headcount reduction of I believe it was negative 22%.

Is a portion of that simply just ratcheting down the operating model?

Yes, I think in terms of the number that we gave for year-over-year headcount, Emily, 5700 positions, that does include a ratcheting down for the operating model.

But for the most part, the earlier number that I gave, the 3100 positions, that almost all is not related to the business model.

It's taking real fixed overhead out of the business.

Okay, so when I look at you give the three buckets, the five-point plan at $200 million 3Q '08 at $50 million and performance excellence at $100 million, what portion of that call it $350 million of savings for '09 is attributable to your variable cost structure, which is what makes car-rental so attractive?

Let me see if I can answer your question a little differently.

The five-point plan we expect to be over $300 million.

I think you can assume that $300 million of that is unrelated -- $200 million of that, rather, is unrelated to volume.

The third quarter 2008 reductions, which we said were about $50 million are all unrelated to volume.

And the process improvement initiatives at $100 million, if you think back to our earlier calls, we probably told you those were $125 million this year.

Some of those are related to volume because if you are improving a process and there's less volume, you get less savings out of it, which is why we have trimmed it back to $100 million.

So I think if you look at the overall total of somewhere around call it $300 million to $350 million, not very much of it relates to volume.

Okay, great.

Thank you so much.

John Healy, North Coast Research.

Good morning, guys.

A question for you from a big picture standpoint.

In the quarter you made an incredible amount of progress on the fleet and the pricing and it really appears the industry is doing the right things at this time.

I guess when you look at the changes taking place, do you think that there are more things that you guys can do maybe from a pricing or a fleet management standpoint than you are already doing?

Maybe charging for guaranteed reservations and things along those lines.

Are there additional things you see on the horizon that the industry can move towards?

And I'm just trying to understand your confidence that the progress you guys have made in the first quarter and it looks like for the second quarter, this progress is sustainable.

You know, I think I'd put each of your items in -- I would qualify it all with the word potential.

We have thought about all those things.

I think it's very hard to unilaterally implement them and they can have dramatic profit improvements, but again, you can't do it all at once.

You know, I think on pricing, I think you know as I tried to point out, I think everybody has a cost structure, historic cost structure that has been driving them towards going after more pricing.

You know, in the leisure market you can affect pricing quickly and I think that's why you have seen price increases move up in leisure.

It's still pretty competitive in commercial, but, you know, I think we are optimistic just given the way price increases have been adopted during the last part of last year and the first part of this year that we can continue to realize some price.

But again, you can't do it unilaterally.

You can raise prices and you can hope that it sticks, but eventually the industry has to go along or you've got a competitive market action you've got to deal with.

I think on fleet, you know I think there's always a possibility that you can move utilization at point or so during the course of the quarter and certainly given that our fleet is down 22% going into the second quarter and we don't think volume is greater down that much, you know we are either going to have to add fleet or improve utilization a point or so.

But I think meaningful amounts of utilization gains are pretty tough and if you're thinking three, four, five points of utilization, that's pretty tough even our business mix and given the fact that we have a lot of corporate clients that want guaranteed availability of cars no matter what the day of the week is.

And I think the other opportunity that we have in fleet is our model year 10 negotiations.

I think everybody is coming to the table with a pretty sobering view of the economy and a sobering view of where each party stands economically.

And, you know, we are hopeful that we are going to come to a rational conclusion that starts to narrow that gap that I talked about over the last five years where our rates went up 1% and their prices went up 40%.

So I think that's -- those are generally the opportunities, but it's a competitive market and you can't do anything unilaterally.

Okay, great.

Then a question for you, David, on the vehicle funding facilities.

Could you walk through -- and you may have, I might've missed it -- what the aggregate level of enhancements that's required on the facilities today on a blended basis and maybe what the letters of credit outstanding were for the vehicle funding facility at quarter's end?

Sure.

When you combine the pieces of ABS debt we have, our blended enhancement rate in the US is in the mid 30s and as a result, we end up with about $500 million of letters of credit right now supporting our fleet.

Okay, great.

Thank you, guys.

Yilma Abebe, JPMorgan.

Thank you.

Good morning.

You had $89 million of free cash flow in the quarter and it looks like was $113 million of that was just from vehicle program cash.

I understand you are not giving forecasts, but directionally how should we look at that cash going forward, this vehicle program cash?

Yilma, as we've talked about before, I think pretax income continues to be a proxy for free cash flow in our business.

Capital expenditures and depreciation tend to run over time pretty much in line with each other.

We are not a cash taxpayer and we are not seeing a significant amount of working capital uses.

In fact, we continue to try to find ways to squeeze cash out of working capital.

So as a result I think pretax income is a good proxy for free cash flow.

And as a result, what you saw -- what you see in the first quarter is that we did take some cash from our vehicle programs as -- as cash that was available in the first quarter as our fleet levels came down a bit.

I thank you.

So I guess as you refleet back for the summer travel seasons, would there be use of cash related to vehicle programs?

No, I think a good question.

The cash that we were able to take out I think we will probably be able to keep out and be able to fund the increase in fleet levels dollar for dollar with additional debt.

So I don't see us having a whole lot of -- I don't see us being under pressure to put that cash back into the vehicle programs.

Great, thank you.

My final question is -- I think if I remember -- if I heard correctly about $15 million to $20 million of incremental interest expense related to fleet.

Can you walk us through kind of I guess in a generally the assumptions behind that in terms of the debt levels to get to that incremental interest expense?

A little bit.

I can give you the key items that are going through it.

You know, the math is more detailed.

The three impacts we have are, number one, that fleet levels are down, so the amount of borrowings we have are down.

LIBOR is down and to the extent we have some floating-rate exposures and borrowings, we are getting a benefit from LIBOR being lower.

And those two benefits are being more than fully offset by the fact that our borrowing spreads are significantly higher this year than they were last year, particularly on our asset-backed conduit facilities where we are borrowing at over 300 basis points over LIBOR compared to being at 30 and 42.5 basis points over LIBOR last year.

Great, that's it for me.

Thank you.

Michael Millman, Millman Research Associates.

Thank you.

I was wondering if you could go into some more detail about the commercial market because we seem to hear how bad it is.

I think you suggested at least on a pricing basis only down 1%, but maybe you can talk about what you are seeing in new negotiations, if you are seeing trading down and if you are still seeing that national is being a very tough competitor in terms of new contracts.

If you are seeing any price deterioration on present contracts or anything else that might help us.

Mike, I'm not going to go into specific numbers and specific negotiations, but I think some of the trends that you allude to are certainly there.

Travel departments and major corporations have gotten very aggressive about bidding out business and making sure that they get as competitive a price as possible.

You know, corporate America is having the same kinds of challenges as we are in looking to reduce costs at each and every line on the income statement.

That factors into it.

I think of the competitive environment between the three corporate -- three major corporate rental car companies is as strong and healthy as it's ever been.

I will point out that in the first quarter we renewed over 99% of our relationships and we added some new account relationships.

And I guess the only guidance I would add, Mike, is that I think in that environment, it's going to be a challenge to see increases in the corporate rental rate.

You know, we continue to push for them and I think that we will hopefully get them, but I think it's certainly more challenging than the spot or the leisure market.

Are you getting current contract rates or are they discounting against current contract rates?

You know, our current rates are holding.

I don't think that we are having to give up much if any ground.

I think I alluded to last year I think the real art of -- or last call rather, not last year -- the real art of this is learning how to provide value in ways other than simply the time and mileage rate per day.

You know, I think we need to convince our customers of the productivity gains of taking GPS.

I think we have an enormous opportunity to co-brand and co-market with a lot of our consumer products customers.

And frankly, I think the biggest opportunity is to reinforce the service proposition that we give the corporate customers with e-receipt and Avis Interactive reporting and all the things that make their life easier.

I think the service proposition is clearly what we have to sell.

So that's how I'd address that.

On an another topic, you indicated that I think April you were seeing as much as 18% increase and at least on the leisure side in T&M, obviously Easter bolsters that number greatly.

Could you give us some indication of sort of a normalized number or --?

Let me answer it this way.

First, what I said was Budget was booking gains north of 15% in April and yes, you are right.

Clearly the Easter effect has an impact.

I will say, though, that the res build looking forward on Budget is achieving what I would say are impressive RPD gains.

So they are certainly not on the order of north of 15%, but they are certainly above last year.

Where do you expect your peak fleet to be relative to a year ago?

Mike, I think that as we said, I think the fleet is going to be in line with what our projected volumes are and right now we are looking at about right there.

I think, look, our fleet is going to be down, Mike.

We are not going to give a summer projection on demand.

But we think that we are going into the quarter down 22% and this is something that Bob and his team reviews on a weekly basis with the entire field operation.

You know, we will adjust the fleets in accordance with how our demand shapes up.

For closing remarks, the call is being turned back over to Mr.

Ron Nelson.

Please go ahead, sir.

Well, I would like to thank you all for joining us today.

We are enthused about how well our team has been able to achieve the cost reductions that we had targeted for this year.

You know, we are hopeful that we can get little more volume in the second and third and fourth quarters.

We think when we do we are going to have a relatively quick and leveraged return to profitability and we hope we have a good story to tell you in three month's time.

Thanks for joining us.

This concludes today's conference call.

You may disconnect.