Avis Budget Group Inc (CAR) 2014 Q3 法說會逐字稿

Good morning and welcome to the Avis Budget Group's third-quarter earnings conference call.

Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the meeting over to Mr. Neal Goldner, Vice President of Investor Relations.

Please go ahead, sir.

Thank you.

Good morning everyone and thank you for joining us.

On the call with me are Ron Nelson, our Chairman and Chief Executive Officer, and David Wyshner, our Senior Executive Vice President and Chief Financial Officer.

Before we discuss our third-quarter results, I would like to remind everyone that the Company will be discussing forward-looking information that involves risks, uncertainties and assumptions that could cause actual results to differ materially from the forward-looking information.

Important risks, assumptions and other factors that could cause future results to differ materially from those expressed in the forward-looking statements are specified in the Company's earnings release and other periodic filings with the SEC, which are available on the Investor Relations section of our website at www.avisBudgetgroup.com.

We have provided slides to accompany this morning's conference call, which can also be accessed on our website.

Our comments will focus on our results, excluding certain items and other non-GAAP financial measures that are reconciled to our GAAP numbers in our press release and in the earnings call presentation.

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

Thank you Neal and good morning to all of you on the call.

So let me begin with the headlines.

Operationally we had a great record third quarter both in North America and an international, driven by strong demand and pricing trends in North America.

We had continued growth of the Budget brand in Europe.

We realized benefits from phase 1 of our integrated demand fleet pricing system, and we harvested incremental synergies from our Avis Europe, Payless and Zipcar acquisitions.

On the capital allocation front, we repurchased $60 million of our shares in the third quarter, $70 million more in the month of October, bringing our total purchases this year to $280 million.

We increased our share repurchase authorization by an additional $200 million not only to give us the capacity we need, but also to highlight the confidence we have in our Company and the long-term prospects for business.

And as important, we announced a significant tuck-in acquisition of our largest Budget licensee holding rights to all of Southern California and Las Vegas.

A busy and productive quarter indeed.

So those are the headlines, and David will give you more detail in a few minutes.

But this morning I'd like to spend some time talking about the trends that we are seeing in our business and how they influence and are influenced by our strategic initiatives.

These trends include pricing demand growth in fleet costs in North America, record results in our European operations, continued expansion of our Zipcar brand, and our use of free cash flow for both bolt-on acquisitions and share repurchases.

So starting with pricing.

On the pricing front, the positive trends that we've experienced since late 2012 continued in the third quarter.

North American pricing increased 3% year-over-year in constant currency with the peak months of July and August up 4%.

We again achieved price increases across all of our brands both on and off airport in both leisure and commercial rentals.

Increased pricing has been and will continue to be a principal objective for us, and with seven quarters now behind us, we believe we are demonstrated our Company's ability to achieve pricing growth in the market environment that has developed over the last few years.

Our success in growing revenue per day continues to be driven by our efforts to accelerate growth in the most profitable sales channels, customer segments and car classes, as well as a continuation of what we started 24 months ago, consistently leading price increases across our entire book of business.

We are achieving price increases that are highly meaningful to our bottom line but have a de minimis impact on the overall cost of customers' business trips or vacations.

As a result, we've been growing our pricing while maintaining our share of on airport revenues.

The critical element in this work has been the first phase of our demand fleet pricing tool which we have highlighted in previous calls.

Over the summer, we rolled out the first phase of this tool, our yield manager, to additional locations including eight of our largest local markets where we saw immediate benefits.

When you consider all of the different car classes and length of rentals we offer and multiply that by the number of our locations and days in the quarter, there are literally millions of opportunities to optimize competitive pricing, and our pricing tool accelerates and streamlines the decision-making process well beyond the capability of manual action.

As a result, our pricing has become more nimble and dynamic, and we are better able to optimize our pricing through the entire product portfolio.

The results speak for themselves with leisure pricing up 3% in the third quarter on top of a 2% increase in last year's third quarter.

And while this tool focuses primarily on pricing on our leisure segments, our commercial segment also continued the trend we saw in the first half of the year with overall commercial pricing increasing 2% in the third quarter.

Possibly the most positive side of success in our strategy to drive higher achieved pricing came in our large commercial segment where we reported year-over-year pricing growth for the first time since 2009.

And while one quarter does not make a trend, I'm encouraged that our efforts to improve returns in our large commercial segment are beginning to bear fruit.

Our work is far from done.

We continue to believe that the pricing we received today does not adequately reflect the value we offer to customers or the capital we deploy in our business.

With the continued rollout of our yield management system, our ongoing focus on most -- more profitable segments and the industry facing the reality of rising fleet costs, we continue to believe the positive pricing trends we've been able to deliver in our North America segment still have a ways to go.

Let's move to volume.

Another favorable trend has been demand.

Over the summer, we saw a robust demand environment both on and off airport.

We grew our rental volume 6% in North America with commercial rental volume up 5% and leisure up 6%.

To break it down a bit further, international inbound revenue, our single most profitable customer segment, increased 21%.

Small business revenue grew 8%, but pricing that was more than $10 a day higher than our average large commercial rates.

Revenue from our higher-margin specialty and premium vehicles increased 6% on top of a double-digit increase in last year's third-quarter as we continue to expand the size of our noncore and signature fleet.

And finally, revenue on a local market operations rose 10% led by a 7% increase in volume.

Clearly our strategy to focus on growing our volume is general use rentals and the off airport market is paying off.

We also continue to our initiative to move reservation activity to our higher-margin proprietary websites and shifted over 200 basis points more volume toward our proprietary sites in the third quarter alone.

This includes not only our website but also our mobility apps where revenues generated from this channel have grown over 50% year to date.

With the growing consumer trend towards mobility, these channels are increasingly important to us, and we are focused on staying in tune with these lifestyle changes.

Turning to EMEA, in Europe we generally experienced what most economists are talking about: macro economic conditions that appear to be going sideways.

It resulted in softer summer demand than we expected in turn generating some industrywide overfleeting, and what followed was not a surprise.

The pricing environment that was not terribly constructive.

But here is the punchline.

We had record results.

Our international EBITDA, which is always paced by Europe in the third quarter, grew 7% to a record $160 million.

Our revenues in Europe increased, 3% driven by growth in total revenue per rental day.

Our focus on ancillary revenues drove a 12% per rental day increase led by higher insurance and GPS sales.

Our continuing initiative to aggressively grow the Budget brand in Europe led to a revenue gain of 17% year-over-year and more than triple what they were in 2011.

And we're generally starting to see the benefits of the integration synergies we've been achieving.

They manifested themselves in a number of ways, the more efficient operation with greater operating readiness every day, incremental synergies from performance excellence and reduced customer waits by effective use of low-cost line busting technology.

As a result of these actions, the contributions from our European operations increased significantly even after we made an incremental $5 million investment in brand marketing in the quarter as well as continued investment in new digital platforms.

So not quite the quarter we had hoped for in Europe, but not one I'm losing any sleep over.

Fleet costs.

As we highlighted in the recent investor conference, vehicle residual values weakened in August and September more than typical seasonality would explain.

This trend obviously impacted the prices we realized over the 25,000 risk cars we needed to sell in those months and also caused us to adjust the depreciation rates on vehicles remaining in our fleet.

Part of the issue was the unprecedented number of vehicle recalls this year.

It is our policy to ground a car immediately when we receive a safety recall, so we found ourselves holding onto more fleet than we normally would have throughout the summer to meet customer demand.

This not only impacted our utilization, which was down 160 basis points in the quarter, but also affected the timing of our fleet dispositions.

Certain cars earmarked to sell in the spring when prices are traditionally higher wound up being sold in the late summer and early fall which is a period where used-car pricing always tends to be seasonally lower.

These adjustments to our fleet plan were pushing us towards the higher end of our per-unit fleet cost guidance for the year at the time of our last earnings call.

The other part of the residual value equation has been a surprisingly strong SAAR along with pent-up defleeting by our competitors.

In a market largely influenced by supply, this has had an impact on used-car values as well as trade-ins reduced dealer demand for late-model used cars at the same time the auctions were flush with off rental volumes.

That phenomenon began to affect used-car values over the summer, reaching a bottom in September and seem to be stabilizing at September levels throughout October.

David will talk about our preliminary 2000 fleet costs views in a minute, but I think it's important to remember two things.

Fleet cost pressures are an industrywide issue, and we have far fewer risk cars than any of our competitors.

However, in light of the strong pricing that we have been able to achieve this year, you should expect us to move aggressively to offset somewhat higher input costs.

Let's talk about Zipcar.

I want to get back to the record-breaking theme for a minute.

Zipcar has generated more revenue in the third quarter than any quarter in its history.

We saw increases in both usage revenue and pricing as well as membership which now stands at over 900,000 members worldwide.

We took several steps in the quarter to expand the brand to new markets and to offer more services to our members.

Let me [tic] some of them off.

We began pooling of cars between Zipcar and Avis Budget over 80 locations and with plans to expand over 150 locations nationwide.

By adding this flexibility, we're now able to further satisfy more members' need for wheels when they want them.

We launched an innovative program that initially targets some of the world's most frequent travelers: the 45,000 members of the Southwest Airlines flight crews.

We're adding Zipcars at airports and at hotels where crew typically stay and have begun to sign up thousands of new Zipcar members this year due to this affiliation.

In September we made one way transactions available to more than 80,000 Zipsters in the Boston.

We're excited to bring this new service to our members and look forward to the learnings that will provide us as we expand the rollout in 2015.

We also signed an agreement with the GSA to serve government employees in Washington, New York, Boston and Chicago.

We leveraged existing Avis Budget relationships by signing additional corporate accounts to Zipcar to serve their mobility needs.

We added Zipcar are to 21 additional universities and four new markets domestically including Zipcar in Dallas.

And finally we continue the global expansion of the Zipcar brand opening Paris in the third quarter and Madrid this month.

There is no question our enthusiasm for the opportunity that Zipcar has to be an ongoing leader in providing safe, cost effective and convenient mobility solutions to citydwellers and others continues to grow.

Acquisitions and share repurchases.

The last important trend I want to discuss is our use of our free cash flow for bolt-on acquisitions and share repurchases.

Earlier this week we announced that we would be acquiring our largest licensee in North America, holding rights for the operation and sublicensing of the Budget brand in southern California and Las Vegas.

This asset has been in our acquisition target list for a long time as one of the Budget's founding families had held onto royalty-free rights to these important markets for decades.

It's a strategic target for us because LAX is one of the largest airports in North America and Southern California is a significant Gateway market for a value-oriented brand like Budget as well as for inbound travelers.

As part of this transaction, we will take over and expand Budget's operations at LAX, significantly increase Budget's local market presence in Southern California, and reduce overhead costs so that we own this asset at accretive EPS and EBITDA multiples.

In addition because SoCal's sublicensees will now be our licensees, this transaction should unlock incremental tuck-in acquisition opportunities over time, although they will be much smaller in size than this one.

This transaction has not significantly reduced our appetite for returning cash to stockholders through share repurchases.

We took advantage of the market induced pullback in our stock price to step up share repurchases.

We bought back more stock in October than in the whole of the third quarter and more than in any single month in our history in Avis Budget Group.

In the first nine months of the year, we repurchased $210 million of stock.

Earlier this month we added $200 million to our existing share repurchase authorization, giving us roughly $375 million of capacity.

In October, we repurchased $70 million stock at prices generally below our 200 day moving average.

We now expect that our share repurchases this year were total between $300 million and $330 million.

Our targeted net leverage ratio remains 3 to 4 times EBITDA with a focus on the lower push in the net range.

Plans for cash flow deployment continue to be a combination of share repurchases and tuck-in acquisition.

The mix will depend on the opportunities available to us, but I do consider us fortunate to have a couple of deals in our pipeline for the first half of 2015 that are both strategically important and financially attractive, and at the same time we have increased our share repurchase forecast for 2014.

Outlook.

Our progress on all these fronts for North America pricing to our record summer for us in Europe leaves me feeling good about what we've accomplished in 2014 and enthusiastic about 2015.

As we announced last night, we now expect North America pricing to increase 2% to 3% this year in constant currency inclusive of a half a point of so headwind from Payless.

The positive demand and pricing trends we experienced through the first nine months of the year continued in October with pricing up 3% in the month excluding currency and rates up across both our commercial and leisure books of business.

Pricing on our November res build was also holding positive although we expect demand maybe a little wider in view of the midterm election and the fact that Halloween falling on a Friday effectively gave us another commercial week in October.

The December holiday season will clearly be an important period for us as it is every year.

Regarding North America fleet costs, we're fortunate to have sold nearly 3/4 of our planned risk car dispositions by the end of July which insulated us somewhat.

We have less than 6000 cars left to sell in November and December, and since we tend to do fleet in November December primarily the program cars, we're pretty comfortable that the fleet cost guidance we provided last night is about where we will wind up for the full year.

At the risk of feeling some of David's thunder, we do think fleet cost increases were currently expecting for 2015 are manageable.

So while macro economic conditions outside North America and vehicle residual values here at home are presenting some headwinds, we've considered them in projecting roughly $100 million at the EBITDA growth this year compared to 2013.

Across our business, we continue to drive efficiencies, manage our costs and focus on more profitable rentals to help mitigate challenges and to put us in position to deliver record results in 2014.

In addition, we do continue to target $1 billion EBITDA in 2015.

Now to be sure, the path to get there has had its up and downs since we set this target a few years ago, including the absence of an economic rebound materializing in Europe.

But we push pricing, manage costs, invested in our business, and relied on our people to put ourselves in a good position to achieve our $1 billion goal next year -- all the things you expect your management team to do.

We continue to view pricing as the easiest way to protect and improve margins, particularly when there are fleet cost pressures, and we think it makes sense to look for both increased pricing and increased efficiency in our operations as we turn our attention to 2015.

With that, I will turn the call over to David.

Thanks Ron.

And good morning everyone.

Today I'd like to discuss our third-quarter results, our fleet cost, our balance sheet, and our outlook.

My comments will focus on our results excluding certain items.

As Neal mentioned, these results are reconciled to our GAAP numbers in our press release and in the earnings call presentation on our website.

Revenue increased 6% in the third quarter and adjusted EBITDA grew 9% to a record $417 million.

Margins expanded by 40 basis points, and diluted earnings per share increased by 29% to $1.91.

At the risk of being immodest, we consider our 29% EPS growth in the quarter and 33% EPS growth year to date to be significant achievements.

Our trailing 12 month adjusted EBITDA now stands at $862 million, and for those analysts who compare company margins and valuations based on adjusted EBITDA before deferred financing fees and stock-based compensation, our trailing 12 month adjusted EBITDA would be $911 million.

Revenue in our North American segment grew 8% to $1.6 billion, making it the strongest revenue quarter ever for North America.

Total volume grew 6% in the third quarter while pricing was up 3% in constant currency.

Ancillary revenue per day increased 7%, driven by higher damage waiver and insurance product penetration and our in car Sirius XM satellite radio service.

For the third consecutive quarter, we saw positive volume and pricing in both leisure and commercial segments.

Leisure revenue increased 9% in the quarter with volume up 6% and pricing up 3%.

Commercial revenue grew 7% in the quarter, including a 5% increase in volume and a 2% increase in pricing.

And as Ron mentioned, large commercial pricing increased, a trend we hope will continue going forward.

North America adjusted EBITDA grew 13% year-over-year, primarily due to increased pricing and higher volume partially offset by 7% rise in per unit fleet costs and a 160 basis point reduction in utilization primarily due to vehicle recalls.

Despite the increase in fleet costs, margins improved in North America for the fourth straight quarter driven by lower direct operating costs as a percent of revenue.

In our international segment, revenue grew 4% in the third quarter, principally as a result of the increased ancillary revenues.

Excluding currency, revenue was up 2%.

International adjusted EBITDA grew $11 million to a record $160 million.

Ron already discussed our results in Europe Middle East and Africa.

In our Latin America Asia-Pacific region, the story is consistent with prior quarters.

Revenue increased 4% in constant currency, driven by higher pricing and ancillary revenue gains partially offset by a 4% decline in volumes.

The main culprit continues to be Australia, where economic weakness is suppressing car rental demand.

In the third quarter, we elected to remain firm on pricing with our Avis brand, and that clearly had an impact on volumes.

However since we remain focused on profitable rentals, growing ancillary sales and managing our costs, our bottom line results for the quarter were in line with our expectations.

Looking forward, we're going to continue to optimize pricing, fleet and volumes with the focus on profitability.

We're also excited about exporting a copy of our successful new yield management system to Australia.

We have already begun the implementation work and look to launch the pricing robotic early next year in both Australia and New Zealand.

In our truck rental segment, revenue declined 5% in the quarter due to the planned decline in our average fleet size.

Adjusted EBITDA declined $1 million in the third quarter driven by higher per unit fleet costs as we refreshed a portion of our fleet.

We expect these newly acquired trucks to improve the customer experience we offer and lower our operating costs.

More importantly, in the quarter we reached our goal of rightsizing our fleet to approximately 20,000 trucks.

And while the reduction of our fleet over time has impacted our volumes which were down 5% in the quarter, we've been able to yield up nicely with pricing up 2% and utilization up over 130 basis points.

And we expect our truck rental segment to again deliver positive earnings growth in the future.

I am particularly enthusiastic about how our package delivery bookings are shaping up for the fourth quarter.

Next I'd like to take a few moments to talk about fleet costs.

North America per unit fleet cost increased approximately 7% in the quarter, and as we announced last night, we now expect our full-year North America per-unit cost to be approximately $312 to $315 a month, an increase of 4% to 5% year-over-year.

We've experienced incremental costs related to recalls and higher than expected new vehicle sales this year as well is a greater supply of off fleet vehicles entering the used-car market than in the recent past.

Against this backdrop, we continued to execute on our plans to mitigate potential pressure from lower used-car values.

First, we've been increasing our use of alternative disposition channels such as online auctions, direct to dealer sales and our direct-to-consumer partnership with AutoNation.

So far this year, a quarter of a risk dispositions have been through these channels, an increase of approximately 50% compared to 2013 with close to 30% of our cars sold through these channels in the third quarter alone.

The benefits of selling cars through alternative disposition channels can be $250 per vehicle or more, and we expect alternative channels to represent a still higher percentage of our risk cars sales in 2015.

Second we've been cascading fleet to Payless throughout the year.

At this point, a majority of Payless's fleet is comprised of cars from Avis and Budget locations, enabling us to lower the monthly depreciation on a portion of our overall fleet while still meeting the expectations of our Avis Budget and Zipcar customers.

In addition we are finding some good opportunities to source low mileage used cars for Payless at wholesale auctions.

And finally, we are using our fleet optimization system to enable us to make better decisions about our fleet purchases, rotation and dispositions.

The good news is that in the face of record levels of vehicle recalls that required us to re-optimize our fleet to accommodate a significant number of surprises, our fleet management systems have been more valuable than ever.

Bad news is that due to the recalls, it is not easy to see the benefits in our P&L in 2014.

Looking forward while we're smack in the middle of our 2015 planning process, I do want to give you some early thoughts about next year's fleet costs.

We've now completed most of our model year 2015 negotiations, and we feel good about our ability to source the vehicles we need at prices that are up only modestly.

Generally speaking we saw better value in program cars relative to risk cars for model year 2015.

At this point, we anticipate the risk cars will represent only about half of our North America fleet in 2015 compared to around 64% this year.

We realized that the number of off fleet vehicles will increase supply of late-model used cars again next year, and we've been working to offset as much of that for fleet optimization and cascading as possible.

So while we're still building our 2015 plan, we are refining our fleet forecast and evaluating residual value trends, the completion of the substantial majority of our model year 2015 negotiations allows us to note that program car costs are going to increase only a point or two.

That allows us to estimate that our aggregate per unit fleet costs will increase 3% to 6% in North America next year which translates into a 9% to 12% increase from 2013 levels.

We'll certainly have better visibility on this topic and more to say about it in February when we report our full-year results.

Turning to the balance sheet, our liquidity position remains strong with $4.3 billion of available liquidity worldwide.

We ended the quarter with $713 million of cash, no borrowings under our corporate revolver, and roughly $865 million of availability under that facility.

We had unused capacity of $2.7 billion under various vehicle backed funding programs.

Our quarter end debt balance benefited by $50 million from the decision we made in 2013 to issue euro denominated corporate debt to better match our assets and liabilities.

Our ratio of net corporate debt to LTM adjusted EBITDA at the end of the quarter was 3.0 times.

We then took advantage of attractive financing available to us, expanding our revolving credit facility by $150 million and extending its maturity earlier this month.

Before I wrap up, I'd like to discuss our expectations for the remainder of this year.

As we announced last night, we now expect our 2014 revenues to be approximately $8.5 billion, a roughly 7% increase compared to 2013 including a 2% to 3% constant currency increase in North America pricing.

We now expect total company per unit fleet cost to be $305 to $310 per month this year.

In North America as I mentioned per-unit fleet costs are now expected to increase 4% to 5% compared to 2013.

We now expect full-year adjusted EBITDA to be approximately $860 million to $885 million, a year-over-year increase of 12% to 15%.

Our 2014 pretax, excluding items, is expected to be $500 million to $525 million.

We expect our effective tax rate in 2014 will be approximately 37% and our diluted share count will be 110 million to 111 million including the effect of repurchasing $300 million to $330 million of outstanding shares this year.

Based on these expectations, we now estimate that our 2014 diluted earnings per share will be $2.82 to $3, an increase of 28% to 36% compared to 2013.

We're still expecting our performance excellence efforts to contribute $40 million to $50 million of incremental benefits again this year.

We expect our cash taxes to be approximately $60 million to $70 million.

We estimate that our non-fleet capital expenditures will total around $190 million this year as we take advantage of strong ROI opportunities to reinvest in our business particularly in the area of technology.

And finally we expect our free cash flow to be approximately $415 million this year absent any significant timing differences.

So to wrap up, we had a record third-quarter and overcame some headwinds to deliver this result.

North America reported its strongest revenue quarter ever due to growth in volume and pricing.

Our international operations achieved their largest quarterly profit despite economic challenges.

And we increased our total company EBITDA margin by 40 basis points year-over-year.

On the capital allocation front, we see the acquisition of our Southern California licensee and its pro forma EBITDA contribution as creating incremental debt capacity for us.

So does our retirement at $65 million of outstanding corporate debt on October 1 with the maturity of our convert.

We are pleased to have returned $280 million of free cash flow to our stockholders so far this year in the form of share repurchases.

And we expect to repurchase a total of $300 million to $330 million of stock this year.

We've reduced our diluted shares outstanding by more than 24 million shares since April 2012 through our convertible debt and common share repurchases.

And finally we narrowed our full-year 2014 estimates and continue to target $1 billion of adjusted EBITDA next year.

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

(Operator Instructions)

Our first question comes from John Healy from Northcoast Research.

You may ask your question.

Good morning.

Wanted to ask a big picture question Ron.

In your prepared remarks, you continue to indicate that you don't feel like yourself or the industry is getting enough for the value that you provide to the customer.

I was hoping that you could help us shape that a little bit.

Ultimately from a return from a price point standpoint, I imagine there is a way you think about what the appropriate return on your services should be and was hoping you could give us bigger picture thoughts about what you think that is.

Well there's a couple ways to answer that John.

One is the market -- the customer approach is what I like to think about it.

I think people get to an airport and they make decisions based on convenience and price.

And when you think about the alternatives when you get to an airport, it's either a limousine service or a taxi.

And limousine service is far more expensive, and a taxi is far less convenient.

And it seems to me that when you look at the value that car rental provides and the price at which we provide it, there should be a significant amount of upside in terms of the pricing that we actually realize for the service.

Secondly, just in terms of return on capital, I've said this many times before.

It feels to me like we are couple hundred basis points shy in terms of what our return on capital should be, given the investments that we make and the amount -- the amount of capital it takes to drive our business.

Everybody measures return on capital in a different way.

I tend to look at it what's our free cash flow return on our market equity plus our debt.

And it's still a number that's in the mid-single digits, and I think it needs to get higher, and we should be 100 or 200 basis points over our cost of capital.

And then maybe a third way to think about it is look at what's happened to other people in our -- in the travel sector.

Airlines and hotels have increased their pricing significantly over the last three years.

There's absolutely no reason why car rental, which is smallest component of anybody's travel budget, shouldn't be able to realize some incremental pricing just solely on the basis of what's going on in the travel sector.

That's my view.

Great.

I appreciate that.

I just wanted to ask one follow-up operational question.

You talked about the defleeting that the industry had a little bit later in the year this year.

How do you feel about that defleeting process?

Do you think you consider yourself right fleeted, that you think your competitors are right fleeted there?

Just a little color on where you think the environment is today.

I think throughout the third quarter and even through October and looking forward to November, I think everybody is right fleeted.

We tend to monitor the number of locations that go on LOR restrictions on a daily and weekly basis, so we know what percentage of locations are shut down or restricted.

And that only happens based upon fleet levels.

So looking at October and even into the third quarter, all the shutdowns would suggest that everybody was right fleeted.

And I think it begs the question about the excess fleet that Hertz is rumored is have, and the conclusion you can draw from it is that they probably parked a lot of these cars and are really managing their airport fleet with the cars that are simply available to them.

Great.

Thank you.

Our next question comes from Chris Woronka from Deutsche Bank.

Hey, good morning.

Wanted to ask you about, as we think about recalls this year and then into next year, I mean obviously it was a huge jump this year.

Do you -- is there any fundamental shift in -- if you look back a long ways and what the typical recall rate has been, is there something going on where we might expect higher recall levels on an ongoing basis?

Maybe not this year's level, but versus the long-term historical average.

Do you think that rate is trending up?

While I think there's two things, Chris.

One is you are right.

We had over 140,000 vehicles recalled this year through the end of the third quarter and that's twice the rate at which we had them the year before, and the year before was higher than the year before that.

I do think it was out of the ordinary.

I think there has been a structural shift and what is a safety recall.

A number of the things that were part of the 140,000 this year would have been campaigns last year that didn't necessitate grounding of the vehicle.

And I do think going forward that the OEMs will be quicker to pull the trigger on a safety recall just based upon the scrutiny that this has all had over the course of the last eight or nine months.

That being said, I think what we're hoping is that there is some perception that this -- we're in an amnesty period here.

And everybody is cleaning out their closet.

For all the things that could possibly be recalls, and that next year's level of recalls won't be anywhere quite as significant.

I think when you add up all the cars that have been recalled over the past year, there may not be many left out there that haven't been recalled.

So the opportunity may be smaller, but I think we all believe the recalls will be down next year and that this is really just a one-time event, but obviously we can't guarantee that.

Sure.

Just a quick follow-up if I can on pricing.

Do you see more of -- you talked about some of the large commercial pricing being up for the first time.

As we think about next year and the opportunities, is that a much bigger opportunity than leisure if we try to break down the portfolio on the whole?

Well I think in the abstract, yes, it is a much bigger opportunity because it's gone from being our best business to our worst business.

And I think at the levels that exist in a large commercial marketplace now, going much lower is just basically taking on an unprofitable business.

But I do think it's always going to be competitive.

And we are bouncing around the zero to up a half, down a half place in the pricing scheme in large commercial.

So I don't want to get too carried away with it, but my feeling is it just can't go any lower unless you want to lose money on a contribution basis.

So look, we're going to continue to push for increased pricing.

We're not participating in RFPs where there is no service issue.

And I think the numbers that we reduced -- we renewed something like a 70% of the contracts this year at flat or better rates.

So, I'm mildly optimistic and hopeful that we're going to continue that trend.

Okay.

Very good.

Thanks Ron.

Our next question comes from Chris Agnew from MKM Partners.

Thanks very much.

Good morning.

Given the fleet cost headwinds in general and from the recall in particular, have you seen any change in behavior of your peers in terms of greater willingness to follow your lead on pricing?

What are the sorts of adoption rates you are seeing to your initiative?

Thanks.

Chris, it is still inconsistent.

The tone of the market right now is that we are leading with price.

And Enterprise seems eager and anxious to follow.

But they are generally not following unless Hertz comes along.

And from time to time, we see Hertz coming along and other times we don't.

And look, I think all of this plays into the fleet bubble that's working its way through the system by virtue of recalls and excess fleet.

I continue to believe it's transitory, that throughout the course of the fourth quarter that people will work their way through and then we will get some normalization of the fleet market.

I think it will normalize at a lower level because it is a supply driven market, and you can't deny that the supply is up.

But this industry has always been best at getting price when it had cost-driven pressures.

I think that in combination with the fact that both of our competitors have far more risk cars and we do and a far greater need to get price would suggest to me that pricing will hopefully be more consistent as we go forward.

Thanks.

And just a follow-up.

Can I just confirm you are not planning a breaking out Payless going forward in terms of -- but it is still likely to be a mix drag?

And I guess as you add grow Payless and add tuck ins, is it fair to think that mix drag will be half a point next year?

Thanks.

Good morning Chris.

That's right.

We anniversary the Payless acquisition out of this quarter, and we felt it was the right time to re-simplify our disclosures.

The Payless affect this quarter has added about 1.5 points to our volume.

It reduced our pricing by just under a point.

And I think the volume impact was a little bit greater than it typically would be because last year we had Payless for 10 weeks in the quarter, not all 12.

So that's what's giving rise to it.

I think there will continue to be mix adjustments depending on the acquisitions that we are folding in.

Generally speaking though I think they're going to be relatively small, and that is why we took the approach we did with respect to the Payless disclosure.

This is the number so you have it.

Thank you.

Our next question comes from Kevin Milota from JPMorgan.

Good morning.

Appreciate your commentary on 2015 fleet costs.

And reiteration of the $1 billion target for EBITDA.

With the fleet costs in mind and the EBITDA target, what's your early view on pricing for 2015?

Is it still expected to grow in the 1% to 3% range on a normalized basis?

And then secondly, on the yield management systems, what are your expectations and talk about timeline and rollout for phase 2 and phase 3 and what the potential benefit could be to the overall operation.

Thank you.

Good morning Kevin.

With respect to more details on 2015 and pricing in particular, I think we're going to wait until February when we have our full-year results and go through our 2015 projections in detail to go into that.

We are clearly enthusiastic about the continuation of the trend we have been seeing of price up to 3%, and we do, as Ron eluded to, we do view fleet cost pressures as being a reason for us to continue to try to push pricing in the future.

Beyond that and with respect to any particular numbers, we're going to wait until February.

Okay.

And then the yield management system benefit?

Sure.

And then on the DFP system and yield management, we ramped up from a very small number of markets using the pricing robotic to about 110 markets currently over the course of the first nine months of the year.

So we will have the benefit of starting 2015 with 110 markets or more.

And so we will get an anniversarying benefit solely from the robotic in the first half of next year, which we think will be helpful.

We are making progress toward our forecaster and expect to be able to combine that with our -- with the integrated demand fleet pricing module in the second half of next year.

I think it would be helpful in the second half of next year, but I'm not expecting it to have a large impact on our results in the second half of the year.

I do think with respect to the pricing robotic and yield management tool, the benefits that we will get in 2015 aren't just the anniversary of the rollout in the ramp-up.

It's also that using the tool as much as we have this year and getting more experience with it is making us better able to derive value from it.

And so I do think it will have an incremental benefit in 2015 even after we anniversary being at 110 markets.

And the last element I want to mention is that given the success we've had with the pricing tool, we are accelerating the rollout of it in Australia and New Zealand and into Europe.

And I think as I mentioned earlier, the rollout to Australia and New Zealand should have a positive impact beginning in the spring, and we are looking to get Europe up and running as soon as possible in 2015 as well.

Okay.

Thanks a lot.

Our next question comes from Afua Ahwoi from Goldman Sachs.

Thank you.

Good morning.

First on the price, can you remind us what is the as reported price number, especially North America, given the Canadian dollar has been a headwind and probably will be again in 4Q.

So how does the 2% to 3% number you mentioned on the constant look on an as reported number?

And then, separately, in international I was frankly a little surprised that maybe the volume didn't grow, at least was not flat, given some of the gains in your market share that you indicated in the past that Budget has been making.

Does that imply that the core has softened materially more, and what do you expect in the years, or is a Budget gains more moderate now given it's been around for a while now?

Thank you.

Sure.

The foreign exchange impact in North America was around half a point in the third quarter -- and half-point negative.

And that's really where it's been running throughout the year in each of the first two quarters and probably will have a similar impact in the fourth quarter, as well.

So that is the impact there.

With respect to Europe, I think the way you are looking at it makes sense.

We are continuing to grow Budget volumes.

They were up in the high teens in the third quarter.

And where the economic weakness and some industrywide over fleeting showed up is in our overall volumes.

And so you can see that Avis gave up a little bit of volume to get to our overall numbers, and we really attribute that, based on what we're seeing, to economic weakness that was there in Europe in the third quarter.

So this is Ron.

There are a couple of other considerations to take into account.

You should not judge the ability of Budget to grow by the third quarter.

We yield Budget up significantly in the Southern region during the third quarter, so it's not going to have the same capability to grow in the 20% to 30% range, and actually into the 40% that it grew in the first half of the year.

But we continue to believe at least for the next three to four years that Budget is going to grow in the 20% to 30% range.

We're actually adding a fairly big block of Budget licensees in one of our bigger territories over the course of the next couple of months that will drive the volume fairly significantly.

And then the other thing is that there are a few things that affected volume over the summer months.

One clearly was the World Cup.

There's no question that it had an impact on volumes.

But I think the other thing that affected it: volumes were short in Italy and Spain and markets where you didn't actually think they were.

And our sense is that our competitors, it wasn't lost in our competitors how well we did last year in those markets.

Any think they all fleeted up to try and grab some of the business that we took last year in those markets.

And so I think the combination of the World Cup and the increased fleet drove what manifested itself as fairly tepid volume in those markets.

We still did quite well in those markets over the course of the summer.

So I don't want you to take away that there was some serious economic issue that affected the ability to harvest the summer peak in those markets.

That is exactly right.

We are bringing some of the tools that we've used in North America to focus on profitable transactions to Europe, as well.

And so what you're seeing is that in some areas, some submarkets we may have given up some volume, I think that was all part of our strategy to focus on profitability.

And it is how we were able to achieve the record results that we did in Europe.

Our next question comes from Fred Lowrance from Avondale Partners.

Good morning.

Just wondering, and looking at fleet costs what you can tell us about the 2014 fleet cost guidance.

If you can parse out the impact of recalls versus just maybe normal market changes in terms of what's happening to residuals here lately.

How many points or whatever related to recalls.

And then along those lines, when I look at the 3% to 6% increase target guidance for fleet cost of next year, have you done anything to maybe put in a little bit of a cushion for maybe after this year having more historically elevated levels of recalls?

Obviously nothing like this year, but maybe taking a little more conservative approach to what that normalized recall run rate might look for you.

Sure Fred.

As we think about fleet cost this year, we really do view the increase in our fleet cost guidance range, which had been $300 to $310, and now is $312 to $315, as being essentially all due to recalls and the disruption they've created, both of the used-car market and our ability to adhere to the optimize fleet plan we started with this year.

As a result, we do think the recalls had a significant impact in the movement upward from the midpoint of the range where we started to the midpoint of the current range.

So we attribute that to recalls as Ron mentioned, and I agree, I think recalls should moderate a bit in 2015 because of some -- the pent-up elements that were released in 2014.

But I also expect that recalls will be at a higher level in 2015 than they were historically because of the sensitivity and scrutiny in this area.

So put together 2015, I think one of the biggest best buffer that we could put in place would be to increase the percentage of program cars we have in our mix.

And I think the plans we've been able to adopt and the ability to make a fairly sizable shift for us of North of 10 points in the program component of our fleet does provide us with some buffer to be able to manage fleet costs in an environment that's had a bit more volatility than over the prior 18 months.

So that is the thinking that goes into the forecast of it 3% to 6% increase in per unit fleet costs in 2015.

Okay, and with that fleet cost guidance in mind, can you just, one of you, Ron or David, give us a sense for how the path to your $1 billion-plus in EBITDA for 2015 has changed since you first introduced that target.

Obviously it seems like pricing running a little bit hotter, fleet cost obviously a little bit higher.

And also curious to know how these tuck in acquisitions like your Southern California licensee purchase -- how maybe that pipeline has changed and given you more confidence in that $1 billion target over the last few months.

Yes.

Well Fred, I think historically we've used somewhere around a 2% to 4% fleet cost accelerator when we built a model to get to $1 billion of EBITDA.

So, obviously if we are 3% to 6%, we've got some headwind there that we have to make up somehow.

I think the components of what's going to get is there are still the same.

We continue to harvest the synergies from the acquisitions.

It's a continued benefit that we're going to get from demand fleet pricing.

I think overall pricing is going to play a greater role in it now than it would have before, largely because we've got to overcome some cost pressures.

And the $1 billion was made without the impact of considering the Budget acquisitions, so it would be disingenuous for me to tell you that is part of the $1 billion target.

But nonetheless, we will go a long way towards hitting our revenue and EBITDA targets and Budget.

It's a property we know well.

And it should integrate fairly smoothly.

I think so -- I'd like to see it add to the $1 billion target that we get, but we will issue guidance in February and you will get a better sense of where all this fits together.

All right.

Thank you.

We are running out of time, so that will be our final question.

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

Before we close, I think it's important to reiterate what I believe are the key points from today's call.

One, we expect 2014 to be a record year driven by healthy industry dynamics, as evidenced by strong volume and pricing in North America.

Two, we continue to focus on pricing as a key lever in our business, whether it's to offset input cost increases or to drive margin improvement both.

Three, we are achieving incremental synergies from our acquisitions of Avis Europe, Zipcar and Payless.

And lastly, we continue to return cash to our shareholders through share repurchases.

We do have a full investor calendar this quarter beginning with the North Coast Best Ideas conference next week in New York.

Hope to see many of you during our travels.

With that I want to thank you for your time and interest in our Company.

And this concludes our conference.

You may disconnect at this time.

Thank you.