Avis Budget Group Inc (CAR) 2016 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 meeting over to Mr. Neal Goldner, Vice President of Investor Relations.

Please go ahead, sir.

Good morning everyone and thank you for joining us.

On the call with me are Larry De Shon our Chief Executive Officer and David Wyshner our President and Chief Financial Officer.

Before we begin 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 AvisBudgetGroup.com.

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

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

Now I would like to turn the call over to Avis Budget Group's Chief Executive Officer, Larry De Shon.

Thank you, Neal, and good morning.

Our business is about connecting people with what's important to them and I believe Avis Budget Group is as well positioned today around the world to meet this critical need as ever.

Yes, we faced some headwinds in the first quarter but we also made meaningful progress on our strategic initiatives to drive revenue growth and position us to improve margins longer term.

And importantly, as you saw in our earnings release last night, our full year's expectations are unchanged and we remain committed to delivering shareholder value over time.

The first quarter was full of challenges.

Some of which we expected and others that wound up being more difficult than we anticipated.

Softness in commercial volume continued while inbound travel to major leisure destinations in the United States was lower than normal.

The lack of a major winter storms also meant that rental cars that would normally be utilized to meet insurance replacement needs found themselves at airports instead.

With half of the quarter being a seasonally low demand period for used cars and therefore being a difficult time to defleet we saw elevated fleet levels across the industry resulting in an unusually tough pricing environment.

In the face of these headwinds our teams pulled together and aggressively managed those things that are under our control.

We took advantage of our fleet flexibility, aggressively managed our inventory and delivered increased utilization both in the Americas and in our international segment.

We made substantial progress in our shuttling and manpower planning initiatives as well as expanding our self-service offering to more locations and more customers.

We took steps to streamline our operations and lower our cost structure which will provide benefits for the remainder of the year and we took advantage of our stock price by repurchasing $80 million of our own shares in the quarter.

We made a lot of progress in a short amount of time and I believe we are well placed to take full advantage of the substantial opportunity still ahead of us.

But before that there are a few key things I want to highlight.

First the answer to a question that some of you have on your minds this morning is, yes, pricing in the first quarter was tougher than we thought it would be.

We now know that our soft President's week, particularly in markets like Florida and Arizona, was the start of what turned out to be an unusually week spring break, coupled with the commercial demand, weak inbound volume and a mild winter fleet was abundant across the industry and pricing finished down 5% year over year in the quarter.

Second our view is that this unusually soft pricing event we experienced in the first quarter is an anomaly not a trend or a new normal.

Our year-over-year comparisons have been improving fairly significantly over the last few months.

March was better than February, April was better than March and May bookings are indicating a continuation of the favorable pricing trend.

We are running our fleet type relative to demand and based on what we are seeing in the marketplace it appears that the industry seems to be shifting to a better alignment of fleets with travel demand.

Third we have revised our full-year Americas pricing forecast to be down around 1 point this year.

This revision primarily reflects the challenges we faced in the first quarter and our expectation that the remainder of the year will be better than Q1 due to our actions and better aligned industry fleet levels.

We are going to continue to work to optimize our pricing strategies through the use of demand fleet pricing yield management tool and running our fleet tight to demand.

But with the first quarter having been down 5 points the math tells you that we are forecasting progressive improvement so that the last nine months of the year in aggregate have roughly flat pricing year over year.

We also had a number of positive trends in the Americas in the first quarter.

We achieved 7% growth in leisure volumes, our seventh straight quarter in excess of 6%.

Our prepaid volumes grew 28% and now represent more than a quarter of our total dot com reservations.

Our ancillary revenues from satellite radio revenues were up double digits.

Our fleet utilization was up 100 basis points from first-quarter 2015.

Our customer satisfaction scores increased significantly and on the technology front we continue to make good progress on the modernization of our core wizard system which will help us reduce costs and be more technologically nimble.

We migrated Palis onto Wizard and we are investing in our brands' mobile sites in the United States to make them more user-friendly and more effective.

Moving to our international segment, as many of you know we have been working very hard over the past few years to improve our international operations.

Since acquiring Avis Europe in 2011 we have reduced hundreds of overlapping and outdated IT systems.

We have expanded our low-cost shared service center in Budapest and driven out substantial cost while also making the business more nimble.

We put a renewed emphasis on growing ancillary sales, improving fleet utilization and expanding the presence and growth of our budget brand and we have also followed a well executed acquisition program.

And with the European economy starting to feel better we expect the benefit from all this hard work to begin to come through in our financial results this year.

In the first quarter revenue in our international operations grew 14% in constant currency.

We saw significant growth in leisure demand while double-digit growth in the UK, France, Portugal and Spain and in Italy we saw leisure volumes grow more than 30% even excluding Maggiore.

Inbound volumes were strong with intra-European inbound increasing double digits and inbound rentals from outside Europe growing almost as much.

Our customer satisfaction scores in Europe improved significantly.

We laid the groundwork for incremental marketing spending Q1 and launched our new Avis brand campaign in April.

And we made further progress on the integration of Maggiore by concluding our Union negotiations and social plans and have begun tri-branding some stores in Italy with the Avis, Budget and Maggiore brands where it makes sense to do so.

It would be easy for a solid international results in the first quarter to get lost amid currency effects and pricing challenges but it is something we do want to highlight.

Moving to our outlook.

As I mentioned in my opening remarks our full-year EBITDA guidance remains unchanged.

We have reduced our full-year pricing outlook in the Americas to reflect our first-quarter results and more gradual improvement over the remainder of the year.

We are also projecting lower per unit fleet costs in our international segment compared to our previous guidance as well as higher global fleet utilization, less foreign currency headwinds and improved labor productivity based on actions we took in the first quarter.

In the Americas we expect volume growth to be driven primarily by leisure demands.

As I mentioned pricing has already begun to improve.

In addition with fleet costs for our entire industry likely to be up this year we continue to believe there should soon be a tailwind pushing pricing to strengthen in order to offset margin pressures.

In our international segment summer bookings are just starting to come in.

While it's still early days our reservations are building nicely and we are optimistic about this trend.

We think currency exchange rates are going to have Europeans traveling within the euro zone, that inbound volumes to Continental Europe will be strong and that the threat of terrorism will have limited effects on travel volumes.

On the pricing side we continue to anticipate a highly competitive environment and expect to see a decline in constant currency international pricing in 2016 and as I mentioned our second-quarter results will reflect our additional investment in brand marketing.

And we are looking to deliver incremental benefits from our key initiatives for the year, robust ancillary revenues, reduced shuttling expenses, increased productivity, effective sales and marketing, strong customer retention and excellent fleet management including higher fleet utilization and increased use of alternative disposition channels.

We continue to expect to invest $50 million or more through the income statement this year to help deliver savings and growth in 2016 and beyond.

We see a significant opportunity in the near-term as well as the long-term to reshape our business in meaningful ways and that means leveraging technology.

So before turning the call over to David I'd like to take a minute to update you on the progress we have made since our last earnings call to enhance our service offering and drive long-term margins.

We serve a lot of customers at our locations and it takes a lot of hard work to make each rental experience a great one.

The customers don't always come to us in a steady flow.

We have peak months during the year, peak weeks during the month, peak days during the week, and even peak hours during the day.

To drive higher margins our staff needs to be as variable as our volume.

Our manpower planning initiative will help us sharpen our deployment of our people to more efficiently service the different demand patterns at our various locations.

When you consider that we spend nearly $0.75 billion annually on field manpower a small improvement in productivity can have a big impact on our profitability.

Since our last call we have assembled a team and have begun the work to deploy sophisticated manpower planning tools in our business and we are confident that the savings from this initiative will be substantial.

We also move a lot of vehicles every day which is expensive.

We shuttle cars within our airport operations.

We shuttle cars between our airport and off airport locations and we even move cars between brands.

And when you consider that we spend over a $0.25 billion shuttling vehicles, even a little bit of incremental efficiency can save a lot of money.

Improving a driver's route, making sure we are shuttling the best car for the rental, we are making a better decision regarding whether the shuttle should occur at all.

We believe that we can reduce our shuttling cost per transaction over time through investment in technology and people.

To that end we are piloting a shuttling technology tool and repurpose an important resource in our organization to sit over the top of that cost line with new data analytics that can evaluate every shuttle move we might make.

The early indications have been encouraging.

We are also investing in our brands as planned.

At our Avis brand we are deploying ambassadors at the busiest times for our busiest locations to help our customers through the checkout stage of the rental process particularly on our lots and in our garages.

At Budget we have launched a new series of direct response commercials featuring Jessica Simpson both to drive volume through proprietary channels and to build brand awareness and brand preference.

And in Europe we completed the rollout of new Avis websites and mobile apps in 12 countries over the last 6 months and are seeing the benefits and improved conversion rates.

And finally we continue to make significant progress on our self-service initiatives.

We have expanded our test to encompass nearly 20,000 commercial customers and 50 airports in the United States.

When their flight lands, enrolled customers can see the vehicle assignment on their Smartphone as well as other vehicles they can select without going to the rental counter.

Our app enables customers to exchange or upgrade their vehicle, extend their rental period, end their transaction upon returning the vehicle and obtain a receipt right on their mobile device.

In other words we are giving customers the control over their car rental experience that they have been asking for.

To sum up while the first quarter was challenging I believe we have turned the corner and are headed in the right direction.

The hard work we started this quarter to drive efficiencies and strengthen our service offering will go a long way to improve our margins long-term.

Leisure demand around the world continues to be good pointing towards a robust summer when pricing tends to firm up.

We signed a number of large commercial accounts recently which are already starting to drive incremental volume.

Our international segments had a strong first quarter giving us optimism that the economy there continues to rebound.

We will continue to push for higher pricing where we can get it and to manage our costs as tightly as we can while also making the investments in our business to capture the opportunities that lie ahead of us.

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

Thanks, Larry, and good morning everyone.

Today I would like to discuss our first-quarter results, our fleet, Zipcar, currency effects, our balance sheet and our outlook.

My comments will focus on our adjusted results which are reconciled to our GAAP numbers in our press release and in the earnings call presentation on our website.

Total revenue increased 2% in the quarter and grew 3% in constant currency to $1.9 billion which is a record first quarter for us.

However due to a $33 million negative impact from currency movements, lower year over year pricing and higher per-unit fleet costs adjusted EBITDA declined to $44 million in the quarter.

Currency gave rise to a significant year over year variance not because of earnings translation but rather because our earnings hedges generated mark to market gains in the first three months of 2015 and mark to market losses in this year's first quarter.

Even aside from currency effects it was a tough quarter for us but we don't think it's indicative of how other quarters this year will play out.

Our trailing 12 months adjusted EBITDA is now $830 million and for those analysts who compare company margins and valuations based on EBITDA before deferred financing fees and stock-based compensation our 12-month adjusted EBITDA would be $886 million.

Revenue in our Americas segment declined 1% in the first quarter.

Volume increased 3% driven by 7% growth in leisure rental days partially offset by a 3 point decline in commercial volume.

As Larry mentioned pricing in the Americas was below our expectations with rate per day declining 4.7% in constant currency.

Commercial pricing declined around 3% while leisure pricing declined 6%.

The acquisition of our licensee in Brazil had a 50 basis point negative impact on our reported pricing and the mix effect of lower commercial volume negatively impacted our pricing by another 50 basis points.

While we knew pricing would be challenging in the quarter we did not expect the severity of the weakness.

The strength of the US dollar negatively impacted international inbound travel in the geographies like Florida and Arizona that are typically quite important to our first-quarter results.

We believe that currency exchange rates simply made it cost prohibitive for many Canadians and Latin Americans to travel to the United States and our operations team worked all quarter to get our fleet in Florida and Arizona right sized to demand.

Having a significant number of program cars certainly helped us manage our fleet size.

To be clear though while Florida and Arizona exacerbated the challenges we faced pricing was tough throughout North America.

In this environment we pushed for a higher pricing where and when we could.

Our international segment had a strong start to the year.

Revenue increased 9% in the first quarter on a reported basis and was up 14% in constant currency.

Growth was driven by a 21% increase in volume with the acquisition of Maggiore contributing 9 points of that growth.

Pricing was soft in the quarter declining 3% in constant currency excluding Maggiore.

International adjusted EBITDA decreased $15 million on a reported basis but grew $14 million in constant currency reflecting the strong volume growth, lower per-unit fleet costs and synergies from our acquisitions.

Turning to our fleet.

Per-unit fleet costs in the Americas increased 6% in the first quarter to $312 per month.

We achieved 3% growth in rental days with less than 1% fleet growth.

We saw elevated inventories at many used car auction sites in the first quarter.

Nonetheless through the end of April we have been able to complete nearly half of our planned US risk car dispositions for the year at values near what we had planned for including selling about one-third of our US risk vehicles through alternative channels.

We have also seen some increased pressure on risk vehicle residual values this year which is reflected in our full-year fleet cost guidance.

In particular we now expect that fleet residual values in the marketplace will be about 2 points lower as a percentage of cap costs than they were a year earlier which is about 1 point below our prior expectations.

We have actively re-optimized our fleet plans to help mitigate residual value pressures.

In addition we expect that industry wide fleet cost pressures will be an impetus for pricing to strengthen over the course of the year.

With us having turned back more program vehicles early in the year to keep our fleet in line with demand.

We now expect risk vehicles to represent roughly 65% of our Americas fleet this year compared to 55% last year and an initial expectation of 60% for 2016.

Our Zipcar brand continues to play a major role in the broad mobility market.

In the first quarter we took significant strides to expand Zipcar service offering.

We successfully completed our test of instant drive which enables a new customer to sign up, become a zipster and initiate his or her first transaction in minutes instead of days all by a Smartphone.

We plan to rollout instant drive nationwide starting later this quarter.

As part of the incremental $50 million investment we are making in our business this year we launched Zipcar's one-way offering in Los Angeles in March and expect to expand one-way into additional markets over the remainder of the year.

The future of Zipcar's mobility solution is not just round-trip, it's enabling members to transact in whatever form suits their needs.

It's truly wheels when you want them and how you want them.

And finally we continue to get closer to the 1 million member milestone with solid membership growth in the Americas and double-digit growth internationally.

Zipcar is the clear leader in the global car sharing industry.

It continues to be in the forefront of technological innovation in the urban mobility landscape and we are enthusiastic about the growth opportunities Zipcar has as consumer preferences, vehicle technologies and our service offerings all evolve.

One of our principal objectives over the last 1-1/2 years has been to drive incremental efficiency by consolidating, standardizing and strengthening our non-field operations.

Everything from reservations and customer care to legal and human resources.

Our transformation initiative has been delivering significant progress and the benefits are both lower costs and higher quality.

We are reengineering many of our human resources processes to move from practices that often varied by country, didn't provide scaled benefits and required dispersed infrastructure to a consistent approach that will leverage a common system and global service providers.

We have brought increased procurement discipline to our third party legal spending allowing us to reduce the rates we pay without sacrificing quality including by an insourcing certain activities where we have enough volume to make it cost effective to do so.

We have restructured the claims processing area that deals with more than 100,000 accidents and incidents that our customers have each year in the United States in order to take advantage of third party systems and expertise in that area.

And we have re-optimized how we handle reservation and customer care calls to increase conversion rates, strengthen our customer service, leverage self-help technology and reduce costs.

Despite its name Transformation 2015 is an extended initiative that is providing incremental benefits each year as we execute on existing plans and tackle additional areas.

Also to be clear our 2015 efforts are in addition to our performance excellence team's ongoing and valuable work on process improvement throughout the organization.

Moving to our balance sheet our liquidity position remains strong with nearly $5 billion of available liquidity worldwide.

We ended the quarter with $876 million of cash, no borrowings under our corporate revolver and more than $900 million of availability under that facility.

We had unused capacity of more than $3 billion under various vehicle back funding programs.

Our ratio of net corporate debt to EBITDA was 3.57 times.

And later this month when we use $300 million of cash on our balance sheet to pay off corporate debt that we have called for redemption we will have only $250 million of corporate debt maturities through year end 2018.

Our access to capital to fund our business needs is solid.

In the first quarter we issued $450 million of 5-year vehicle back term notes with an average interest rate of 3/4% and advance rates above 80%.

Proceeds will be used to repay maturing ABS debt.

We also issued $350 million of 8-year corporate bonds in order to fund the corporate debt redemption I mentioned.

We continued to repurchase our stock in the first quarter buying back 3 million shares or 3% of our shares outstanding at a cost of $80 million.

Looking forward while we continue to look for accretive tuck in acquisitions we expect to use our free cash flow primarily for share repurchases.

As you can imagine with our stock trading at more than 20% free cash flow yield share repurchases remain particularly attractive right now.

We continue to expect that we will buy back $300 million to $400 million of stock this year and our first-quarter repurchases therefore represent about one-quarter of our anticipated buy backs this year.

As we think about our full-year 2016 expectations we have tweaked a few of our estimates to reflect our first-quarter experience in changes and currency exchange rates but our adjusted EBITDA and earnings per share projections remain unchanged.

As we announced last night we now expect our revenues to increase 3% to 5% this year compared with 2015 and our revised revenue range reflects both or revised pricing expectation and currency movements.

In the Americas we expect our rental days to increase 2% to 4% this year with that growth skewed more toward leisure travelers.

We have adjusted our full-year pricing to account for the year-to-date softness.

We now expect America's pricing to decline approximately 1% in constant currency this year and we expect pricing trends to improve as the year progresses.

In our international segment we expect revenue to increase 7% to 10% in constant currency.

Total company fleet costs this year are expected to be $280 to $290 per unit per month, reflecting low to mid single digit constant currency cost increases in both of our operating segments.

We continue to expect our adjusted EBITDA in 2016 will be $820 million to $900 million.

We expect adjusted EPS to be $2.70 to $3.30 per share which includes the benefit of our continued share repurchase activity.

We still expect our cash taxes to be $40 million to $60 million and that our non-fleet capital expenditures will be roughly $210 million this year.

As a result we continue to expect our free cash flow to be $450 million to $500 million in 2016 absent any significant timing differences.

Our fifth straight year with free cash flow of more than $450 million.

This works out to roughly $5 per share giving our stock a free cash flow yield of more than 20%.

We now estimate the currency will have a roughly $20 million negative effect on adjusted EBITDA this year.

With currency having had a $33 million negative impact on our first-quarter results the forward curve now implies that currency will have a modest positive impact on our results for the remainder of the year.

We have again provided a slide that lays out our estimate of the effects that currency movements will have for the year by quarter based on recent rates.

In closing while the first quarter was challenging we do not expect the unusually soft pricing we experienced in Q1 to continue.

In fact while pricing is not yet back to flat it has improved dramatically.

Our goal is to have better pricing comparisons in the remaining quarters of the year to manage our costs assiduously and to invest for the future carefully in order to achieve the targets we laid out in February.

The summer travel season both in North America and in Europe will be key to our success.

We continue to be aggressive in areas that we can control, opportunistic in areas we can influence, attuned to real and potential risks and focused on enhancing shareholder value.

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

(Operator Instructions)

Chris Woronka with Deutsche Bank.

Hey.

Good morning, guys.

Wanted to drill down a little bit more on pricing obviously.

I know you have talked in the past about how putting in some pricing increases there's a so-called the K curve as the time approaches, has there been a change in that through the I guess March and the second quarter so far?

Are you seeing actually different dynamics as far as that's concerned?

Yes.

In the first quarter there were a number of rate increases that were put in in the industry which is a positive thing.

But I think with the pressure of the fleet position that the industry had it makes holding onto those raises it gets into the booking curve very, very difficult.

And I think the rate that the rate increases started from also was at a lower point.

Even where some of them may be held closer in, it started from a lower point.

I think the good news is that rate increases were attempted.

In many of them there were some good matching as they went out.

But then as you got closer into the booking curve with the fleet position they started to erode and particularly started to erode from the third tier parties and then on up.

So we haven't seen that number of attempts of rate increases so far as we look into the second quarter yet.

But as fleets tighten up I would expect that as rate increases go in that there is an opportunity for that to hold closer into the booking curve as fleets are tighter as we go through the second quarter and into the summer.

Okay.

Great.

And then more from an industry perspective or anything you would care to share about your own fleet.

Are you seeing more harmonized action with all the players in terms of fleet because it seems like it's been a little bit erratic throughout last year?

Do you think everyone's kind of on the same page now?

Hi, Chris.

I am not going to touch that language but I think the thing to look at is the utilization that we experienced in the first quarter growing our volumes about 3% on a fleet that was up just over 0.5%.

We are running our fleet relatively tight and as we have moved through the first four months of the year we have actually tightened up the extent to which we are planning on running the fleet over the course of the year.

Great.

And finally for me.

You mentioned you sold over -- about half of the planned risk dispositions through April.

How does that compare against last year?

Are you kind of selling more in the first half this year than you did last year?

It's actually fairly similar to last year.

Last year was the first time we really accelerated into the early part of the year as much of our fleet, risk fleet dispositions as we did.

We have continued that this year.

And we were able to do that even in a somewhat soft residual value environment with no significant gain or loss on our vehicle disposition.

So we feel good about how we managed that and then we obviously had the advantage of having some program cars in our fleet that we could use to de-fleet in areas like Florida and Arizona where we had to adjust our fleet plans based on the volumes we saw.

John Healy with Northcoast Research.

Larry, I wanted to ask a little bit about pricing to start.

In a February call clearly you had indicated the year started off difficult and the expectation was for flat pricing for the year.

Now we know that through March things were a bit more difficult and the pricing expectation is for down [1%].

If you look at that period of April through December have your expectations for pricing in that timeframe changed relative to what they were in the February call?

And then additionally I wanted to ask, you mentioned the month on month improvements but I just wanted to confirm has pricing gone positive or at least gotten better than flat at this point in the year in terms of a month -- year over year on a monthly basis?

Yes.

The way I would characterize it is you start with February ended worse than what we had thought and then as we went into March although March improved over February, March was still not what we had planned for it to be.

Then as you go from March into April, April improved again over March and then as we are looking at May bookings, May is also improving over April.

We haven't turned positive as of yet but we are getting very close to it at this point and we are very optimistic about what we are seeing for June and summer bookings are looking strong and rate is looking significantly better.

So I think it was just the curve of the pricing trends just delayed a bit and started to improve later than what we had hoped.

It fell a little bit harder than we thought at the beginning and then delayed a little bit more than what we had hoped when we went out of the declines in February but the good news is every month it's getting stronger and we are seeing that in the advance bookings going into summer.

Okay and then relative to just kind of your expectations compared to early in the February timeframe, is that April through December expectation much different than it was back in February?

What I would just say is that we are calling the pricing overall down a point for the year so that incorporates the first-quarter results and then just a slower more gradual ramp up to better pricing as we go through the remainder of the year.

We are going to have some down months and then we will have some positive months later in the year to net out the last nine months as flat which then brings the year down about a point.

That's right.

I think everything is a little bit -- just a little bit softer than we had anticipated in January and February.

I think it's important to remember that what we saw in January and February was so weak and so anomalous compared to what we typically experience, it really was a difficult time to be projecting out for the remainder of the year so we have tweaked those estimates as well.

Chris Agnew with MKM Partners.

Thanks very much.

Good morning.

I was wondering if you could first reconcile your comments on strong leisure travel but weak summer break and if I remember sometimes spring break is a good harbinger for summer demand.

Slightly related on international inbound it was weak in the first quarter that you talked about.

Are you assuming a continuation of those trends into the summer and what are the risks that international inbound continues to negatively surprise?

I think the way to think about it as you go through the year the impact that inbound into North America from particularly Canada and South America starts to have less impact as a percent of the total volume.

It's a big percent of our volume in the winter months in the first quarter, but as that continues on our reliance on that volume declines over time.

So, yes, I think as people are looking to go inbound into the US from those markets it is going to be a challenge with the currency impacts that have happened but we don't depend on it as much as we go through the rest of the year.

Any thoughts on -- you've got strong leisure travel but why was spring break so weak if it's predominantly reliant on more leisure travel?

You know that's where the international inbounds seem to have a much more of an in effect this year than last year and that's why we call it out.

As Larry said the markets like Florida and Arizona in February and March probably derive as much international inbound business as a percentage of their overall business as any areas that we have at any point during the year.

So the inbound issue becomes smaller just as a percentage of our business as we move into other parts of the year.

Adam Jonas with Morgan Stanley.

Thanks.

Hi, Larry.

There's been a few announcements by some OEMs who are ostensibly entering the car rental and car sharing business in some form, examples like GM's Maven and some of the car sharing efforts within Ford, Smart Mobility LLC separate legal entity and some others.

How does senior management at Avis Budget view these moves?

Is this a sign of validation for your core rental business or is it new competition that you need to consider maybe not very near term but over time or is it both?

Thanks.

There's a lot of people that are going to be getting into the mobility space and car share space.

And I'm not surprised by the OEMs that are looking at it as well.

I think to answer your question is really both.

I think that as you take a look at the logistics that are involved in managing car share and car rental are extremely complicated and we have 15 years of experience on the Zipcar side of managing car share and we have 70 years experience on the rental car side of managing [this].

So there's a whole infrastructure and talent skill set that is required, people, systems, equipment and it's quite complicated.

And so there have been a number of people that have gotten into car share globally and many have left.

There are some that are in car share globally and are not making any money.

We continue to grow Zipcar.

We are going to cross the million member paying member mark this year.

We continue to grow locations.

We continue to grow use case offerings.

We are pretty pleased with how we have been able to grow the business and we are growing it internationally.

And I just think that the logistics that are involved are -- it's in our wheelhouse.

It's what we do.

We've got a lot of experience doing it.

I'm not worried about it.

I think it is something we watch.

But we are pretty confident about how we can manage that business.

Thanks, Larry.

Can I ask a follow up on your IT budget?

I don't know if you have ever disclosed the size of your annual IT spend.

That is something you have given to order magnitude or disclosed?

From an expense perspective, it's in the $100 million range, Adam.

$100 million range.

Yes.

Okay.

Thank you very much.

Brian Johnson with Barclays.

Hi.

Good morning.

This is Dan Levy on for Brian.

Thanks for taking the question.

Just a couple of questions on fleet cost guidance and overall on industry fleeting levels.

First, just wondering on the fleet cost guidance, I know in the prior call you assumed residuals to the percent of cap cost would decline by around a point.

I assume that's down.

Could you just disclose what the magnitude of that is and if percent of -- residuals as a percent of cap cost is down what is it that is allowing you to maintain your fleet cost guidance?

Is it better cap costs, is it a longer holding period, are you seeing better benefits on your disposal through alternative channels?

Sure, Dan.

Our expectation is now that fleet costs will be down about 2 points -- fleet residual values will be down around 2 points as a percentage of cap costs and we had gone into the year expecting it to be down around 1. So we have seen about a point of softening there in our expectations and we have done a number of things to mitigate that.

It actually starts with the fact that in markets where we were a little bit heavily fleeted relative to demand in the first quarter we used program cars fairly aggressively to deflate to the right levels.

Program cars on average tend to be a little more expensive than risk vehicles and so that's one of the things that is helping us.

And then we are working through our fleet optimization opportunities as we see different cars having different values as the year plays out.

Larger cars and SUVs doing better than smaller ones.

And we have re-optimized both risk and program cars, the hold periods and our mix of vehicles really down to the make and model level to help mitigate the impact of residual values.

So far this year being a bit softer than we had expected and the possibility that will continue to some extent going forward.

Okay.

And is it safe to say that if we see the rental risk auction data underperforming to the magnitude that it did in the past couple months.

It was down 6% I believe.

Is it safe to say that there would be incremental risk to that fleet cost guidance?

Clearly if the market softens relative to where it is now there would be incremental -- there could be risk there.

On the flip side if the market strengthens a bit that would be helpful to us.

I think it's important to note one of the things I mentioned and that is that auction sites really had a lot of cars at the start of the year.

They were backed up a bit and I think we have worked through a significant amount of that backlog.

It was both program cars and risk cars from a variety of sources.

January and the first half of February is not a great time to work that backlog down.

And I think what we saw in February and March and even to an extent in April was that backlog being worked down which had an impact on residual values and that phenomenon shouldn't exist to quite the same level that it did at the start of the year.

Hamzah Mazari with Sterne Agee.

Hey.

Good morning.

Just a question on European margins.

I know you guys don't disclose that but any color as to how those are trending and maybe an update on some of the initiatives you may have in place to improve the concentration of the European network?

Thank you.

Yes.

As you know we have been working for a number of years on a strategy to improve our European margins.

We put in a number of initiatives to drive efficiencies across the operations as well as into our back office administrative work as well.

This has all been with the eye that when the economy starts to recover in Europe that we would be repositioned in a better place to be able to improve our margins over time.

Those strategies are continuing.

We have been updating our IT systems which has caused a lot of headaches by having a lot of outdated overlapping systems that varied by country.

We have been consolidating all of those.

Putting everyone on the standard systems, reducing our IT expense.

We moved all of our back office work into Budapest and eliminated those functions in the countries.

We consolidated the countries down into regions.

So we have improved our performance, our operational performance as it relates to net promoter score as well as our utilization.

We have been growing ancillary revenue and expanding our budget brand.

So there is a number of initiatives that are going and I think what you will start to see is that as the economy recovers there and volume starts to rebound that's what will have a bigger impact on our profit margins as we go forward.

I think all the hard work that has been going on there for the last four years is starting to come together and new initiatives being put in place to continue to drive that over time.

Thank you.

Just a quick follow up.

Just wanted to confirm the cadence of pricing.

You made a lot of comments around pricing.

Is it fair to say that Q2 is going to be down still low single digits, Q3 flattish and then Q4 up low single digits?

Is that the right way to think about pricing in your guidance or is there some flexibility around how that moves around?

Thank you.

I would say yes to both.

It's not a crazy way to think about things at all and could very well be the way it plays out.

We really don't want to get into quarter-by-quarter guidance and that's why we really spoke about the first quarter and then the subsequent nine months in aggregate.

The path you are laying out could very well be the way things play out but I think it's also quite possible there would be a little bit of noise around that as we see some seasonal effects.

The other thing that's worth noting is that I do think we have an easier comp in the fourth quarter than any other point this year.

Anjaneya Singh with Credit Suisse.

Good morning.

This is actually Zach in for Anjaneya.

Given the number of headwinds you have talked about in terms of pricing whether it's Brazil or FX, or international inbound being down, it seems like your expectation for the next nine months is not flattish core pricing but core pricing actually being positive.

Can you give us some sense of how that [has translated] and whether or not you are seeing improved strength there and what your expectations for that are over the next nine months?

Yes.

The acquisition of Brazil I think closed in April of last year so the Brazil impact that we had in the first quarter really shouldn't be a continuing impact now that we have anniversaried that transaction.

And while the commercial leisure mix as I pointed out had a 50 basis point impact, I consider that mix to be part of what's going on in our core.

I would actually be inclined to view the comments that we made about pricing going forward as being applicable to the core, if you will, and not distinguish between the core and something else as we look out over the remaining nine months.

Got it.

Thanks for clarifying.

You talked a little more about that free cash flow yield.

I think one of the things you have mentioned there is that timing can have a significant issue there but in addition you have given out sensitivities to EBITDA for example in relation to some of your operating drivers.

Given that some investors do have concerns about how wide that range is and whether or not that's a safe range, could you speak to whether or not the sensitivities of EBITDA should be roughly similar to the sensitivities that you will see to movements in relation to your free cash flow?

I think EBITDA and free cash flow will generally tend to move in line with one another.

There is always some differences between them but generally speaking if our EBITDA were toward the higher end of our range I would expect free cash flow to be toward the higher end of the range and similarly at the lower end of both ranges.

Kevin Milota with JPMorgan.

Hey.

Good morning guys.

I was hoping you could get some color on how much of your May business is booked at this point and how much of the June to September business is booked as of now?

Then follow on to that would be how confident are you in that business follow-through given that first-quarter surprise to the downside?

And then secondly on the holding periods for fleet could you give us a sense for what or how much you are extending your holding periods on the risk fleet and why not just take a mark on those assets now and move on?

Thank you.

You know we are obviously in the month of May so bookings as far as our percentage of our total volume for the month of May bookings are strong.

I don't know exact percent that we have taken for the month but we are in the booking curve now and the pricing that we are seeing we are encouraged by, significantly encouraged by for the month of May.

When you take a look at over summer at this point probably 15%, I am going to estimate, of our bookings are probably taken at this point and once again the indications from those bookings are that both volume is coming in strong as well as rate continues to improve.

There's nothing in what we're seeing this point for May or for summer, although is summer still pretty early that gives us any cause for concern.

And then on the fleet side I think will probably end up extending lives of vehicles slightly which put more in the matter in weeks it could be anywhere from two to eight weeks as we work through our optimization but not significant or drastic changes in how long we are holding cars.

We still like to sell the significant majority of vehicles that we sell on a risk basis in the 30,000 to 40,000 mile range and that really hasn't changed.

I just want to emphasize that in the first quarter as we sold a lot of vehicles we did not have any significant gains or losses on disposition and so we feel good about the rates at which we have been depreciating vehicles.

I think we would have liked to have some gains in the first quarter but where we ended up was really right in line with where we have been depreciating to.

Okay.

Thank you.

Afua Ahwoi with Goldman Sachs.

Thank you.

Just two quick questions for me.

First the $50 million incremental investment you talked to on the fourth-quarter call, how much of that was in Q1 if at all and how should we think about the spread over the next few quarters?

And then on the other side of that are there any savings we can expect to offset some of that spend?

And then the second question I had and it's something I continue to struggle with is on your comments on the industry being right sized or fleet being right sized.

How should we think about that?

Because I think I believe on the fourth quarter we were expecting the industry to be right sized going into Q1 and obviously given the soft spring break that threw us off a little bit.

As we think about the balance of the year, is the plan to grow your fleet less than demand, in line with demand?

How is the best way to think about when you say the industry is right sized?

What exactly that means?

Thank you.

Sure.

It's David.

I'll tackle the first part and Larry will tackle the second.

With respect to the $50 million investment, I would say that a small portion of it occurred in the first quarter but probably less than 25%.

Some of the areas that we are investing in such as our investment in incremental marketing will be more concentrated in the second quarter, both in the US where we have new commercials running for Budget and in particularly in Europe where we are going to be doing a fair amount of brand advertising in the second quarter which is a key part of the booking curve for the summer peak and we want to make sure we take advantage of marketing during that period for that time.

Some of the other initiatives are ramping up over time and so I think the impact that they will have will actually grow a little bit as the year moves on.

I think the right way to think about the $50 million incremental investment is really as the net number.

So some of the areas that we are investing in such as our shuttling pilot and manpower planning we are getting benefits from but I would think of the $50 million as being the net number.

Spending a little more than $50 million gross generating some benefits this year so that the net impact is in the $50 million range.

As far as the fleet question is concerned, as you know in the first quarter the industry was extremely over fleeted.

We managed very hard to get our fleet down and to keep our fleet below volume so that we can continue to improve our utilization.

That will be our plan as we go through the rest of the year is to fleet underneath what expected volume that we are planning to get.

As you look to the first quarter and you saw what was happening with defleeting and the number of cars that were being sold at auctions, the number of cars that were at the auctions and working through that inventory and now.

Then you see a series of storms that happened in Texas and other surrounding countries have soaked up a lot of fleet as we have sent cars down to support insurance replacement needs down there and then backfill those at airports and so forth.

We have moved a lot of cars as the industry has moved a lot of cars into that territory.

And what you start to see and we see it at our locations as you see where we go on length of rental restrictions or our competitors start to go on length of rental restrictions or we start see suspend actions put in place and that gives us a sign of how the industry is actually fleeting in those markets.

So we are kind of heading into the normal period of time that we would see where people are getting their fleets down, getting ready for summer and as far as we are concerned we will be trying to fleet basically underneath the demand for the summer and keep our utilization improving.

Okay.

Before we close I think it would be a mistake to judge our full year and long term potential based on what we believe was a first-quarter anomaly.

Pricing is already started to turn the corner with fairly substantial improvement seen over the last few months.

We continue to see significant opportunity to reshape our business by leveraging technology and I hope we have given you a flavor of the progress we have already made and our full-year adjusted EBITDA and free cash flow guidance remains unchanged.

We have a full investor calendar this quarter and we look forward to seeing many of you during our travels.

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

This concludes today's conference call.

You may disconnect at this time.