Avis Budget Group, Inc. Q3 FY2020 Earnings Call

Greetings and welcome to the Avis Budget Group’s Third Quarter 2020 Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host David Calabria, Treasurer and SVP of Corporate Finance. Thank you. You may begin.

Good morning, everyone, and thank you for joining us. On the call with me are Joe Ferraro, our Chief Executive Officer; and Brian Choi, our Chief Financial Officer. Before we begin, I would like to remind everyone that we will be discussing forward-looking information that involves risks, uncertainties and assumptions that could cause actual results to differ materially from such forward-looking statements and information. Such risks and assumptions, uncertainties and other factors are identified in our earnings release and other periodic filings with the SEC as well as the Investor Relations section of our website. We undertake no obligation to update or revise our forward-looking statements. On this call, we will discuss certain non-GAAP financial measures. Please refer to our earnings press release, which is available on our website for how we define these measures and reconciliations to the closest comparable GAAP measures. With that, I’d like to turn the call over to Joe.

Thank you, David and good morning, everyone and thank you for joining us today. I also want to introduce and welcome Brian Choi, who recently joined our executive team as our new Chief Financial Officer, who has been with us for quite some time as an investor and longtime Board member. Brian and I have worked together for the last 10 years, and I'm excited to be able to leverage his experience and depth of knowledge as we grow this business profitably for the years to come. When we first started to feel the impact of this pandemic, it was impossible to guess how things might play out. While the future revenue environment remains uncertain, what is becoming increasingly clear is our company's ability to adapt, react, and thrive through adversity. In the second quarter, we mitigated the impact of an unprecedented decline in travel, and in the third quarter, we've begun to show what our business is capable of as travel returns. I'm incredibly proud of our team, not only for their heroic efforts to protect our customers, but also their ability to improve our financial performance with a lean cost structure, enabling us to profit even with moderate market improvements. This morning, I'll provide an update on the actions we took in the third quarter to remove costs and right-size our fleet while improving our revenues since the start of this pandemic. I'll then remind you of our commitments to cleanliness and safety through our Avis Safety Pledge and Budget Worry-Free promise, including our innovative safety partnerships and touchless rental experience. Finally, I will discuss business trends and our outlook for October and beyond. After that, Brian will discuss our liquidity and cash position, which illustrates the strength of our company. In the quarter, as stated on our last call, we achieved both positive adjusted EBITDA of $220 million and generated $100 million in positive adjusted free cash flow. While revenue remained challenged due to the pandemic's effect on travel, our cost removal efforts since March have enabled us to benefit from sequential revenue improvements throughout the summer. This culminated with the Americas generating more adjusted EBITDA this September than in September of 2019 with more than 30% less revenue. During the quarter, we right-sized our fleet and profitably sold 75,000 cars in the United States - the most we’ve ever sold in a single quarter in this company's history. This included record quarterly sales through our direct-to-consumer channel, which we continue to expand with the recent opening of our largest retail location in Irving, Texas. Through our increased use of data and analytics, we capitalized on a strong used car market to take advantage of peak used car prices throughout the summer, with August being the single largest fleet sales month we've ever achieved to date. As you can see in our investor presentation, we have a strong history of aligning our fleet with demand, which we demonstrated again this quarter to achieve peak utilization rates close to 70% in the Americas. Our cost removal efforts were not limited to our fleet. Globally, we reduced our total expenses in the quarter by approximately another $1 billion, bringing our total cost removal for the year to more than $2 billion. We expect to remove more than $2.5 billion before this year is over as we persistently evaluate every line item of expense and find creative ways to work with suppliers and partners to find efficiencies. We've been fortunate to have many great partners who have worked with us along the way. We've become a leaner and more efficient organization, which will continue to benefit our bottom line even after the impacts of this pandemic have subsided. Our overall travel demand remains down. Revenues in the third quarter continue to show sequential improvement, down 50% from prior year in July, 43% in August, and finished down 37% in September. Airport travel has been recovering moderately and our on-airport volume is still performing better than passenger screening data released by the TSA. Similar to last quarter, non-flying customers are still coming to airports to rent vehicles and blind customers appear to be more comfortable renting one of our vehicles and taking alternative forms of transportation. Our off-airport operations continue to provide stability driven by local market business like commercial vehicles, ride-hail, package delivery, and Zipcar. These areas performed especially well during the quarter. Ride-hail business was up significantly year-over-year with active rentals back above pre-pandemic levels. Additionally, revenue from our local market operations exceeded prior year levels in the quarter. Notably, our package delivery business in the U.S. has nearly doubled and we've increased our fleet to match further demand as we head into the holiday and peak package delivery season in the fourth quarter. Zipcar also improved sequentially as urban customers seek private transportation to run errands or vacation outside the city. The pricing and volume have improved dramatically as competitive fleet levels have tightened. In the Americas, revenue per day turned positive by the end of the quarter, driven by strong leisure pricing on the weekends, offsetting drags from the mix shifts to domestic longer length business. Longer rental lanes tend to have lower rates, but are accompanied by higher margins due to fewer touchpoints. Longer rentals mean you move one shuttle or car less. You need to clean the car less, you gas the car less, and you have fewer transactions associated with the vehicle. Ultimately, this means you have fewer costs associated with these rentals. Due to this increase in mix, revenue per transaction has been especially strong, up 14% in the Americas as the pricing environment has improved while customers continue to hold our vehicles for longer lengths of rent. With improved market conditions, we were able to leverage our prior technology investments in demand fleet pricing and maximize the profitability of our transactions. We also optimized our fleet positioning so that our vehicles were well-positioned to capitalize on the most promising demand opportunities. We achieved similar improvements in the international business, right-sizing the fleet for average utilization in the quarter near 70%. While the lack of cross-border inbound business continues to create a drag on revenue per day due to fewer ancillary sales opportunities. We're proud of the way we've been able to navigate through these uncertain times, but even prouder of our industry-leading efforts to protect our employees and our customers. We launched our ABG Medical Advisory Council of five well-established medical professionals from leading institutions charged with reviewing and advising on our COVID-19 protocols. While I won't go into as much detail around our holistic safety efforts as I did last quarter, we further enhanced our protocols and training. We're also expanding our partnership with RB and are proudly using their well-known Lysol products across all locations to benefit from the proven effectiveness against COVID-19. We continue to expand our use of technology to deliver contactless mobile experiences. We've worked hard to improve our services across our brands. We have an award-winning app, and through our mobile select offering, our Avis preferred customers can select their specific car on their phone upon arrival, proceed directly to their vehicle, and then utilize a unique QR code to exit at our automated express exit for a completely contactless experience. All of our Avis and Budget customers can also take advantage of our digital check-in on our websites, reducing their transaction time at our counters to quickly and safely get on the road. Given the differentiated experience we provide, we're not surprised that many of those currently traveling are choosing our vehicles over other mobility options available. We continue to innovate with our Zipcar brand. We have streamlined both our backend platform and front-end enrollment process with instant access, enabling new members to access a car with a smartphone and drive within minutes of joining. This allows anyone near our Zipcar vehicles, especially in urban centers, another completely contactless option to get on the road quickly. Now I'll provide an update on our current business trends and our outlook for the rest of the year. Rental patterns continue to be driven by higher leisure compared to corporate and skewed towards local versus out-of-town customers. Reservation demand remains closer to the date of travel surrounding weekend checkout days. While we’ve limited visibility into the future as customers are primarily booking close in, we have more confidence in our current reservations. We no longer have significant pre-pandemic reservations, and thus seeing cancellation and no-show rates come back down to pre-pandemic levels. We were also seeing positive revenue per day on reservations recently booked for travel into the fourth quarter. Our efforts to protect both the financial health of our company and our customers have put us in a stronger competitive position and appear to be paying off. We have adequate vehicles to service our customer base today and also a strong financial position to give customers confidence in our ability to provide them with the vehicles and service they deserve even into an uncertain future. We've had great success with small business where our longer-length monthly rentals in the Americas grew over 10% in the quarter compared to prior year and nearly 30% in September. We were busy in the quarter working with our OEMs on our fleet buy for 2021 to refresh our fleet, get back to a more normal fleet cycle, and ensure our customers have new low-mile vehicles that meet their quality expectations as we further align supply with demand. Given our now proven ability to sell vehicles at scale, we are confident that even if 2021 proves more challenging than anticipated, we have the flexibility to continue to match up fleet levels with demand. Going into the fourth quarter, while we see a traditional decrease of the seasonal summer peak, we still expect to see steady improvement in our year-over-year revenue declines from the lowest levels of travel demand in April. Given market uncertainties beyond our control, with customers booking reservations closer to the rental date, it remains difficult to see how revenue will unfold. But with our strong cost position, we continue to anticipate both positive adjusted EBITDA and positive adjusted free cash flow from our operations. In closing, I'm extremely proud of our team and their performance. I must continue to express my sincere gratitude to our frontline employees for their unrelenting hard work during these uncertain times. Their tireless efforts ensure our locations and vehicles are ready to allow customers around the world to access safe and efficient transportation. Travel demand recovered throughout the quarter and we met our objectives, achieving positive adjusted EBITDA of $220 million and positive adjusted free cash flow. We removed more than $2 billion in costs this year so far and will remain diligent in keeping fixed costs at a minimum while simultaneously finding new ways to be more efficient. With that, I will turn it over to Brian to discuss our liquidity and cash positions.

Thank you, Joe, and good morning, everyone. Let me begin by saying how proud I am to join the Avis Budget team. It's an uncertain time for the entire travel industry, but what I am certain of is that the actions taken by our employees over the past two quarters have positioned us to take full advantage of the opportunities that will arise as the world normalizes. For that I'm grateful and hope to contribute to their continued efforts. I'll now discuss our third quarter results together with our cash flow, liquidity, and outlook. My comments today discussing changes in revenue per day, pricing, and per-unit fleet costs will all refer to changes in constant currency, excluding exchange rate effects. My comments will also focus on our adjusted results, which are reconciled from our GAAP numbers in both our press release and earnings call presentation. While the team faced an unprecedented change in demand late in the first half of the year, the third quarter showcased a remarkable stabilization of our company as we aligned global fleet levels to demand and continued our cost removal across all expense lines. On our last call, we stated that we would be adjusted EBITDA and adjusted free cash flow positive for the remainder of the year. We delivered on that with adjusted EBITDA of $220 million, despite revenue declines of 44%. Adjusted free cash flow for the quarter was positive $100 million, driven by our record fleet sales and successful cost removal strategies. As of September 30, we had available liquidity of $2.4 billion comprised of approximately $1.6 billion in cash and equivalents and approximately $800 million in availability on our revolving credit facility. Our proactive management of our corporate debt ensures that we have no meaningful corporate debt maturities until 2023 and no need to refinance any fleet debt this year. Next, I'll provide an update on our vehicle securitization debt, which is comprised of ABS term debt and bank conduit facilities around the world. We were in compliance with all facilities as of the end of the third quarter and did not require any additional equity injections. Our largest structure, AESOP in the United States, continues to have significant headroom on maintenance covenant tests at the end of September. I will refer you to our investor presentation for a historical view of our maintenance covenant tests, which show the strength of our structure. Additionally, in the quarter we completed one of the best AESOP transactions at the lowest rates since 2013, showing the strength of our relationships with lending partners and in the ABS structure and their confidence in our business. We believe our current operating environment and liquidity position are now robust enough to return the excess equity that we accessed earlier in the year back into our ABS facilities to allow for growth in 2021. Finally, I would like to share our latest thinking for the remainder of the year. While we cannot precisely predict the path of the virus, scientific progress, or governmental actions, we currently see demand proceeding with its slow recovery, especially where new cases are low and quarantine restrictions are lifted. Our experience throughout this initial recovery period continues to show that as states or countries reopen, vehicle rental activity accelerates. We believe there may be meaningful pent-up travel demand from those feeling cabin fever. However, we believe that a full recovery is contingent upon effective therapeutics and a vaccine. Keep in mind that we are a seasonal business and we anticipate the normal seasonal declines in demand as we move from the summer to the fall and winter and as the business mix shifts from leisure to commercial during this period. With the large portion of our fourth-quarter revenue typically earned during the holidays late in the quarter and rental reservations occurring closer to the rental day, there are still significant unknowns to the development of the fourth quarter. Given these uncertainties, we have focused our efforts on areas within our control, and would like to provide some guidance around costs. Our cost removal efforts are not yet complete as we continue to look for efficiencies and renegotiate with partners as we are now a sustainably leaner company as this pandemic effectively forced the organization into zero-based budgeting. We will keep fixed costs out with only focused strategic investments throughout the remainder of the year and into the beginning of 2021. Our fleet levels are now back in line with demand and we fully expect to continue to improve our utilization levels as we believe our most difficult fleet challenges are behind us. We do not plan to bring back overhead costs ahead of demand, as we will keep fixed costs at minimal levels and keep variable costs in line with relevant pockets of demand. What this all means is that despite travel demand remaining challenged and despite the headwinds of normal seasonal shifts, we are reiterating our goal of being adjusted EBITDA and adjusted free cash flow positive, excluding the return of vehicle equity as discussed previously in the fourth quarter. Adjusted EBITDA was down roughly 50% in the third quarter, and we hope to narrow that year-over-year decline in the fourth quarter. In conclusion, we remain focused on building a sustainably stronger organization while continuing to emphasize safety, trust, and empathy in all of our actions as we protect our team and our customers. With that, Joe and I are happy to take your questions.

Our first question comes from Billy Kovanis from Morgan. Please go ahead with your question.

Congrats on the strong result. Quick question on your cost profile. So in 3Q, it looks like there were some artificially low costs with respect to SG&A. As we look forward, can you please quantify the extent to which some of these costs will revert back? I'm thinking in categories like labor, advertising, logistics, and therefore rents will have cost rising again. On the other hand, if you could also quantify how much of the $2.5 billion quoted annualized cost savings in 2020 you expect to be permanent cost savings. That would be very helpful. And I have a follow-up. Thank you.

Yes, good morning. This is Joe. As you know, we've worked hard to align our cost basis with our revenues. At the onset of the pandemic, this became a key goal for our company and our team. As we progressed through the second and third quarters, the benefits of that effort became evident. We examined all areas of our profit and loss statements, including direct operating fleet and SG&A. Our strategy was straightforward. We estimated our revenue demand, which we anticipate will be X. Although, as I mentioned earlier and Brian reiterated, there is some uncertainty regarding that revenue figure, we rely on analytics to make our best projections. All our teams are actively monitoring this globally. As a result, we've managed to eliminate a significant amount of costs—more than we have ever cut in this company's history. This was a considerable undertaking. Looking ahead, as Brian and I forecast our activities for the fourth quarter and next year, we will be careful about what we decide to reinstate. It's a careful process, and we're not completely finished yet. We've put in a lot of effort to ensure our costs align with our revenue, and we will be meticulous about considering which costs to bring back. That's the best update I can provide at this moment. We will likely share more insights during our next quarter's earnings call as we will have a clearer picture by then. Additionally, we've just completed our fleet purchase, which we also need to factor in. I hope this information is helpful.

That does.

I just want to add that I don't consider any of the cost reductions to be artificially low. Currently, as volume decreases, we're adjusting accordingly. We recognize that when volume increases, certain costs will also go up. Right now, we are evaluating every cost line item to determine if they are fixed or variable, with the objective of keeping fixed costs as low as possible. We have put a lot of effort into this over the past quarter. Regarding variable costs, we aim to keep those low as well, so when volume returns, we can maintain as much incremental contribution margin as possible. We are actively working on this and will share more details in the future.

That makes sense. Yes, it will take a significant effort to eliminate those fixed costs. Congratulations on that. We look forward to more detail in the fourth quarter and beyond. I just wanted to ask a question about the international segment. The U.S. segment appears to be performing very well. You mentioned pricing as a challenge in the international segment, but could you also discuss the other factors that have contributed to the underperformance in international and what differentiates that market from the U.S. that has resulted in lower adjusted EBITDA? Thank you.

Yes. Okay. Hi. This is Joe. I think when you look at the international market, it operates a bit differently than the U.S. obviously. In the quarter, while there was pent-up leisure travel demand in the U.S., a big portion of the European business is based on inbound travel, especially in the third quarter. I think if you look at the three segments of business that we have in Europe, domestic business, intra-European business, and then there's inbound, let's say from North America. Inbound business has been depressed, right? We all know that. I'm encouraged to see that some of our airline partners are signing to open up potentially to test out of locations in the U.S. going into the U.K. with COVID tests prior and after you land. I think that'll aid in some growth there. But if you think about the pricing, is that kind of what you asked. The overall pricing of what you would sell to a customer was okay. It's the mix shift that caused the decline. And if you think about the mix shift and an international customer coming from, let's say, North America and going to land in Europe, they buy a lot of ancillary products, a lot. They don't know the area, they aren't familiar with the road systems, and they tend to want to have that level of protection. In this particular case, that customer wasn't there, right. The mix changed. So I am particularly proud of the way we took costs out internationally. They’re just as diligent as the teams are in the Americas to align costs with revenue country-by-country, but it was the mix shift that caused that revenue decline.

Makes sense. Thank you.

Thank you. Our next question comes from Chris Woronka with Deutsche Bank. Please proceed with your question.

Good morning, everyone. I would like to ask about the fleet plan for next year. I know decisions are being made right now, and I'm curious about how you assess the situation given the lack of visibility. Additionally, could you provide a brief overview of the financing aspect, especially since you plan to refill the ABS in the fourth quarter and how that will be affected by the expectation of selling fewer cars in 2021?

Yes. Hi, Chris. This is Joe. I'll start off, and then I'll hand it over to Brian for your question about liquidity. We took two specific actions to better align our fleet with demand this year. Many were concerned about our ability to synchronize our fleet with demand going into this quarter. However, we saw sequential volume improvements. Specifically, our off-airport or local market segment experienced significant growth, which helped us leverage utilization opportunities. Additionally, we canceled many existing orders, setting ourselves up for success. During this quarter, we also capitalized on a strong used car market. Our strategy for moving cars, utilizing data analytics, and timely deletions allowed us to normalize our fleet size. For example, in February, our volume was up 15%, and we positioned our fleet accordingly. In the past, we've demonstrated our ability to scale our fleet up for available revenues and quickly downsize it to align with demand. We have just completed negotiations for our fleet purchases, and I'm very satisfied with the outcome. The vehicles are diverse and tailored to customer enjoyment, thanks to the features provided by our OEMs. Moreover, we have vehicles, including vans and trucks, that can be sold profitably. Historically, we've kept our fleet slightly below projected demand, and while the current situation is challenging, we're analyzing all available external data, including airline projections and our individual market insights. We plan to introduce newer model vehicles to our fleet. Considering fleet costs in general, there are three key aspects: purchasing cars, selling cars, and cycling in new vehicles to ensure optimal mileage and holding periods that support future profitability. We will maintain our fleet accordingly. I can assure you that new cars are on the way, and we'll align our fleet with demand as we've always done since about 2008. Chris, just to add to that, when we accessed the equity in our AESOP facilities in the second quarter, that was never meant to be permanent. That was during a period of severe uncertainty to ensure that we ended up with liquidity to weather the storm. Given where we sit right now and the outlook that we see for the business, and given that despite revenues being down 45%, the fact that we're free cash flow positive, we believe that we don't need to be sitting on that excess liquidity at this point. So the thought is we're going to return that back into our AESOP facilities, which will allow us to fund fleet purchases up to 2019 levels and provide the cars our consumers are accustomed to.

And Chris, if I could just add, this is David. We issued that AESOP deal that Brian talked about at 2013 levels. It was opportunistic and it was pre-funding maturing debt from next year. And globally all our facilities are in place, and capacities are sufficient to fund 2019 levels and beyond. So we feel really comfortable and good about our ability to finance whatever fleet we need to get going forward. Thanks.

Okay. Appreciate all that color. Just a quick follow-up. Are you seeing length of rental? I know you talked about how it was still elevated in the third quarter. Are you seeing that come down much heading into the fourth quarter? Or when you say it's still pretty elevated?

Yes. I'd have to say it's pretty elevated. Our customers are keeping the cars longer. So when I say that people are checking out during weekends, it's not like a weekend rental. It's like you think you'd take out Friday and come back Sunday. It's not that at all. They're using the car over these longer leisure periods, and that bodes well for us in our utilization strategy. I mean, what you’re missing in that is the 1 or 2-day daily business that came from a commercial peak that obviously is not as robust as leisure as we currently speak. But we see that continuing this quarter, as Brian said, with the holidays, holidays are traditionally a longer length opportunity for us. So I don't see that changing.

Okay. Very good. Thanks, guys.

Thank you. Our next question comes from Michael Millman with Millman Research Associates. Please proceed with your question.

Thank you. Kind of following up on the last topic, a couple of things. Used car prices as we all know are record highs. Not sure to what extent we can attribute that to stimulus, and to what extent is the lack of air travel or concern about air affecting that. Maybe talk about how you see used car prices in the near future?

Okay. I'm sorry. Did you want to continue, Michael?

Fine. We can start there.

Yes, used car prices were strong. There were obviously reasons for that in the quarter. It was no secret that the OEMs shut down for a period of time, which created inventory challenges on their retail lots, which affected our businesses as far as used cars. There was stimulus, as you suggest. We think that has given us a good advantage as well. And I think there's stuff that we do internally, right? Like data analytics and we have changed our selling strategy since 2017. We are more risk-averse than we ever were as far as risk to program fleet, and we figured out ways to sell more direct-to-consumer, which increases your prices while reducing costs that you would normally pay at auctions and things of that nature. So while there was a robustness in the market, we think we've enhanced that with some of the strategies that we've put in, starting many years ago. That being said, as we see that there is still demand for one-year-old used cars. Now, sequentially that always declines from the summer season to the winter. I mean, that's a seasonal decline and we see that every year. This year is no different. But the demand is still solid. The price in the marketplace is still up quite a bit compared to the prior year. And we anticipate that this is a very big positive for our company.

Do you believe there is a need for another stimulus or a larger stimulus package in the future to maintain used car prices at the current record high levels?

That would be tough for me to answer. I would say that a stimulus package always would be a help. Someone on a previous call asked me about cash flow pumps or something a couple of calls ago, and the stimulus package we think was just as big as that. So if there is one, I think that helps. I think that the inventory levels for retail would probably trigger some reaction. But as of right now, there's still demand in the market.

Thank you. Our next question comes from Hamzah Mazari with Jefferies. Please proceed with your question.

Hey, good morning. My first question is just on utilization. If you could maybe talk about how utilization played out during the quarter. The reason I ask is, you had this big benefit from monthly fleet costs being down 37%. You sold cars really well. Just trying to assess how clean the EBITDA number is in the quarter and whether the lower utilization initially in the quarter kind of offset any of those gains you saw. Just trying to see how going forward as utilization ramps, does that offset kind of fleet costs coming back to a more normal level?

Yes, I think you're right on about that. So our utilization at the start of the quarter was lower than it was towards the end. A couple of things happened with that. We canceled orders upfront to get us in the best possible position to start off at a lower base, which helped. But at the start of the quarter, our utilization was not as robust as it was at the end. When you think about the summer season and what transpired, there's a lot of leisure travel, and a lot of longer lengths which we spoke about earlier, which helps in the overall utilization process. And then the robustness of the demand for selling cars and our ability to sell them and de-fleet them with the velocity that we did also helped. But you're absolutely right. The utilization at the start of the quarter was not where it was when we finished for all those reasons. And I think it's probably right to say that as our utilization gets more and more in line, that will help offset the big gains that we saw in the used car market.

Yes, just to add to that, Hamzah. In terms of how clean the quarter was, the monthly debt rate for the company was $163, that's completely abnormal. But even though those per-unit fleet costs were so low, we were paying for a lot of cars that just weren't being used. I'd say that you're going to see in the queue what that total gains on sale were to see what that benefit was. But I'd say that nearly two-thirds of that was eaten away just by the fact that we were over-fleeted. There's only so many cars that you can sell-through in a month, responsibly, and keep the market where it should be. In terms of how clean the quarter was, I think that, yes, of course, the lower depreciation costs were a benefit, but they offset nearly like two-thirds of it from the lower utilization. As Joe said, because we're exiting now, right-sized in terms of the fleet, we think that the quarters would just be a lot cleaner going forward.

Got it. That's very helpful. And then my follow-up question. I just wanted to ask the cost question a bit differently. Avis's prior peak margins were 11%-ish. Avis in 2016 talked about a 13% to 15% aspiration. Given the costs that we've taken out of the system, and they're going to come back very slowly, is it fair to say that the company can surpass prior peak margins on just a structurally smaller revenue base given corporate travel may take a while to come back? Is that sort of a fair thesis?

Yes. This is Joe again. It would be unfair for me to comment on where we think that's going to be, but because Brian and I have to use these next couple of weeks to get our hands around that. But I will say this. The amount of costs that we took out of this company was unprecedented. We've never done that in the history. I've been around for a period now, and I have never seen that. We did it and our teams did it. We learned to operate in a leaner environment. It taught us something. As terrible as this pandemic has been, it taught us how to operate in a differentiated way that maybe that's something that you would get if you went into zero-based budgeting and things of that nature. But theoretically it's very different than operating. We were able to operate in a much leaner environment, so we are going to be diligent about that, because you’re right. The first quarter is uncertain, what is it going to be therapeutics or a vaccine. I heard people talk about in the state that we operate in that they want the population vaccinated by July. No one knows if any of that is true or whether it’s going to happen. I mean, those are theses. We have to be ready for what if it does and what if it doesn't. I think that's where you would see our cost base aligned with what we believe our revenue projection will be. Brian, I'll turn it over to you for any other color.

Yes. Hamzah, I don’t think we're in a position yet to give kind of a range of what we think a margin profile will look like once we reach steady state again. But to your specific question on whether we would be higher than that 11%, given the cost takeout that we've gone through this year and a lot of those are just structural cost takeout that we don't ever see coming back. I would be embarrassed if we got to prior revenue levels and we weren't significantly higher in terms of sustainable EBITDA margin.

Got it. Very helpful. Congrats, Brian, on your role as well. Thank you.

Thank you.

Thank you. Our next question comes from Brian Johnson with Barclays. Please proceed with your question.

Yes. Two questions. So first, with regard to pricing, I'm sure you look at data for kind of like-for-like transaction. So if you were to look at trends, for example, for a kind of mid-week single day, large airport rental versus say a week-long airport rental or a week-long off-airport rental, what is the pricing trend you're seeing within kind of similar SKUs, use if you will?

Okay, this is Joe. We've observed that the public data aligns with our insights. In September, our exit trends indicated an increase in pricing, particularly in the leisure segment, which saw a surge in leisure business. However, the higher pricing stats may be slightly skewed since the customer base for single-digit rentals isn't as robust. While pricing has held steady as we concluded the quarter, similar to its performance in September, I should mention that Columbus Day was quite strong as well. It's important to consider the mix effect we've noticed; there has been a significant increase in the length of rentals. I believe this is beneficial, as longer rental durations lead to reduced transactional costs, enhancing our operational efficiency.

So that was kind of getting my question. If you take a one-week off-airport rental, what's the pricing on that versus say a year ago?

One-week airport rental, as it stands right now is positive.

Okay. Can you say how much or roughly…?

No. It's hard to say, because you're saying, well, someone keeps the car for 5 days, is that a week? 7 days, is that a week or plus that. So, like I said, there is a mix change, right? There's people have kept the cars not just for weeks, but we have an incredible number of people, whether that would be commercial or leisure, that have kept the cars for months. If you think about what the pandemic has done, great uncertainty and people want certainty and vehicle solutions allowing them to have that.

Brian, I don’t think I want to get into it like skew by skew kind of what pricing is doing. But generally speaking, across kind of all the different segments we have, we are seeing positive pricing.

Yes, thanks. That's what I was just trying to do because the headline is of course very mix driven. Second question on the balance sheet and ABS structure. Just roughly what is the amount of expected liquidity that you have in mind to put back into the structures? That's one. And then the follow-on to that is, is that in anticipation of expanding the fleet or just going, maybe not expanding but going back into the market and having the flexibility to buy new cars when and if you need them.

I think that's the right way to think about it, Brian. It has to do more with the flexibility. We're going to put in, in excess of $700 million back into the AESOP facility, which gives us the option to fleet up to what we need to. It doesn't mean we are going to use every last dollar of this. To Joe's point, the industry itself just kind of gotten it rightfully so right now, and we don’t want to go and buy more cars than we need, but we want the option to, as we see demand recover, given that it's kind of uncertain how things will shake out, we just want the ability to buy that fleet when we do need it.

Okay. Okay. Thank you, and congratulations again, Brian.

Thanks.

Thank you. The next question comes from Ryan Brinkman with JP Morgan. Please proceed with your question.

Hi. Thanks for taking my questions. There've been a number of developments recently with regard to the Hertz bankruptcy. What is the latest in terms of your thinking relative to how that firm's current execution or future capitalization fleet capacity or brand reputation, et cetera, might impact your operations going forward?

Yes. Hi. This is Joe. I really cannot comment on one of our competitors. We are obviously aware of what's going on publicly and we monitor that. I think when you think about the environment in our industry, it's a very competitive industry. We all try to differentiate ourselves based on products or services or technologies in that regard and our teams on the ground throughout the world compete with each other every day. I think it would be best to say, I've always tried to do is make sure that we understand what's important for our company and what we can do to move our company forward profitably. And that's kind of the way I would leave it.

Okay. Thanks. And I'm curious what the latest is that you're seeing with regard to demand in Europe, which seems to be several weeks ahead of us here in the fourth quarter in terms of virus reemergence. We're starting to see the beginnings of some government lockdowns in various markets.

Yes. I think the answer to your question is that government lockdowns and restrictions cause people to stay put. Now, what we saw in the U.S was prior to a lockdown, people rented a good number of our cars to shelter at a different spot. We see some of that in Europe as well, but in general, government lockdowns of that magnitude generally don't bode well, quite frankly. And then, what I would think about also is quarantining. If you go somewhere and you have to quarantine for 14 days, I think that's the single biggest deterrent. People tend to do, like we saw in the U.S., tend to want to get out, its pent-up demand, and they do tend to want to get out after a period of time. I'm sure we'll see something similar to that. But the usual initial is people escape with a vehicle to go somewhere else; then there's a lockdown situation which slows it down.

So just one more thing to add to that in terms of the international segment. I think the way that they've been positioning themselves has been for something like this to happen. If you look at what the international team has done in terms of cost takeout, it's pretty incredible. The Americas is down 40% in rental days, international was down 50% in rental base in the quarter. So definitely tougher in terms of days perspective. But if you look at their RPD, that was down 15%. The fact that they could take that kind of revenue hit and generate a positive EBITDA without nearly the benefit in terms of per unit fleet costs that we've seen in the Americas is astonishing. That's amazing work by the international team. For them, they were always focused on that cost takeout to be able to weather a storm like this that we're seeing right now.

Very helpful. Thanks.

Thank you.

Thank you. Our next question comes from John Healy with Northcoast Research. Please proceed with your question.

Thanks. I want to ask a big picture question for Brian. I kind of wanted to ask two parts to that. You've been around the company for a long time and kind of want to know where you're spending your time right now. Obviously, costs are a focus, but I was hoping you could kind of dive into aspects of the business where you think that the costs can structurally be different or approached in a different manner. And then secondly, longer term, how you view the capital structure of this business. Your predecessors have been largely focused on share repurchase. Obviously, the leverage needs probably to be managed a little bit in the next year or so, but was curious your thoughts on capital allocation over the long term.

Sure. I'll start with the first question, John. I would say the vast majority of my time right now is spent on kind of what the sustainable margin profile of this business looks like as we return to normal travel trends. Now, I don't know when those travel trends are going to return to normal in terms of is it next year, is it the year after, but I want to make sure that all the good work that the team here has done, kind of before I joined, in terms of the cost takeout, one, pay out and that we capture as much of that incremental contribution margin as volume does return. That is an exercise going line-by-line, understanding what's in our control, what's out of our control, how do we keep things out, how do we provide visibility throughout the organization, throughout the team to make sure that everyone is marching towards that same end goal. This is something we're still working through right now. What I can say is that I'm highly encouraged about the long-term prospect of where we will be in a normal basis. There's just a lot of opportunity and kind of seeing it at this level has just given me a lot more confidence. In terms of your second question, you're right. I think the leverage does need to be managed. I think some of that will occur naturally just by virtue of EBITDA expansion and leveraging returning normals to leverage returning to normal levels that way. There are certain tranches of debt that we're going to be opportunistic with in terms of retiring as well. So we're keeping kind of all options open on that front.

Great. Thank you.

Thank you. We have reached the end of our question-and-answer session. So I would like to pass the floor back over to Mr. Ferraro for any additional or closing comments.

Great. So thanks for joining us all today. To summarize, I'm incredibly proud of our team's resiliency and ability to navigate our company through these truly unprecedented times. We remain flexible and adjust our actions to respond to future market conditions. Our financial position remains strong and we will continue to capitalize on any level of recovery as travel demand returns. I really want to thank you for your interest in our company. I look forward to speaking to you again soon.

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.