Avis Budget Group Inc (CAR) 2018 Q1 法說會逐字稿

Good morning, and welcome to the Avis Budget Group Fourth 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, Jill.

Good morning, everyone, and thank you for joining us.

On the call with me are Larry De Shon, and Chief Executive Officer; and Martyn Smith, our Chief Interim 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 would cause actual results to differ materially from the forward-looking information.

Risks, assumptions and other factors that could cause future results to differ materially from those expressed in the forward-looking statements or identified in the company's earnings release and other periodic filings with the SEC, they can also be fine in the Investor Relations section of the company's website.

The company undertakes no obligation to update or revise its forward-looking statements.

Our comments today will focus on our adjusted results.

We believe that our financial performance is better demonstrated using these non-GAAP financial measures.

All non-GAAP financial measures are reconciled from the GAAP numbers in our press release and in the earnings Call presentation, which is available on our website.

With that, I'd like to turn the call over to Avis Budget Group Chief Executive officer, Larry De Shon.

Thanks, Neal, and good morning.

We had a great start to the year.

Volume grew nicely, pricing under our historical T&M per day metric improved in constant currency, in both the Americas and in our international segment.

Leisure pricing was particularly strong from President's Day to the end of March.

Per-unit fleet cost were lower year-over-year, and utilization improved globally.

We also made significant strides to improve our margins through our initiatives, which are focused on targeting more profitable revenue growth, driving operational efficiencies and optimizing our fleet cost.

Each of these initiatives helped drive margin improvement in the quarter and as I'll discuss in a minute, we also expanded our presence in the broader mobility services industry.

Starting with profitable revenue growth.

As we've discussed previously, we've been on a journey to build an integrated yield management system that can optimize pricing and fleet decisions based on the available demand.

Something that the rest of the travel industry has had for some time, but which has never been fully realized in car rental.

I am happy to say that this integrated Demand-Fleet-Pricing system or DFP is now live in 14 markets in the U.S. With these locations seeing 1% to 2% higher revenue and pricing on average compared to non-DFP markets.

In Europe, where we're currently implementing Phase 1 of the DFP, the pricing robotic, we are seeing benefits there as well.

With our plan to roll out the full DFP system to the rest of the United States throughout the remainder of the year, and the next 2 phases still to come internationally, the success of this innovative technology leaves me feeling very encouraged by the opportunity still ahead of us.

We're also showing continued progress on our initiatives to drive bookings through our direct channels.

In the first quarter, website conversion rates in the Americas increased by another 80 basis points, prepaid reservations increased to more than 35% of all bookings made on our own platform, including nearly 45% with our Budget brand.

I believe we still have more opportunity to increase the percentage of reservations that are made on this lower cost booking channel.

Ancillary revenue in the Americas was again challenged in the quarter, but we continue to see positive signs from several of our initiatives to turn this around.

We recently promoted a highly-talented executive from within the organization, with extensive leadership in both sales and operations to lead our efforts to improve ancillary revenue performance.

Under her leadership, we've already made a process of selecting ancillary products on our .com site a lot easier, with better product placement, simplified language and bundled products, which continue to show promise.

Customers today want to transact when it's most convenient for them.

For us, that meant we needed to do a better job of offering our ancillary products and services on our website, and mobile devices and not rely solely on our counter sales functions when customers are in a hurry to get their cars.

With ancillary revenue on both avis.com and budget.com, growing in the quarter, I believe we're on the right path.

Our Avis mobile app continues to be a success, with availability now expanded to more than 300 locations in 10 countries.

Customers have used the app well over a million times to change reservations, select their car choice, upgrade their vehicle and even buy Sirius XM while on their journey.

Everyday our customers tell us how much they liked the Avis app experience, and our Net Promoter Scores for those customers who used the app are significantly higher than for those who do not.

And I believe -- we still have a lot of opportunity to make the mobile app experience even better.

Moving now to our initiatives to drive cost savings and efficiencies come across our organization.

We continue to see benefits from our new manpower planning system in the first quarter.

As a reminder, we rolled out a new manpower planning software tool in the middle of last year, and it is already assisting us in planning our workforce more efficiently.

At the end of this month, managers will have the capability to edit, delete and create new shifts on their mobile devices enabling them to spend more time with customers.

Our efforts are clearly working.

In fact, after producing a 6% increase in productivity in the first quarter last year, we were able to drive an additional 3% increase in Americas productivity this year, and I believe we still have opportunity, ahead of us, as our operations people gain more expertise with this tool.

Our shuttling initiatives also continue to bear fruit.

In addition to focusing on lowering the number of shuttles, we've also increased the number of fixed fleet locations to nearly 500 stores.

Fixed fleet locations are stores to which we allocate cars and subsequently, freeze the size of the fleet.

Local managers are then required to deliver higher utilization before we allocate more vehicles to that store.

This initiative helped fuel another 3% improvement in America shuttling cost per transaction this quarter, while volume and utilization at fixed fleet locations improved nicely.

Turning now to mobility.

We continue to look for new ways to meet the needs of our Zipcar members.

Complementing our existing round-trip service, Zipcar Flex, which we launched last year, has been expanded to 9 boroughs across London as demand for flexible car sharing grows.

This product allows members to find, reserve and unlock their Zipcar through their mobile app, and drop it off at any space approved by the borough, following the completion of their trip.

Since implementation, Zipcar members have taken more than 120,000 flex trips, with momentum growing every day, illustrating the strong customer need for this product.

We just launched Flex at Heathrow as part of a 3-month pilot with the airport, and at roughly half the price of a similar ride-hailing trip, we expect this service to have a very strong appeal.

In North America, our Zipcar commuter product also continues to see strong growth with revenue growing double digits quarter-over-quarter.

This service is now available in 11 major metro markets across North America and offers those who live in urban areas, a recurring weekly rental including insurance and parking, providing a cost-effective mobility solution.

As Connected Car technology continues to evolve, we are rapidly adapting our fleet and rolling this technology out to our locations.

We currently have 65,000 connected vehicles in our fleet, a two fold increase from last year.

In March, we announced a deal with Toyota, that will add an additional 10,000 Connected Cars to our fleet in the United States.

On Monday, we announced an agreement with Peugeot to add another 5,000 connected vehicles to our fleet by year-end to our European fleet by year-end, in addition to the existing Peugeot Connected Cars we have in our fleet today.

And we have already received some shipments of the new ID Systems' telematics devices and expect to have all 50,000 of them installed by year-end.

As you know, we created a mobility lab in Kansas City last year that continues to deliver exciting new insights in the Connected Car arena.

Let me give you just a few examples of some of the early benefits we're seeing.

First is fuel.

As we've discussed with many of you in the past, Connected Cars measure gas in the tank to a greater precision than can be done by the human eye.

With this increased accuracy, we've been able to collect incremental fuel revenue when cars come back with less gas than when they left our facility.

And to be clear, we also refund the customer back the difference when the car comes back with more gas than it left with.

Thus far, the incremental fuel revenue we've been able to collect with the Connected Cars alone, is paying for the cost of the connectivity.

Another example is our ability to recover overdue cars faster than non-Connected Cars.

The benefits from this are clear.

By recovering an overdue car faster, we are able to get it back on rent sooner, adding incremental volume and utilization while also reducing cost.

And a Connected Cars ability to communicate detailed tire pressures is proving valuable.

In fact, by the car being able to tell us that we need to add air to a specific tire before we put it on the ready line, we not only improve the customer experience, we also lower our operating cost.

These are just a few examples of how we are using technology to strengthen our business.

With our commitments to have a fully connected global fleet by 2020, it's easy to envision the potential benefits, we will be able to achieve.

Shifting gears, we now have multiple locations in Phoenix that are providing full management services -- fleet management services for Waymo autonomous vehicles.

We are also providing additional fleet management services for Waymo in markets other than Arizona, and look forward to working with them in the future, as they grow their fleet of autonomous vehicles.

Our partnership with Waymo also builds our knowledge of fleet management as a service and is providing us with expertise for a future when autonomous cars are part of our rental fleet.

To summarize, we had a strong first quarter with a combination of good global volume growth, positive underlying pricing, improved fleet costs and higher utilization, which has given us a great start to the year.

We also continue to take advantage of margin enhancing opportunities by growing our direct bookings, expanding DFP, selling a higher portion of our cars through alternative fleet disposition channels, lowering our shuttling costs and improving our manpower productivity.

The success of our mobile app also illustrates our ability to exceed our customers' expectations when we put their feedback to work, and our mobility work continues to position us well for the future.

As I look around, I believe the industry is in better shape today than I have seen in a long time.

Demand is good, fleet cost have stabilized, and we're seeing more instances of fleet tightness in the market, which allows us to further leverage our DFP systems to take advantage of these yielding opportunities.

New vehicle registrations for the industry were down 2% in the U.S. through February compared to a year ago, and were 11% lower than 2 years ago, which hopefully, is a good indicator that fleets will remain tight during the upcoming peak periods.

We are investing in technology to improve the customer experience, lower costs and increase margins, and we're devoting resources to succeed in the broader mobility services market.

After 2 long years of industry over-fleeting, declining used car values and lower pricing, we are now poised to capitalize on the opportunities that lie ahead.

After all the hard work we've done and will continue to do to lower costs and drive efficiencies across the organization, I believe we have an exciting future in front of us.

With that, we'll turn the call over to Martyn.

Thanks, Larry, and good morning, everyone.

I'm now going to discuss our first quarter results together with our cash flow, liquidity and outlook.

My comments would largely focus on our adjusted results, which as Neal mentioned, are reconciled to our GAAP measures both in our press release and earnings call presentation.

I want to start off by echoing Larry's comments.

We had a great start of the year.

Volume, pricing under our historical T&M per day metric, utilization and per-unit fleet cost were all improved.

This led to total company adjusted EBITDA increasing by $29 million year-over-year with a margin in the quarter expanding by 160 basis points.

Starting with our Americas segment.

The 3% revenue growth in the quarter was driven primarily by higher volumes.

Total revenue per day, the pricing metric we are now reporting was unchanged in the quarter.

However, pricing increased by 2% under our historical T&M per day metric.

This was offset by lower ancillary rates per day, which we're working hard to reverse as well as the effect from the newly adopted change in loyalty accounting.

We increased leisure volume by 5% in the quarter and increased its T&M per day by more than 4%, as industry fleet levels were tight in the key leisure destinations around the quarter's seasonal peaks, enabling our teams to yield up nicely.

We also saw very strong growth in inbound leisure revenue, with both volume and pricing improving.

Commercial volumes were unchanged in the quarter.

Strong growth in midmarket, small business and inbound were offset by lower insurance replacement and some other commercial subsegments.

Commercial T&M per day is 1% lower, being partially attributable to an increase in length of rental, as we focus on growing more profitable transactions.

Moving now to Americas costs.

Per-unit fleet costs were 4% lower in the quarter, and we also improved utilization by 120 basis points.

This was partially offset by a $5 million increase in vehicle interest expense, primarily related to higher market interest rates.

Used car values were strong in the first quarter, enabling us to avoid the substantial losses that we incurred last year.

In addition, we increased our usable alternative channels by 10 percentage points in the first quarter compared to the same period last year with very strong online and directed dealer sales.

With the recent launch of our new direct to consumer website, we plan to further increase the proportion of our risk car sales that we sell through alternative channels.

As a result of strong revenue, improved fleet cost and another good performance of our manpower planning and shuttling initiatives, which Larry discussed, we increased our Americas segment adjusted EBITDA by $35 million with margin expanding in the quarter by 260 basis points.

Turning now to our International segment, revenue improved 7% in local currency year-over-year.

We grew rental days by a robust 9%, driven by particularly strong commercial volume and achieved good growth in both EMEA and Asia Pacific regions.

Total revenue per day was 2% lower in local currency due to the continued expansion in our light commercial van business and strong growth in local markets, both being where ancillary opportunity is lower.

Underlying local currency pricing under our historical T&M metric, however, increased by 1%.

This reflects the deployment of the first phase of the DFP, the pricing robotic, as well as an extended European ski season.

Leisure volume was unchanged in the quarter while we increase its pricing by 4%.

Commercial demand was very strong, with rental days increasing the 11% against prior year, with particularly robust demand in Italy, Australia and Spain.

Commercial T&M per day was 2% -- was 3% lower, largely on increasing rental length, reflecting our drive for more profitable transaction and customer mix.

Our strong volume performance, improved utilization and a $4 million benefit from currency exchange were offset by the lower revenue per day and the additional marketing investments, which I mentioned during our last earnings call as well as higher airport confession fees.

As a result, Adjusted EBITDA in our International segment was $4 million lower in the quarter.

Moving now to our cash flow and funding position.

Adjusted free cash flow was an outflow of $13 million for the seasonally low first quarter, as planned and compares to a $48 million inflow in the first quarter of last year.

This variance is mainly a result of the timing of vehicle programs, which largely reversed over the course of last year.

For the full year, we remain on course to invest around $220 million on non-Fleet CapEx, including Connected Cars, additional Avis app developments, DFP and completing the modernization of our global rental and reservation system.

As a reminder, we plan to use the existing NOLs to settle our estimated $104 million of tax due on foreign earnings as a result of the U.S. tax reform rather than paying cash over the eight-year period.

For the full year, we are reconfirming our adjusted free cash flow guidance of between $325 million and $375 million.

Our financial position remains strong with approximately $3.9 billion of available liquidity is comprised ending the quarter with [$544 million] (corrected by company after the call) of cash having $713 billion of available capacity on our revolving credit facility, plus $2.6 billion capacity under our vehicle programs.

As a reminder, none of our corporate debt matures until 2022.

Our net corporate leverage of 4x was marginally improved year-end but continued at the top of our targeted 3x to 4x range.

However, we expect this leverage ratio to ease down over the course of the year as our earnings are expected to increase.

Our new first lien coverage ratio for covenant purposes was more than full turn below our maximum 2.5x.

We will continue to invest our free cash flow on attractive tuck-in acquisitions as well as returning capital to shareholders.

Regarding acquisitions, in addition to the initial 20% stake in our licensee in Greece, which I discussed in February, we acquired a sub-licensee in Western France, which closed in the first quarter as well as our largest sub-licensee in Germany, which closed in early April.

We still have a pipeline of tuck-in acquisitions that sat isfy the criteria of having attractive returns and contributing to our growth.

As our leverage ratio is at the high-end of the target range, we plan to time our share repurchases to better match the profile of our free cash flow generation, which as you know, is generated primarily in the second half of the year.

Regarding our full year 2018 expectations, these remain unchanged and are as follows.

We expect our overall revenue to grow between 3% and 5%.

Americas volume growth is expected to be between 1% and 3% and International volume growth to be between 5% and 7%.

We expect revenue per day for the Americas to be in a range between unchanged to up 2% versus prior year, after a roughly 50 basis points to a 75 basis point impact related to the change in loyalty accounting.

International local currency revenue per day is expected to be between flat to down 2%.

We expect our per-unit fleet cost in the Americas to be in the range of down 1% to up 1%.

International per-unit fleet costs are expected to be in the range of flat to up 2% in local currency.

We expect currency translations contribute $25 million to $35 million to adjusted EBITDA.

Largely offsetting this currency, as I mentioned last quarter, vehicle interest expense is expected to be approximately $20 million higher this year on rising North American interest rates.

For clarity, this excludes the effect of higher interest related to fleet growth, that results from increased rental demand.

As a result, we expect our adjusted EBITDA to be between $740 million and $820 million.

We estimated non-vehicle depreciation and amortization, excluding acquisition-related amortization to be approximately $210 million.

While we are presently leaving unchanged our effective tax rate guidance of 25% to 27%, we continue to assess the effects of tax reform, particularly, the new foreign minimum tax.

However, any change to this, would not impact our free cash flow given our NOL availability.

Finally, we expect adjusted diluted earnings per share to be between $2.90 and $3.75.

In summary, we saw a strong year-over-year improvement in the first quarter driven by robust global volume growth, high underlying pricing and utilization and improved per-unit fleet cost.

Meanwhile, with both pricing and fleet costs stabilizingthe benefits of our strategic initiatives were evident this quarter with margin improving 160 basis points year-over-year.

And while we don't want to make too much of the first quarter given its relative size compared to the full year, we are certainly pleased to start this year on a strong note.

With that, Larry and I will be happy to answer your questions.

(Operator Instructions) Our first question comes from Hamzah Mazari with Macquarie.

This is Mario Cortellacci, filling in for Hamza.

Could you update us on how you think about ancillary revenue in your guidance?

And any initiatives to get us that segment maybe rent double a little bit?

Sure.

Obviously, we're disappointed in ancillary revenue, the drag that's having overall.

But we've got a lot of initiatives that we've got in place going forward.

So we're expecting it to improve as the year goes on.

We've got some new product that we're -- new product offerings that we're looking at, both Internationally and the Americas region as well.

And as we said, early in the comments, that we've really dug deep into how we're selling our ancillary products beyond just the counter, but how we're actually offering them on our website to make sure that we are offering them in a way that customers really want to consume them, that they understand the actual benefit of them.

We describe it more in friendly language.

We've been testing the bundling product on the avis.com site, which allows us to bundle certain products together, which makes it easier for consumers to make their decisions.

We are giving discounts, if you offer -- if you purchase more than one item.

And we're doing that on the Budget side as well.

And we saw a nice pick up on both the avis.com site as well as the budget.com site as far as the amount of ancillary revenue product, the sites are selling the penetration were having on the sites since we made these changes.

So we got a new leader in place, and she's really digging deep in all the different avenues of how we're selling, and also has got a lot of product in the pipeline that we've been working on to see, if he can bring to fruition and offer new products as we go forward as well.

Okay.

And just a quick question on technology and ride-sharing.

Specifically, how do you think about the impact of peer-to-peer sharing startups and initiatives, around peer-to-peer car sharing from OEMs, which have been around for a while but want to see what you -- what you do think the impact will be on car rental business?

Yes.

Actually it's -- we are watching all the peer-to-peer platforms that are out there, and the different product offerings that are being offered.

As you said, they have been offered for actually for a number of years on the OEM side.

And we are also in discussions with the number of the different platform companies as well to see if there's a place for us and all of that.

I do think that as peer-to-peer grows, that there will be an opportunity for us to think differently about peer-to-peer as a product offering in our portfolio.

So it's something that were not ignoring, it's something that were actually taking a look at to see what opportunities that may present for us down the line as well.

Next question comes from Chris Woronka with Deutsche Bank.

I wanted to ask Larry, on the DFP rollout.

It sounds like some pretty good results, thus far.

What aiming do you kind of think you're in terms of getting that rolled out?

And maybe if we look at it on a company wide base.

Do you think, there's a bigger impact in '18 or maybe in '19 and beyond?

Chris, thank you.

It's -- I think it's going to be a probably more impact in '19, because I think in '19 and then actually '20.

Because in '18, we'll be rolling out the rest of the United States markets, which will probably take us through most of the year.

And then in '18, we'll be rolling out the rest of just Phase 1 markets in International.

And so 2019 will be the year that International start moving into the second, and then the third phase, which will high take most of 2019 for them.

So then I think you'll be kind of fully ramped up with all 3 phases in all markets kind of by 2020.

So it'll continue to just to be a ramp up as we go, and the third phase that we're rolling out now in the United States, it really is a market at a time.

There's a lot of analysis that have to be done and tweaking of the models to make sure that we are heading the right areas that we want to make sure that we really hit.

So it's not a matter of just turning it on.

It does take a team and an effort to actually make sure that we're addressing all the uniqueness of each market.

So it does take a while to do it.

So I think by the time it will be fully ramped up, it will be more 2020.

Okay, great.

And then just some on the mobility stuff you're working on with partners, whether it's Waymo in the future may be others.

I mean, is it fair to say that doesn't require a lot of upfront capital spend from you?

And do you expect that to change at all?

Or is that gets to be a bigger part of the business down the road, should we think about that as being really, really high return and little capital investments?

Yes.

I mean, each market is kind of different as far as what you need to do to location to make it set for purpose for their needs, and we're being -- we want to be very responsive to what it is they actually needed at each location.

I wouldn't say the capital is a huge expense for us.

There's certain things like fencing and certain security things that you might want to put in place.

So really depends on market and the location, but I wouldn't call it a huge upfront capital expense as we expand it.

Our next question comes from Dan Levy with Barclays.

Just wanted to start off asking on fleet cost.

I can certainly appreciate fleet cost we're down the quarter.

But one might have assume that could have been down more just given the magnitude of the change in used car pricing that we've seen.

And I don't want to go into, I guess, what it was that were the offsets.

Just trying to get a sense of for the remainder of the year; A, what are you assuming in change on residuals; and B, to the extent that -- that we continue to get, good used car pricing, like we saw in 1Q, and I know that's far from guaranteed, what that effect maybe on your fleet cost may carry into '19?

Yeah, Dan, I'll start and probably Larry will jump in as well.

So it was the first quarter where we are lapping obviously, the first quarter last year where we took large losses on sale.

So we haven't incurred those.

So we're actually about a breakeven in terms of our risk sales disposals in the first quarter.

As we then go through the year, kind of, the pattern changes and this is to do with the model-year 17 vehicles as depreciation was reset around the second -- around the June, July of last year.

We are carrying those vehicles through, particularly, the first half of this year.

So you've got quite complex overlap.

We would expect our absolute level unit cost to go up a bit in quarter 2, but be better than prior year considerably and then begins to overlap, because we had some favorable conditions in the second half, particularly, remember around hurricane effects as well.

That's the reason we're not actually increasing our guidance and improving our guidance on fleet cost for the whole year.

We have a changing pattern between Q1 and Q2, and then the second half.

Let me just add that, the number of cars that was on the first quarter is quite small compared to the number of cars we still have to sell through the rest of the year.

And obviously we were going to do better in the first quarter we knew we probably would based on the fact that there weren't going to be the number of cars in the market being sold as there were last year from the industry.

As you recall, a lot of cars went into the market in the first and second quarter last year.

That's not repeating obviously this year.

But we do have a little bit of headwinds in the back half, as Martyn said, with some of the hurricane benefits that we got towards the back half of last year aren't going to repeat this year.

And we just have a whole lot more cars to sell of our total fleet to sell for the year.

So I think it's a bit early to think about anything differently at this time but as Martyn said, it's quite complex when you're comparing year-over-year and how different models are differentiated different times and so forth.

Got it.

And are you assuming a base change in residual in your guidance?

Not material.

Not material, okay, great.

And then just a follow up on pricing.

I suspect you won't talk about quarter-to-day pricing, although, an update would be great.

But beyond that just trying to get a sense of how you think that the set up into the summer make changes some of the reads we've gotten.

First of all, leisure remains quite robust, but also some of the reads we've heard across the travel industry, should that there is a bit of an inflection on the commercial side.

Wondering, if there may be any potential for outperformance into, as you go through the spring and potentially into the summer with fleet sort of on a tighter side, but trying to get a sense of those dynamic?

Yes, it's just too early to really talk about summer.

We are just too far out.

As you know, our booking pattern is just so close in to the actual rental day that I wouldn't want to talk about what we think the summer is going to be at this point.

But we have seen stronger demand in our commercial segments, so we're glad to actually see that demand improving when you look at our total between our large mid-market and small business demand.

So that -- I think that's encouraging rate is still under pressure, but we're working hard on that as well.

But I think at this point, Dan is a bit too early to really be thinking about summer at this point.

Our next question comes from John Healy with Northcoast Research.

Larry, I want to ask a little bit about the ancillary trend.

Could you maybe talk to what products you are seeing that are maybe -- have the biggest short fall compared to maybe a year or 2 ago?

As well as the online travel companies now starting to sell the insurance on products over the last few months -- the insurance products and a white label and private label to the consumer.

Is that having an impact on ancillary?

And frankly, is there an opportunity to push back on the online travel guides for that practice because to me, it seems like, they're kind of now moving from our friends status to almost an enemy status, as it relates to you guys growing your business a little bit?

Well, the OTA selling their version of insurance products and so for their coverage isn't really new.

I think it's probably been growing over time and, of course, we've dealt with this in the International arena with broker selling in for a number of years.

We are in discussions with a number of our intermediaries to think about how we can together sell ancillary products differently, and I think actually, we have a commitment from one at least, for sure, that we'll be looking at starting them selling our products in the third quarter.

So I think these kinds of discussions and partnerships, I think will be helpful, as we go forward to see how we can kind of expand that opportunity, which I think it's just a better product offering for the customer all around versus having to go to another party if something were to happen just to deal with us instead.

And so and then I think -- obviously, GPS continues to decline as we all knew it would continue to decline in this quarter as well.

So we just need to continue to work other products to make sure that we have a really robust product offering for our consumers.

And with less consumers walking up to the counter without a reservation, which had a very high take rate of ancillary products in the past with mobile devices and just access to reservations on the go, we're just seeing less walkups over time and so that means that we'll just have to get more creative on how we sell these products to our consumers, and how often we attempt to sell these products to our consumers leading up to their actual rental date on our.com as well as our mobile apps and that's where a lot of our attentions is really focused, is making sure that we offer in a clear and concise way.

We offer products that we know that that we believe that they'll need for their motivation for the rental.

And then we're offering in a way that they can easily understand it and take advantage of the product, and perhaps, even discounted it if they offer more products, as they said before, if they take advantage of more products.

So I think there's more things we can do to make it more relevant and easier for consumers to actually purchase these products than we have in the past.

And that's where our focus is at this point.

Okay, and then just one question on capital allocation.

I know you guys reiterate the free cash flow guidance, and it sounds like that there's some planned sharing purchase activity in the second half of the year.

But just to know if maybe there's a thought to maybe reevaluate the capital allocation priorities given that the leverages a little bit higher than may be ideal as well as just some of the comments earlier in the year about the rights plan with the elements of keeping control that you guys pointed at that point.

Do you guys begin to think about other ways to return capital to shareholders?

Or kind of over the near to medium term as repurchase activity kind of set in stone as your main priority?

John, it's Martyn.

I think we've comfortable where we are at the moment, although, we obviously, constantly look at it.

So I mentioned the tuck-in acquisitions.

So there's an attractive pipeline, which we kind of restimulated over the last 6, 7 months or so.

So there's at least $100 million and probably more than that to be spent this year on the some -- very attractive tuck-in sub licensees we're buying in, which is very low risk as well, or attractive kind of smaller brands, particularly in the International side.

And then it's likely we'll then do share repurchases, which kind of makes sense for us, but we just continue to re-examine it.

But at the moment, we expect the corporate leverage ratio just to come down as we go through the year, because as you know, our earnings begin to cycle back up per the midpoint of the guidance.

So the moment, I think we'd leave the corporate debt the same.

And as we cycle back up, the leverage ratio should kind of reset to an extent.

(Operator Instructions) We have a question from Michael Millman with Millman Research.

2 questions.

Before 2016, typically, first quarters were actually profitable and now this year when there is a loss of $60 million this quarter.

Can you talk about, whether you see a return to profitability in first quarters?

Or why you don't?

And secondly, if we assume big assumption, that prices keep up with depreciation, when can we expect, and do you expect 15% EBITDA margin?

Michael, I'll take the first one and then hand it to Larry to the second one.

First quarter, as you say, the Q1 '15 and '16 were profitable and then we're kind of cycling back up, as I mentioned earlier to John.

So obviously, our fixed costs are larger proportionally across the year.

So it's pretty natural, we're in kind of slightly a trough position, and then cycle backup through the year.

The other thing that is quite pronounced is leisure is a growing proportion of our business.

So our peak -- seasonal peak is a lot more concentrated in Q3.

So over the last 3 to 4 years, essentially in the U.S, in the North America as well, that's always been the case in Europe, that peak is getting kind of greater as well.

So there's a number of kind of features of why it would seasonally be lower in Q1 and to an extent in Q4 as well, which mirror each other.

But I expect that position to progressively improve as our earnings begin to improve as our fixed cost kind of recover in those off-peak periods.

Larry, do you want to comment on the pricing?

Yes.

No -- we said a couple of years ago that we thought we could move our margins up 300, 500 basis points of net pricing, combination of pricing and fleet cost was net neutral.

There's obviously some point, in which the combination of pricing and fleet cost could be such a headwind that we couldn't overcome to drive the margin growth we targeted, but we're focusing on all the initiatives that we can control and trying to drive the operational efficiencies and that we're -- what we're hoping for is that pricing will return and fleet cost will continue to decrease over time.

So as you take a look at our last couple of years for pricing and fleet cost, both went a wrong direction, and that's not normally what happens in our industry if we get back into a period of time where we can get our fleet cost back down or pricing offset the fleet cost.

Then we believe that the margin improvement initiatives that we put in place and how we're looking for more profitable rental growth, all those initiatives will come forward to continue to improve margins over time.

So we're staying on the course, we're staying working on what we can control and the pricing will come through hopefully, with the help of DFP and the industry is keeping -- the industry keeping fleet tight to demand that will allow things like DFP to really take us course and actually, really provide real benefits.

So that's the focus is to keep developing the technology, keep developing the initiatives that we have within our control, keep looking for the profitable revenue, segments of the business and continue to grow those and look for pricing to offset fleet cost.

So is 15% still a reasonable target?

Yes, we're not going to give up on that, even though, we have set back in these last couple of years, the reason that we talked about.

We are starting to further back than what we had hoped.

But it doesn't mean that over time, we can't get there.

Once again, it's going -- a lot of it will depend on how fleet cost and pricing interact.

And as I just said, as long as the industry keeps fleet tight to demand and we have the opportunity to yield throughout the year and recover fleet cost, and hopefully more, we think we can get there overtime.

At this time for closing remarks, I will turn the call back over to Mr. Larry De Shon.

Please go ahead, sir.

Thanks, Jill, and before we close, I think it's important to reiterate the key takeaways from today's call.

We had a strong first quarter with volume, underlying pricing, fleet cost and utilization all are improving.

We're making strides to improve our profitability through our initiatives to drive profitable revenue growth, operational efficiencies and fleet optimization with margin improving a 160 basis points in the quarter, and we're investing to succeed in the broader mobility services industry.

We have a full calendar of Investor Relations activities plan this quarter, including events in New York, Boston, London and Frankfurt.

And we hope to see some 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.