Avis Budget Group, Inc. Q4 FY2020 Earnings Call

Greetings and welcome to the Avis Budget Group's Fourth Quarter 2020 Conference Call. At this time, all participants are in listen-only mode. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to David Calabria. Please go ahead.

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 including potential future financial performance which is subject to 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. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results. And any or all of our forward-looking statements may prove to be inaccurate, and we can make no guarantees about our future performance. 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 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. Good morning, everyone, and thank you for joining us today. It goes without saying that 2020 was the most difficult year in our company's history. However, as I look back on a year in review, I believe that 2020, while challenging, will also prove to be one of Avis Budget Group's most formative years. When faced with unprecedented adversity, we found it in ourselves not only to persevere, but to structurally improve our business so that we exit this trial a more resilient and efficient company than when we entered it. This wouldn't have been possible without the efforts of our entire organization. They came to work day in and day out throughout this pandemic and proved that no matter what the challenges, we at Avis still try harder. I'm sincerely grateful for the amazing efforts of our employees. It's been 40 years since I joined Avis, and I'd never been more proud to be a part of this team. This morning, I will start by highlighting many of the accomplishments the team made during the year. Then provide an update on the actions we took in both the Americas and international regions. After that, I will discuss our continued commitment to cleanliness and safety through the Avis Safety Pledge and Budget Worry-Free Promise, including our innovative safety partnerships and touchless rental experience. Finally, I will discuss business trends and then hand it off to Brian to discuss our liquidity and cash position, which illustrates the overall strength of our company. Yesterday, we reported our fourth quarter and full year results, closing the books on a year that certainly tested our resolve. However, while 2020 was difficult, it also demonstrated the strength, flexibility, and future capabilities in our company. When the pandemic first hit, we acted quickly. We immediately called our OEM partners to work with us to stop incoming new vehicles. We took quick, decisive actions with our property obligations and our vendors. We also made the hard decision to reduce staff and salaries. We're also very proud of the safety protocols we established, and our exclusive partnership with RB, the makers of Lysol, to ensure the safety of our employees and our customers. After our initial actions, we put out a release stating that we removed approximately $400 million in expenses. But we quickly realized it wasn't enough and challenged our team to do more by continuing to align our cost savings with that of our revenue declines. This was the key to our survival, and they did not disappoint. Ultimately, we removed over $2.8 billion of expenses and aligned our fleet to demand, removing 31% of our fleet, while capitalizing on the strong demand in off-airport operations. At the end of the third quarter, we showed our ability to take advantage of operating opportunities as travel returned, with fleet utilizations peaking back in the 70% area. October continued that momentum. And it was the lowest year-over-year revenue decline since this pandemic started. Rates were positive, and fleets were tight. November looked to continue that trend and Thanksgiving weekend was developing into a good revenue opportunity for us as well as some strong bookings leading up to this week. However, with the resurgence of the virus occurring at this time, we saw a dramatic spike in reservation cancellations and ultimately no-shows. To put this in perspective, we had more vehicles out on rent during the Saturday of Columbus Day weekend than we did on the Saturday of Thanksgiving weekend, something that has never happened before in the history of our company. Christmas, although better than Thanksgiving, was still challenged due to virus transmission and government restrictions on travel. As a result of our cost removal actions and the early alignment of fleet levels, we were able to remain agile and react quickly to those demand changes. We have talented operators who know how to adapt to the challenges we face. We continue to look for, find and remove additional costs and keep our fleet aligned with customer demand. As a result, we achieved positive adjusted EBITDA for the second consecutive quarter since the pandemic began, driven by significant cost reductions globally and culminating in higher year-over-year margins in the Americas as a result of these diligent efforts. As we stated previously, we ended the third quarter with the Americas generating more adjusted EBITDA this September than September of 2019. October continued that trend, delivering continued year-over-year improvements. As mentioned, October was the best month year-over-year since the pandemic began, down only 28% year-over-year. But then the second wave of the virus came and brought reduced demand. The Americas delivered just over $1 billion in revenue, the lowest fourth quarter total in our history. But despite the reduction in revenue, the team delivered their third best adjusted EBITDA of $113 million. Ultimately, the Americas finished the quarter with rental days down 35%, with a strong increase in pricing, up 3, helping to offset the reduction and allowing us to finish with revenue down 33%. However, the impacts of the virus were certainly greater out West in States like California and Hawaii, which saw the most severe travel reductions, with rental day reductions of more than 50%. Volumes at local market stores continue to outperform airport volumes. But even with the reduced volumes on airport, we continue to see an overperformance of our volumes against TSA check-in data. Our strongest segments in the quarter were off-airport operations, including local market rental locations, Budget Truck package delivery, Zipcar, and ride-hail. These areas performed especially well during the quarter. Our profitable ride-hail business has doubled year-over-year, confirming our strategy to expand and grow this business. Revenues from our local market operations exceeded prior year levels in the quarter. And our decision to optimize our business for last-mile delivery has been outstanding. On our last call, we announced that we had increased our package delivery fleet to capitalize on the additional demand from the holiday peak package delivery season. This business improved significantly over an already strong 2019, culminating in our best season on record. Zipcar also improved sequentially, delivering one of the strongest years, as urban customers sought private transportation to run errands or vacation outside the city. The strong recovery of these operations resulted in us finishing the year with 46% of our revenue coming from non-airport activity, an increase from 30% in 2019. During the quarter, our strategy to dispose of more fleet through alternative channels paid dividends. We continue to capitalize on our alternative channel strategy to take advantage of this used car market. We sold more than 69% of our vehicle sales in the quarter, although alternative channels and a record 26% of those vehicles sold directly to consumers. In fact, we sold more than 22,000 vehicles directly to consumers for the year, significantly more than the 13,000 we sold in 2019, capitalizing on our increasing capabilities in retail sales. As you can see in our investor presentation, we have a strong history of aligning our fleet with rental demand, which we demonstrated again this quarter and this year to achieve peak utilization rates of approximately 70% in the Americas. The fact that our fleet is mostly risk enables us to dispose of vehicles profitably, showing our strength in managing logistics on fleet and on utilization. During the quarter, the Americas fleet was in a healthy position and utilization rates held stable following similar trends from the third quarter, peaking on weekends, with business travel recovering slower than leisure. With the U.S. fleet down nearly 30% and utilization rates holding steadily in the 60% range on average, we started the in-fleet vehicles from our recently finished model 2021 fleet purchase. This vehicle rotation uniquely positions ourselves with lower-mileage, refreshed fleet to serve our customers. I would like to take a moment to address the semiconductor shortage that several OEMs have recently mentioned. We do believe this will have an impact on fleet deliveries and availability in our industry. We have always had strong relationships with the OEMs, and even in normal times, we work with them daily on any dynamics they are seeing from their production schedules. Currently, and based on our initial discussions, we believe we have the logistics and sophistication within our team to manage our fleet size appropriately. Keep in mind, a tightness of fleet in the industry usually bodes well for not only the used car market but for yielding opportunities. The aligning of our fleet to demand has certainly improved our revenue per day, up 3%, even with the continued increase in our monthly rentals. As always, we have been managing our revenue per day as a strong measurement of profitability. And during the pandemic, we've been focused on longer length rentals as well. As customers rent cars for longer, there are fewer touch points. On longer-term rentals, you clean the car once, move the car once, and refuel the car once, driving out variable costs and increasing efficiency. This has been an integral part of our business this year. The international market continued to remain challenged, constricted by renewed lockdowns in numerous countries in Europe and travel restrictions in the region. The impact primarily impedes cross-border travel, resulting in a greater percentage of intercompany travel. This domestic customer segment usually has a lower ancillary attachment rate, negatively impacting overall revenue per day. Revenue for the quarter declined to $326 million, approximately 48% lower than prior year, driven mostly by volume decline and rate impacts from reduced ancillary take rates. Volumes held generally stable at 44% below prior year. However, they were significantly better than the 65% declines we've seen in the first wave. As in the Americas, our international team continues to remove costs from the business, with the average fleet in the quarter down 39% versus prior year. We profitably disposed of nearly 14,000 risk vehicles while utilization peaked in the mid-70% range. The team did a great job matching cost savings with revenue declines. With the change in business mix, the international team had to overcome a greater decline than just the one related to volume. By proactive operational management and utilizing government furlough programs, they were able to reduce expenses by more than 42% to closely align with the 48% reduction in revenues. The team has set themselves up to take advantage of opportunities as they arise during the recovery in both EMEA and Asia Pac. When we first started reacting to this pandemic, the most important initiative for us was to ensure the safety of our employees and our customers. We are 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 established the Avis Safety Pledge and the Budget Worry-Free Promise to set what we believe is the higher standard of safety in our industry. Additionally, we launched our ABG Medical Advisory Council with well-established medical professionals from leading institutions charged with reviewing and advising on our COVID-19 protocols. We continue to enhance these protocols and training while relying on our exclusive partnership with RB and are proudly using their well-known Lysol products across our locations to benefit from their proven effectiveness against COVID-19. In addition to our safety partnerships, we continue to innovate through our award-winning app and Mobile Select product, now available at our top airports. Our Avis Preferred customers, upon arrival can select a specific car on their phone, proceed directly to their vehicle and then utilize a unique QR code to exit our automated Express Exit for a completely contactless experience. I want to encourage all our members to sign up for Avis Preferred. But if you're not an Avis Preferred member, you could still take advantage of our digital check-in on our websites, reducing transaction times and lines at our counters to quickly and safely get you on the road. Our employees are critical to our every success, and I would like to thank them for keeping our customers, families, and each other safe throughout this pandemic. In closing, I'd like to highlight an achievement in the fourth quarter that I'm particularly proud of. When a second wave of restrictions suddenly materialized before the key holidays, we were able to quickly flex our costs through the shock in demand and mitigate the impact of reduced revenue. Last quarter, we told you that we were building a leaner, more efficient organization, but we made that statement in an environment of sequentially improving demand. It's easy to be bold when the winds are turning in your favor, but what happens when things go against you? I'm proud to say that when we were tested in this fourth quarter, we delivered. In fact, the Americas achieved their highest fourth quarter margins in the company's history despite revenue being down 33%. I view this as not just a proof point validating our early assertions, but a stepping stone for what I believe will come when the impacts of this pandemic subside. Because of this, I feel even more confident saying today that as the economy continues to recover, you will continually see meaningful improvements in our earnings and margins. Now I know you're all asking right now, what exactly does that mean? At this time, Brian and I are not ready to fully lay out our exact path. There are still significant uncertainties around when revenue normalizes, and we're still in the process of refining our steady-state cost structure. What I can tell you today is this: Whenever the economy does normalize and we're back to the 2019 revenue levels, we believe we will be at or above the $1 billion in adjusted EBITDA. With that, I turn it over to Brian to discuss our liquidity and cash positions.

Thank you, Joe, and good morning, everyone. I will now discuss our liquidity and near-term outlook. My comments today will focus on our adjusted results, which are reconciled from our GAAP numbers in both our press release and earnings call presentation. As of December 31, we had available liquidity of $1.3 billion comprised of approximately $700 million in cash and cash equivalents and approximately $600 million in availability on our revolving credit facility. Additionally, we had cash and available borrowing capacity of $6.8 billion in our ABS facilities. Our proactive management of our corporate debt ensures we have no meaningful corporate debt maturities until 2023 and no need to refinance any of our ABS conduit facilities this year. We are in compliance with all of our secured financing facilities around the world, with significant headroom on our maintenance covenants tests as of the end of December. Because of this strong liquidity position, we felt confident enough to return more than $600 million into our ABS facilities, giving us the flexibility to fund fleet levels higher than 2019 when necessary. Given continued macro uncertainties, we are not providing guidance for the year at this time. We will provide further clarity as travel demand normalizes and visibility returns. However, I would like to make a few comments regarding the first quarter of 2021. Even in a healthy year like 2019, first quarter EBITDA is slightly negative given the lower revenue base and reliance on corporate travel in the quarter. In 2020, with only one month of COVID impacting the business, first quarter EBITDA fell to negative $87 million. In 2021, we'll be facing three full months of a depressed travel environment, so the comparisons will be difficult and noisy. As we learned last quarter, things can change quickly. But as of right now, here's what I feel comfortable saying: Due to our efforts around cost rationalization, we have been able to continuously improve on mitigating the adjusted EBITDA impact of significant revenue declines. In the second quarter of 2020, our first full quarter in a COVID world, consolidated adjusted EBITDA was $557 million worse than prior year. By the third quarter of 2020, the decline narrowed to be $252 million worse in consolidated adjusted EBITDA versus prior year. In the fourth quarter of 2020, this decline reduced further so that our absolute adjusted EBITDA decline was now only $69 million worse versus prior year. For the first quarter of 2021, I expect this improving trend in narrowing our absolute adjusted EBITDA decline to continue. Beginning the second quarter of 2021, when we start comping full quarters with the coronavirus impact, those declines will clearly shift to significant improvements year-over-year. This is what gives me, Joe and the team here the conviction to state that when our revenue base does return to 2019 levels, we expect to be at or above $1 billion in adjusted EBITDA. With that, let's open it up for questions.

Our first question today is coming from Chris Woronka from Deutsche Bank.

Thanks for all the helpful data points thus far. I was hoping, first question, maybe you could just talk a little bit about your outlook for fleet costs. There's going to be a lot of moving parts. You're going to be in-fleeting some new cars and used car prices might move around. We have the chip shortage. Just any high-level thoughts on how those might trend?

Good morning, Chris. We did try to be as transparent as we could in our prepared remarks. Yes, the fleet situation is ever evolving. If you think back to last year, it was really about the removal of fleet. We canceled orders. We had the best-selling month in the history of our company in the month of August. And traditionally, if you think about how we manage our business day-to-day, we don't normally do that, right, because the peak period starts in the summer and then you hold on to cars and you try to leverage that volume and revenue opportunity. This year, it's a bit different. We came off probably one of the better per-unit fleet cost in our company's history, largely due to the COVID shutdowns that some of the OEMs had and the delay in inventories on both the dealership lots and used cars. And we took advantage of that. I would say that going out this year, we still see, as we saw in the fourth quarter, a pretty good used car market. That's it seems increasingly strong, I will say that. But we are getting our new cars in, and the new cars are important. When you think about fleet and fleet costs, it's not just how you buy them, but it's how you sell them, and we've talked a lot about those in the past, buying cars with the right trim levels. People want to drive and also they want to buy when we're done. I think it's also becoming more increasingly important, especially this year, as we cycle in new vehicles and we keep our rotation solid, because what ends up happening there, one of the key indicators of residual values is the mileage on cars. And as we get new cars in, that tends to normalize. I see going forward the opportunity to sell cars is solid. But you're right, the semiconductor thing which I mentioned earlier is going to have an impact on just new cars in general as well as, I believe, our industry. And we're working hard to mitigate any potential issues we might have. I will circle back to one touch point, however. If you go back to 2014, or maybe even 2017, our industry was hit with a tremendous amount of recalls. Hundreds of thousands of cars, one-third, if I recall, maybe in the third quarter of '17, of our entire fleet was under recall hold. And we were able to manage through that. So I have confidence in our team. Do I think there might be disruption due to this travel, due to the semiconductor thing? Yes. But as it stands right now, I'm comfortable with our fleet levels to both sell if we need to, or maximize our volume as it comes.

Chris, it's Brian here. I just think it's a little early to be giving guidance on that. We're comfortable with where we are in terms of the 2021 model year buy. We're just getting into negotiations for the 2022 model year buy. So we'll see how that shakes out. And like you said, there are things going on with the semiconductor shortage. We have the impact of normal tax returns coming in. But we also have the potential stimulus coming in. There's a lot of moving pieces. So we'll update as things settle down. The one thing that I will say is that I think what we proved in 2020 was that when the market is there for us, we were able to move the metal and sell the cars we need to quickly and efficiently. So we'll be ready for that if that materializes this year as well.

Just a quick follow-up. As we think about, hopefully, a much better kind of summer season and a lot of folks planning ahead and maybe a little bit to what you saw in the fourth quarter, is there any concern around kind of this increased cancellation rate as people just making a ton of reservations? And I know that's something this industry has dealt with over time. Does that give you any pause to maybe consider new initiatives to maybe even if temporarily just drive down this multiple reservation and cancellation kind of trend?

Yes. I'll take that. When we started this pandemic in March and April, unfortunately, the cancellation rates were pretty large. And as we got into the summer season last year, they started to come down to a more normalized level. I think what we saw in the fourth quarter, and if you recall, the government actions around Thanksgiving, only congregate with 10 people, they came quick and that was very public and people chose to cancel. What I see now is the same level of close-in bookings. So close-in bookings deter the large cancellation factors that we have. I really don't see that changing in the near term. People tend to book closer in. We have a prepaid product that people tend to use, which removes a little bit of the cancellation factor. But we do tend to give that back, like most of the other travel companies, should there be a situation that warrants that. But the close-in booking is not going to change for a while. And I think that puts a little pressure on the business because we have to anticipate things closer in. But I will say this, that our Demand-Fleet-Pricing system now in year 3 is learning as well as our operators on the ground, and we're able to anticipate where the potential opportunities might be, whether that be in cities or locations. So yes, I think the close-in might protect us a little bit from the large ones, but that Thanksgiving deal, like I said, we came off a pretty good October, all things considered, down 28%, with having what I thought to be very good activity around Thanksgiving. And three days closer in, when the governmental actions and CDC announcements came in, it changed things quite a bit and carried through a little bit through December as we see it now.

Our next question is coming from Brian Johnson at Barclays.

This is Jason Stuhldreher on for Brian. Just two quick questions. I was hoping, and I appreciate we're not giving guidance right now, but as we think about some of the cash flow dynamics for 2021, I was hoping you could talk on just a few things. I mean, firstly, fleet costs, the vehicle programs which was a bit of a tailwind in 2020 of around $200 million or so, should we expect that to reverse in 2021 as you size up the fleet? And what the potential impact there could be? Secondly, on COVID-related costs, which are excluded from EBITDA, and I think we're around $120 million in the year. Do those go away or at least fade next year? And then third, there seem to be kind of a working capital headwind in the fourth quarter. Is that also setting up for a tailwind next year? So just those 3 dynamics. And anything else you want to call out for cash flow next year would be helpful.

Yes, sure. I'll take that in reverse order. I guess the working capital issues in the fourth quarter, that was just us catching up on some bills that we had been delaying. When the coronavirus pandemic was happening, preservation of cash was kind of first and foremost. As we felt comfortable enough to put money back into our ABS facilities, things that we've taken out, we felt more comfortable in our cash positions, we did the same things with our vendors and the counterparties as well, which I guess dovetails into the second portion. Vehicle programs was especially noisy this year, money coming in, money coming out. I think we took care of all of that in the fourth quarter. And that was a conscious decision because we wanted as clean a 2021 as possible. We funded over $600 million back in there in the fourth quarter. So I don't view that as having kind of any big swings for 2021. Sorry, Jason, remind me, what was your third question again?

And just the COVID-related costs…

COVID-related costs, yes, so that will be normalizing this year as well. We don't expect that to be as big. Certain charges that we had taken in 2020 we’re not going to be taking in 2021. There are certain things in there that we'll still be taking below the line, but that will be normalizing this year.

If I could start with the first quarter, which is often a significant month for commercial travel. Typically, your annual distribution is about 60% leisure and 40% commercial. Can you provide insights specifically for Q1? The reason I'm asking is that since the low point in the second quarter, we've observed a steady improvement in year-over-year declines, which we also noticed in Q4. Is there a possibility that this year-over-year improvement might pause in Q1, given that it is such a major month for business travel?

Yes. Okay. This is Joe. What I will say about the first quarter is, as November and December was as challenging as they appear to be after the second wave, what we have seen is that our business still is really centering in on leisure customers traveling like on weekends or leisure periods and mostly in the off-airport versus the airport. That doesn't mean that we haven't seen improvements in those. I will say this: What we saw around the peak holidays, now MLK isn't traditionally a very big travel holiday, especially this year, but we did see increased activity. And what I could tell you, the velocity of reservations that we see closer in have improved compared to what we saw in the third quarter, especially around this President's Day holiday. As far as commercial goes, I will say this: Our commercial business has been transacting better than what you see in the TSA stats that are generally published. So we do see that. We see growth in some of the account types that you would imagine, defense contracting, logistics, distribution, aerospace, even some healthcare in that regard. And what we've seen is that our commercial clients are keeping the cars a whole lot longer. If you look at our fourth quarter, our commercial customers kept the car at full almost 80% longer than they did in the previous year.

Let me clarify what I mentioned earlier. We expect the improving trends to continue into the first quarter. Looking back at the prepared remarks, in the second quarter of 2020, we reported a loss of negative $382 million in EBITDA. Compared to the previous year, which showed a positive $175 million, that's a difference of over $550 million. That was the lowest point. By the third quarter, the difference improved to around $250 million, with EBITDA at $220 million compared to $471 million in the third quarter of 2019. The decline narrowed again in the fourth quarter, where we recorded positive $74 million in EBITDA compared to $143 million in the fourth quarter of 2019, marking a $70 million decline. The trend has moved from negative $550 million to negative $250 million to negative $70 million compared to the EBITDA of the prior year, and we anticipate this trend to continue into the first quarter.

Our next question is from Billy Kovanis from Morgan Stanley.

Appreciate the disclosure on the call around travel trends. Are you able to further help us segment where the strengths and weaknesses are coming from on the travel demand thus far in 2021? I know you alluded to a few of those, but if you could summarize, that would be helpful. And just how bookings are looking going forward? And then finally, I know that commercial in 2020 was still around 40% of your revenue exposure. Was this driven by the last mile business or a few of the other things you mentioned like defense logistics, aerospace, healthcare? And I have one follow-up.

Yes, this is Joe. Currently, our focus is more on a leisure-oriented approach. The holidays in the first quarter exceeded our expectations in terms of both volume and price. March, typically our most commercial month, presents its own challenges. We're uncertain about the usual spring break travel as airlines have reported lower expectations. However, the unpredictable weather across the country may lead some people to seek warmer destinations. Ultimately, the outcomes will hinge on virus transmission rates and vaccine distribution, which are difficult to forecast. While we're hopeful about vaccine rollouts, timelines keep shifting from April to potentially July or August. We want to emphasize that we will be prepared for a business rebound or to take necessary actions if required, as we did in the fourth quarter when it didn’t happen. Regarding our commercial business, I'm pleased with its status. Our retention rate for corporate accounts is impressively high at 98% to 99%, although travel activity remains limited. For the commercial market to recover, several conditions need to be met: employees must return to their offices, access needs to be granted for travel discussions, and there must be willingness to travel. I recently learned that GBTA, a major travel organization, is planning in-person meetings this year. The disconnect felt in the commercial sector, with many companies adapting to remote work, will need addressing, though I can't predict when that will occur. Rest assured, we will be ready.

And then just a question on the long-term here. I think one area of unlocked potential is the real-world miles data that's collected from your vehicles. Can you remind us what percentage of your fleet is currently connected? And is there any plan contemplated around how you could potentially monetize these miles to capitalize players like Techworld who are investing in economy assets?

Yes, this is Joe. To address your first question, about 60% of our fleet in the U.S. is currently connected, possibly a bit higher. I would like to discuss how we implement various strategies regarding mileage within our company. There are three key initiatives I focus on. One of them pertains to our fleet costs. Over the past couple of years, we've managed to lower our fleet costs significantly, and a major factor in this centers around our ability to manage mileage. We've previously talked about mileage optimization, which involves distributing mileage evenly across our fleet. This means providing cars to our rental sales agents in a way that takes into account historical data and segments to predict how many miles a potential customer might drive. We believe that reducing mileage uniformly across our fleet will yield significant benefits, especially for our fleet costs. Additionally, we have been examining mileage through our cascading of cars initiative. For instance, we have a Payless brand that receives cars, but customers who rent from Payless tend to rent less frequently, maybe once a year or even less. Therefore, we have cascaded mileage on those cars, and we've applied this strategy in our ride-hail business as well. We've found that this approach benefits both our fleet costs and our resale value for the cars. Lastly, there are advantages to connected cars in enhancing customer experience. For example, when a customer returns a car and crosses a geo-fence, the mileage is recorded accurately, and they are billed without any uncertainty. This has improved not only our customer experience but also our adjustments. We have numerous initiatives for our connected cars that include simple tasks like identifying an underinflated tire without needing an employee to inspect each tire. We also manage monthly rentals that automatically roll over, which means there's no need to check in for mileage updates. When a car is overdue, we can retrieve it two days earlier than we used to, which helps reduce our overall fleet costs and minimizes potential damage to cars that are overdue. Plus, we have inventory systems that allow for immediate updates without having to connect to the cars. I believe we are just beginning to explore these opportunities. In 2020, we focused entirely on finding ways to cut costs, and as we move into 2021 and the situation stabilizes, we are eager to share more about our developments in the connected space.

Billy, and you bring up an interesting point, though. In a normal year like 2019, just in the Americas alone, we're doing over 100 million rental days and our average customer is putting on 100 miles per day in that vehicle. That's 10 billion miles of data we're collecting every year once our fleet is fully connected. We think that's an extremely valuable asset that is incredibly difficult to replicate. But to Joe's point, at this time, we're figuring out how to use that data to kind of lower our costs and deliver a better experience to our customers versus kind of monetizing with a third party.

Next question today is coming from Hamzah Mazari from Jefferies.

My first question is just on the $1 billion EBITDA figure on a 2019 revenue base, could you maybe talk about your confidence level in that? And then as part of that, has your mix between variable and fixed costs changed just given you have a clean slate to add back costs where you want and the cost takeout has been very impressive during COVID?

Yes, thank you. This is Joe. I want to emphasize that we are a more efficient company now compared to the past, and we believe this trend will continue. The $2.8 billion in cost reductions I mentioned earlier includes both fixed and variable costs. In addressing fixed costs, we explored various approaches such as reorganizing tasks, restructuring, and re-evaluating our spans of control. The primary goal was to establish a sustainable environment that will enable us to pursue further expense reductions and improved profitability. Variable costs focus on operational enhancements. The last two quarters of 2019 demonstrated different paths to similar outcomes. In the third quarter, revenue was on the rise, and September yielded better EBITDA results than the previous year, along with margin improvements. The fourth quarter unfolded quite differently. It started out positively in October but was suddenly impacted by the restrictions from the second COVID wave, prompting us to adjust our strategy. Both scenarios highlight our capability to manage our cost structure. The fourth quarter was the third best in EBITDA for the Americas business unit and had the highest margin performance. I expect we will see similar progress in Europe as we work to reduce costs there. As revenue rebounds and the business mix shifts back closer to what it was in 2019, you will witness significant improvements in Europe too. Now, I will hand it over to Brian to discuss the changes in revenue mix. Brian?

Yes, I would say there aren’t significant changes in the mix between fixed and variable costs. We are currently mapping out where specific line items should be categorized. Generally, thinking of the ratio as roughly 3/4 variable to 2/3 variable seems appropriate, which aligns with what we’ve indicated previously. What gives me confidence in setting that target now is that during a major restructuring, the most challenging aspect is often the removal of costs, which requires tough decisions and discussions. We already navigated that process at the beginning of the pandemic, successfully reducing costs. Maintaining that cost discipline is crucial at this moment, and I have confidence because we’ve consistently demonstrated our ability to achieve this month after month.

And just my follow-up question is sort of just a clarification question. Did you sort of give what January and February trends look like relative to the down 41% in December? And then also, Brian, maybe when you talk about Q1 '21 moderating EBITDA declines, is that versus the Q1 '20 baseline or Q1 '19 baseline?

Sure. Let me begin by discussing the Q1 '20 baseline. This is significant because, in the first quarter of 2020, January and February were very robust for us prior to COVID. We only experienced a full month of the COVID impact internationally and about half a month in 2020. This year, however, we'll be facing three full months in a significantly depressed travel environment. Therefore, the comparison will be against Q1 '20. Now, regarding the trends and the mix changes, I’ll pass that back to Joe.

Yes, I'll just add to what Brian said. We experienced double-digit growth last year in January and February. Additionally, there was a leap year, which is important to consider. Currently, when I compare to Christmas and Thanksgiving, we have noticed an increased volume of reservations made closer to the dates. They are not being booked one or two weeks in advance but the trend is improving, which is encouraging. However, I am uncertain about March as it has usually been quite commercial in previous years, and I don't have a clear picture regarding spring break and similar events that typically boost leisure travel. I remain hopeful that as vaccine distributions increase, people will still seek to travel and possibly vacation in warmer destinations.

Our next question today is coming from Michael Millman from Millman Research Associates.

Sort of touching on what you just talked about. The airlines seem to be talking about how they're seeing reservations increasing and increasing in line with vaccinations increasing. In that connection, do you see some of that? If indeed, that's true that you will lose some of mileage in terms of rentals because now at least hearsay is that lots of people have switched to renting and driving distances rather than airlining? The second question is, what are you seeing in terms of pricing from EMAC and from Hertz?

Okay. Hi, Michael, this is Joe. As I mentioned earlier, we do notice an improvement compared to the TSA stats that have been released. In the context of the airport environment, this improvement is significant. If you look at the fourth quarter, certain regions of the country performed exceptionally well, exceeding our expectations, and we see some of that trend continuing into the first quarter. However, it's important to note that this is regional. For instance, the lockdowns in California and Hawaii have had a substantial impact on our business, as these are major markets for us affected by government restrictions and quarantines. It's crucial not to overlook this aspect. The quarantine requirements mean that if someone needs to travel, they may have to stay home for an additional five days, which acts as a barrier. However, as I mentioned earlier, there are opportunities showing good momentum. Regarding pricing, fleet management often determines pricing fluctuations, and it appears fleets have been optimized as best as possible.

Our next question is coming from Rajat Gupta from JPMorgan.

This is Rajat Gupta on for Ryan. I just had one follow-up. Appreciate the color on the fixed versus variable structure. Could you give us any puts and takes on 2021 specifically, any kind of scenario analysis or something? Your overall OpEx to sales was roughly 65% in 2019, 72% in 2020. It looks like it might shake out somewhere between that in 2021. But could you give us some sense on what it might look like in a down 25% year-over-year scenario versus like down 30% or like down 20%? Any color on that would be helpful, just to frame our models.

Yes, Rajat, I will address that. We're not planning to provide additional details about the fixed and variable aspects or the various scenarios. When you consider it as a percentage of sales and how that revenue contribution shapes up, whether it stems from price adjustments or volume changes, we prefer not to delve into that level of detail at this moment.

Next question is coming from Aileen Smith from Bank of America.

Following up on an earlier question, and not to beat a dead horse here, so perhaps ask another way. As we look at the incremental amount in cost savings that you guys achieved in 2020 versus your projections through the year, so specifically the increase from $2 billion to $2.5 billion to then $2.8 billion ultimately at the end of the year, how much of this would you estimate that you achieved was more structural in nature versus more variable as you saw demand pressure return in 4Q with wave 2 outbreaks?

Sure. The $2.5 billion to $2.8 billion figure you're referencing is a GAAP number. We're calculating it by taking operating expenses and depreciation costs and comparing them to the previous year. True cost savings, in my view, involve identifying the fixed costs that have been permanently eliminated from the business and determining how much more efficiently we can operate on a variable basis, allowing us to handle the same number of rental days with lower associated costs. A lot of these costs may return as revenue increases, as we'll need more cars. However, the genuine cost savings are what are enabling us to reach the EBITDA forecasts we are sharing now. For additional context, we are still evaluating what the ideal cost structure should be, which is why we cannot offer more detailed guidance at the moment. To be completely candid, during the initial response to the situation in early 2020, we made cuts broadly rather than strategically. Now, we find ourselves at a very lean baseline. Our focus at this point is to determine how to wisely reinvest in areas of our business that require support. We recognize that some costs will return, but we also need to allocate resources to enhance the customer experience and ensure a return on investment. As we bring costs back in, we want to ensure that each item is carefully considered, has a clear return on investment, and contributes positively to our growth.

Okay. Understood. That's helpful. And then touching around one of the questions on fleet purchases. Have the order cancellations that you guys very necessarily executed in 2020, as you were depleting, impaired your relationships with the automakers at all in terms of pricing for vehicles that you're trying to acquire for fleet in 2021 and specifically potential implications for fleet cost per unit? And then as a follow-up to that, specifically around the semiconductor shortage, obviously, what we're seeing in the industry is that a lot of these chips are fungible in nature and automakers are choosing where to prioritize production maintenance around higher mix and price vehicles in the retail category, less so fleet. I know you touched upon the vehicles themselves. But is that impacting acquisition price for you in any way as you make sure you're trying to have a fresh fleet?

I'll take that. The first question about our relationship with the OEMs, I can honestly say it hasn't been better. We reached out to our OEM counterparts. We've been doing business with many of these companies and manufacturers for a long, long period of time. And our relationships with them are solid. If you think about just our overall fleet, we talk to at least 15 or 16 manufacturers. We have 100 different makes and models. And we've been in high-level discussions with them last year. And I would say there isn't a week that goes by that we don't communicate with them this year. So I have to say the relationship is fine. And we were very much appreciative of what they did. And we've always worked with our OEM partners when we needed to, when they've asked us to. So I'm very confident of that. I'm sorry, the second part of your question, please.

The second part of my question around the semiconductor shortages, yes.

Yes. The semiconductor, like I said, we first sort of learned it through the press there were a number of companies that talked about how they were going to change mix and models to try to get to the more productive ones. I think that's going to be evident. I think what I'm confident in right now is, I think we have the expertise and the logistics to deal with whatever comes our way. We have been speaking to them about potential disruption. So we are well aware of that. But like I said, we've faced some of these challenges in the past with many, many, many recalls that come up the day before that you have to put them down as we do in our industry. And I'm confident in the conversations, very collaborative with the OEM partners that we could find a way through this. But like anything else, it's a very iterative process and things may change. But I'm confident in our ability to kind of get us through this.

And one last question. That's helpful. And one last question, if I may. I wanted to touch upon the 8-K that you guys issued last night in conjunction with the results, specifically the amendment in your credit agreement. Can you talk about some of the flexibility that, that covenant headroom provides you? What you expect to execute upon through 2021 that you might not have been able to do had you not secured that amendment?

Yes, this is David. We always want to ensure that we have the flexibility and opportunity to manage our balance sheet as effectively as possible, which we successfully did throughout the pandemic. For us, this amendment is another step in collaborating with our banking partners to ensure that we have the necessary flexibility moving forward. It is a crucial amendment for us. We secured the cushions we needed, and we are prepared to take action as required.

Our next question is coming from John Healy from Northcoast.

I wanted to ask kind of a big-picture question, Joe. Competitively, from a market share standpoint, either looking at the U.S. or Europe, some of your biggest competitors are somewhat impaired these days. So when you look at kind of the issues they're facing, do you see this as a long-term share gain opportunity for the company, either on the corporate side or working with mobility partners? Or would you view kind of share gain potential over the next couple of years as largely unchanged because of the pandemic?

I'm not going to comment on our competitors specifically. However, I will point out that we operate in a very competitive industry. We are aware of the public information regarding one of our competitors. Instead of focusing on them, I prefer to emphasize what we do well. If we concentrate on our strengths, I believe we can achieve growth opportunities. Our product meets the expectations of our consumers, and we have a dedicated team that is empathetic in serving our travelers and customers. We manage our supply and demand effectively, utilizing proprietary channels in both car rentals and sales to handle our fleet management expenses. Additionally, we have implemented safety protocols this past year to instill confidence in our customers and employees. We maintain an efficient business model, and if we continue this way, I believe we will sustain our growth moving forward, which supports the idea of reaching $1 billion as we aim for 2019 levels.

Thank you. We reached end of our question-and-answer session. I'd like to turn the floor back over to Joe for any further closing comments.

Yes. So thanks for joining us today. Summarize, I'm incredibly proud of our team's resiliency and ability to navigate our company through these unprecedented times. We will remain flexible and adjust our actions to respond to future market conditions. Our financial position remains strong, and we'll continue to capitalize on any level of recovery as travel demand returns. I want to thank you for your interest in our company, and I want to thank all our employees around the world for really working hard this past year. I look forward to speaking to you guys again soon.

Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.