Avis Budget Group, Inc. Q1 FY2022 Earnings Call

Greetings and welcome to the Avis Budget Group's first quarter 2022 conference call. At this time, all participants are in a listen-only mode, and a question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn this conference over to Mr. David Calabria, Treasurer and Senior Vice President of Corporate Finance. Thank you. Sir, 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, 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 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. Good morning, everyone. And thank you for joining us today. Yesterday, we reported our best-ever first quarter results in our company's history. This marks our fourth consecutive earnings report with record-high adjusted EBITDA for the given quarter. I'd like to start this call as I usually do by thanking all our employees for their best efforts in helping us achieve these results. In January, I stated that as a company, we are getting better. We are becoming better operators, a better management team, and a better organization. I believe the proof of that improvement is reflected in how we managed the business this quarter. You'll recall that during the first six weeks of 2022, the entire travel industry was still navigating through the effects of Omicron. Travel demand was challenged, and we saw the negative effects of this in rental days, rate, and utilization. However, instead of shutting down to ride out the variant, we got to work and mobilized our organization. We took this opportunity to dispose of our highest mileage vehicles at optimum prices to crystallize significant gains while refreshing the age of our fleet. We repositioned vehicles to locations where we believed the recovery would happen the earliest and strongest. We ramped up preventive maintenance to bring our out-of-service vehicles to some of the lowest levels we've ever seen. In short, we were getting ready for the outsized demand we believed could occur once the variant subsided. And that turned out to be the right decision. By the time we reached President's Day, strong demand returned and continued to build sequentially throughout the quarter. By March in the Americas, we had more cars on rent than at the peak of summer 2021. If you followed the reports of other sectors in the travel and leisure space, this will come as no surprise. Consumer demand for travel is the highest we've ever seen. After two years of quarantine, video conference calls, and home improvement projects, consumers have now decided enthusiastically to dedicate a large portion of their wallets to see the world and reconnect with loved ones. We at Avis are ready to help our customers do just that. 2022 is off to a remarkable start. We generated $810 million of adjusted EBITDA in the first quarter, which is actually higher than the full year adjusted EBITDA of 2019, despite it being typically the seasonally lowest quarter of the year. We're ready to build on this momentum and achieve greater heights. But before we do that, let me recap our historic first-quarter results. As usual, let's start with the Americas segment. In the Americas, it was a tale of two quarters. Omicron hit hard in January, and we saw the effects immediately. Regional rent-a-car demand softened significantly, and commercial demand was nonexistent. Just to illustrate how sharp and severe this was, Americas utilization in January was lower than any month of 2021. This includes the pre-vaccine rollout of the first quarter of 2021, the peak of the Delta variant. However, positively, January was also when the used car market was at its strongest. We capitalized on this dynamic and sold high mileage vehicles at attractive gains. I've always said that the vehicles we exit make up some of the best-used inventory in the market. They have one owner, are well maintained throughout their life, and are attractively priced. That was validated through January and February, as consumers aggressively purchased our vehicles, and there was no shortage of demand. The capital pruning and harvesting of our rental fleet dominated our activities for the first six weeks, and gains on sale contributed significantly to adjusted EBITDA during this period. Because we were so quick to act on this, by the time the Omicron cases subsided in mid-February, we were launched and completed our targeted fleet disposition schedule. This allowed us to focus 100% of our efforts on getting cars into the hands of consumers and back on rent. During the second half of the quarter, we saw tremendous rebounds in utilization, revenue per day (RPD), and rental days where we delivered over 10% more base versus the first quarter of 2019 despite a soft start to the quarter. Both reflected in our reported quarterly metrics is the blend of these two opposite market conditions and not reflective of how we're trending into the second quarter of 2021. RPD, for instance, was down sequentially in the first quarter of 2022 for the second quarter in a row. However, February RPD saw marked improvement from January, and March RPD saw improvement from February. So the average RPD of $72.76 that we reported in the quarter doesn't indicate the strength of the exit trend. The same is true for utilization. For the quarter, utilization was 69%, which is roughly in line with where utilization was in the first quarter of 2019. However, utilization in March 2022 was near peak summer 2021 levels. We're operating on all cylinders when it comes to positioning our fleet to squeeze out the most rental days, drive RPD, and maximize revenue improvement. Our demand fleet pricing system, combined with field experience, allows us to consistently execute on operations, no matter the demand environment. Moving on to the income statement results of these metrics. In the Americas, revenue increased by over $900 million year-over-year. Americas adjusted EBITDA during the same period increased by $702 million for an incremental margin of 76%. If you compare our most recent results to the first quarter of 2019, Americas revenue increased by $673 million while adjusted EBITDA increased by $775 million, for an incremental margin of 115%. Obviously, gains on vehicle disposal contributed significantly to these results, but our relentless focus on cost control and operational efficiency also played a crucial role. It's the same story we've told all throughout last year. By maintaining stringent discipline around costs, we were able to maximize the revenue and depreciation benefits that we bring to the bottom line. The results are eye-popping. $810 million of adjusted EBITDA generated from the Americas this quarter, the previous record being $115 million in 2015. As you can see, it's almost as if you're comparing two completely different businesses between now and then. And that's what we mean when we say we are on a transformational journey here. It's not about getting slightly better and calling it a win; we're focused on pressing every last macroeconomic advantage and running it through our proven, tested, and efficient operations, to sustainably get to a structurally different profitability plan. At this point, I'd like to provide a bit of color around April and what we're seeing in early May. The strength in demand that we saw materialize in March has continued to early parts of the second quarter. The Easter season was strong and early indications for May are promising as well. While we're not giving specific guidance on this call, I will say that in the Americas at this point, it appears that both rental days and RPD will be higher in the second quarter of 2022 than it was in the second quarter of 2021. With that, let's move over to our International segment, which posted a record historic quarter as well. Consistent with our prior quarters, our EMEA and APAC businesses have yet to see the robust recovery we're experiencing in the U.S. in terms of travel demand. However, throughout the quarter, we saw moderate but noticeable improvement in rent-a-car demand, leading to sequentially improving rental days and RPD throughout the months of the first quarter. This combined with the rigorous cost control our international team exhibited throughout the pandemic resulted in $23 million of adjusted EBITDA in the quarter. On an absolute basis, that may seem modest compared to the adjusted EBITDA generated in the Americas. However, when you consider that this is the highest first-quarter adjusted EBITDA that our International segment has ever achieved, you begin to appreciate the step function change made in the stable profitability of this business. To put it differently, on a total international basis, adjusted EBITDA has gone from a negative $50 million in the first quarter of 2021 to a positive $23 million in this most recent quarter — that's over $73 million of improvement in adjusted EBITDA on a $140 million of revenue gains representing a contribution margin of 52%. More impressively, if you compare the most recent quarter's results to the first quarter of 2019, you notice that despite having over $160 million in lower revenue, adjusted EBITDA in the first quarter of 2022 is actually $44 million higher than the first quarter of 2019 when we posted a negative $21 million of adjusted EBITDA. The dynamics that allow for such impressive adjusted EBITDA drop downs in the Americas are not unique to this region. We believe that late travel demand in Europe is just as strong as it was in the U.S. a few quarters ago. Like the Americas, the industry's fleet situation internationally is severely constrained as well. I said in previous calls that our international team will be ready when demand materializes, and due to the structural cost improvements made to our operations, the drop-through to adjusted EBITDA will be sizable when we see top-line recovery in that region. I know it's still early, but from where I sit today, it appears that this is the year where our teams internationally will get to show you just that. Moving on to fleet, we're consistent with the last quarter, and we'll focus on the Americas segment. In the Americas, our average fleet size in the quarter was sequentially higher at 443,000 vehicles. Consistent with the last quarter, this was a management decision taken to address the uncertainty around receiving new vehicles these days. We've been in daily contact with our OEM partners to ensure that deliveries of vehicle orders remain intact. However, due to labor shortages caused by Omicron earlier in the year, lack of semiconductor availability, and ongoing supply chain issues aggravated by the conflict in Ukraine, receiving new vehicles on schedule is far from a sure thing. The rental car industry will be faced with delays and cancellations throughout 2022. That's the reality of the rental car industry's supply. However, as we made it clear earlier, consumer demand for rental cars is at all-time highs. We want to do everything we can to ensure our customers have a vehicle available to make that business trip or take that vacation. To service that demand in the coming peak, we are currently forced to carry a larger fleet than we normally would during a shorter period. This is a temporary strategy to get us through the uncertainty around fleet availability. As our OEM supply chain normalizes, so will our fleet rotation. Related to fleet, let me address our unusual fleet depreciation for this quarter. You'll notice that our consolidated monthly depreciation cost per vehicle in the first quarter of '22 is $62 down from $185 in the fourth quarter of 2021. This was due to roughly $300 million of gains from dispositions in the quarter. If you adjust for those gains, you'll see that straight-line depreciation is set at $230 per month per vehicle. We've always taken a conservative approach to how we account for depreciation at Avis. But this measured approach and strong residual environments can result in significant gains in a quarter when dispositions are high. This quarter was an example of that. We're not changing how we account for fleet costs at this time. Our fleet refresh was largely completed by the end of February. Therefore, you will see a normalization of consolidated monthly per unit fleet costs starting next quarter. Lastly, regarding fleet, let me touch briefly on our current buy. While we have begun discussions around the model year 2023 buy, we're still working through how we won't receive our model year 2022 orders. It's a fluid situation, and it has been for the past two years now. Luckily, we have decades of working together with our OEM partners to deal with this uncertainty. We believe this is one of the true advantages. There's a level of trust that can only be developed by finding the same fights together for years. The understanding that comes from shared hardships is what allows you to ask for a favor when you need it and truly give one in return. That's different between a true partnership and a customer-supplier relationship. So yes, it's a challenging time right now with chip shortages, supply chain issues, and labor uncertainties. What we're here to invest in is working with our OEM partners to get through this. And by the way, we've seen some of the product portfolio that's coming down the pipeline from our strategic OEM partners over the next few years, and we couldn't be more excited about what's coming, both traditional and electric vehicles. Moving on to our continued improvements around technology and the customer experience, due to strong consumer feedback and efficiency we've seen in our workflow, we are dedicating additional resources to expand our Avis QuickPass offering. For those unfamiliar with this product, it enables our preferred customers upon arrival to select from a choice of vehicles on their phone, proceed directly to their car, and utilize a unique QR code to exit via our automated Express Exit for a completely contactless experience. Additionally, upon vehicle return, customers can close out their rental themselves, enabled by our connected car technology for an expedited and automated completion of their rental. Our goal is to have QuickPass deployed at the majority of our key airports by the summer travel season. Next, let me comment briefly on Avis' commitment to safety and our latest views on the industry disruptions caused by COVID-19. Our Avis safety pledge and budget worry-free promise remain in full effect and provide both our customers and our employees with industry-leading protocols to keep everyone safe. Thankfully, at this time, it appears the effects of COVID and the Omicron variant are subsiding. While there has been an increase in cases over the past few weeks, we have not seen any impact on our booking demand. Our belief is that as long as hospitalizations remain low, consumers would be comfortable traveling. This provides a good segue to how I'd like to wrap up my prepared remarks. I love seeing our customers traveling again. There's a buzz around the airports, and it feels great to be getting back to normal after so many starts and stops. From what I see out in the field and from the conversations I've had with our operators, it seems like we are all ready for the peak of summer. I have to keep reminding myself that we're just in May. There's a wave of demand headed our way in the coming months, and I'll tell you exactly what I tell our field ops regarding this front. That's exactly what we've been preparing for. All the hardship and sacrifice, cost-cutting, the retooling of operations, and learning how to maximize throughput while minimizing leakage. Those lessons learned the hard way through the depths of this pandemic have prepared us for this moment. Pure true operators being tested like this is what you look for. Thankfully at Avis, we pride ourselves on our operational ability, and I can tell you unequivocally, that we're ready for the summer. If we execute at the level I know we are capable of, I believe that 2022 will fully showcase how transformed the company we really are. With that, I'll turn it over to Brian to discuss our liquidity and our outlook.

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 our press release. I'd like to start off by addressing domestic revenue per day. As Joe mentioned in his prepared remarks, the first quarter of 2022 saw another sequential decline in Americas RPD. We went from a peak of $83.33 in the third quarter of '21 down to $75.02 in the fourth quarter of '21, and finished this most recent quarter at $72.76, 12.7% lower than RPD two quarters ago. That's a substantial change inside a six-month period, and we're likely to see changes both to the upside and downside going forward. That's because, as I've stated in the past, we at Avis do not set rental car prices; we discover prices determined by consumer demand and the availability of supply in the industry. Both industry demand and industry supply change daily. So it's natural that we're going to see fluctuations in price from quarter to quarter. But if you look at it over an extended period, you'll see that rental car prices across the industry have been modest over the past ten years. From the years 2011 to 2021, industry rental car prices have increased at roughly a 2% rate, which is basically in line with the 1.9% CPI inflation rate over the same period, and comparable to pricing rates in other sectors of the travel and leisure space, such as airlines and hotels. Every industry goes through its cycles, and we happen to be in an upward cycle for rental cars. But I'd like to point out four things when considering this. 1. We came off a near-death experience in 2020 with no federal bailout. 2. We honored all of our financial obligations to our business and financial counterparties throughout the pandemic by withstanding substantial losses. 3. This upward cycle in RPD merely brings us in line with inflation, without taking into account the substantial inflation we are seeing in 2022. 4. Over the past ten years, every major input cost in our industry, from the price of new vehicles to labor, real estate, parts, insurance, etc., has all seen price increases well in excess of what we passed along to the consumer. Given these facts, I remain confident that we provide an excellent value proposition for customers. Where else can you get a $20,000 asset simply handed to you for unsupervised use nationwide whenever you need it for less than the cost of a tuxedo rental? Every booking we receive is proof that our customers feel the same way. Let's move on to capital allocation, where it's been a very active year thus far. As you'll recall, share repurchases made up the majority of our free cash flow usage in 2021. In the second half of 2021, we retired over 14 million shares, representing 20% of our diluted shares outstanding at the beginning of the period at an average price of slightly over $100 per share. Year-to-date in 2022, we've retired an additional 8 million shares, representing nearly 15% of our diluted shares outstanding at the beginning of the year at an average price of roughly $215. In aggregate, during this most recent share repurchase program, we've been able to retire 22 million shares, representing nearly a third of beginning shares outstanding in less than a year at an average price of $140, a 48% discount to the closing price as of April 29th. But that only takes into account our buybacks since July of last year. Our share repurchase program has been an active part of Avis's capital allocation strategy since 2013. Since we launched the program, Avis has retired 87 million shares at an average price of less than $60. That's nearly two-thirds of the diluted shares outstanding, retired at a 78% discount to the closing price as of April 29th. We've demonstrated that as capital allocators, we're willing to take a long-term view and step in aggressively when opportunities arise. Our board approved an additional $2 billion of authorization to our share repurchase program, bringing total authorized funds to $2.3 billion. But as I said on the last call, we will be nimble with how we deploy capital at Avis. Just because we viewed share repurchase as the best use of capital for the past year, does not mean we will formulaically allocate a similar amount of capital to this area throughout the balance of this year. We will opportunistically allocate capital to those areas that benefit all stakeholders of Avis Budget Group. We find ourselves in the privileged position of being in the strongest financial standing in the history of our company. In the past four quarters, our LTM adjusted EBITDA has grown from $965 million in 2Q '21 to $1.8 billion in 3Q '21, to $2.4 billion in 4Q '21, and now, as of the first quarter of 2022, we sit at $3.2 billion in LTM adjusted EBITDA. So despite our taking on additional term loans to see this quarter, our net leverage ratio remains the lowest in our company's history at less than 1.3 times. That's less than half of the low range of our three to four times historical target. As of March 31st, we had available liquidity of more than $900 million with additional borrowing capacity of $1.7 billion in our ABS facilities. Our corporate debt is well-laddered with 87% of our corporate debt having maturities in 2026 or beyond. We are in compliance with all of our secured financing facilities around the world, with significant headroom on our maintenance covenant tests as of the end of March. Let's move on to outlook. As you know, we've made the decision as a management team to forgo giving formal annual guidance to allow ourselves the flexibility to make agile decisions as the business environment changes. However, if you want to provide some color on what we're seeing currently for the second quarter, as Joe mentioned earlier on the call, the underlying demand environment is strong both in the Americas and internationally. For the second quarter of 2022, we believe Americas rental days will be above those in the second quarter of 2019, and that RPD will be above that of the second quarter of 2021. Depreciation costs in the coming quarter will see a sequential increase due to lower fleet dispositions. However, we believe consolidated monthly depreciation costs will still be lower than where we're currently standing. As always, we're keenly focused on managing operating costs and using productivity tools to work around the tight labor market. Things are running smoothly, and we feel prepared. This is why Joe has challenged the entire team to keep the streak alive and deliver a fifth consecutive record earnings report for the next quarter by surpassing the adjusted EBITDA we posted in the second quarter of 2021. While it's still early, if these trends hold through summer, we believe we'll be able to achieve our record full-year adjusted EBITDA in 2021 and deliver the highest full-year adjusted EBITDA in our company's history in 2022. With that, let's open it up for questions.

At this time, we will conduct a question-and-answer session. Please limit yourself to one question and one follow-up. One moment while we pause for questions. Our first question comes from Brian Johnson with Barclays. You may proceed with your question.

Thank you. I want to get a little different direction. Just thinking about the use of your balance sheet. I’m sure people are going to talk about the RPD and depreciation strength. First, and this is the first time I've even thought about this since the mid-2000s. You have $4 billion of floating rate debt; have you swaps significant amount of that? And what is the sensitivity of your interest expense on your ABS structures that include to, say, a 100-basis point increase in pricing? I mean, to the interest rates, not pricing.

Sure. Hey, Brian, I'll take that question. So we're definitely in a rising rate environment, but we have a few mitigating factors on our end. One, we've been very proactive about refinancing our debt and extending maturity dates. So we feel really good about the position we have going forward. Number two, 75% of our outstanding corporate debt is fixed at a weighted average interest rate of less than 4.5%. The weighted average maturity of that debt is actually five years. So managing our capital structure has always been a core competency at Avis. Our treasury team and our financing counterparties have proven this over the years. Therefore, we're going to continue doing that. Regarding your inquiry about the sensitivity towards the ABS structure, I think that roughly 65% of our overall vehicle debt is fixed. So we have a lot of stability there as well, but we are going to consider what to do in terms of capital allocation with regards to debt. This will include evaluating callable bonds for refinancing, possible debt paydowns as part of our capital allocation strategy, as well as reinvesting equity into our ABS structures. All of this is on the table; we're going to be proactive, ensuring that our balance sheet is bulletproof, regardless of what the rate environment is.

Okay. And at the corporate level, you added 700 strength, $5 million in corporate debt. How should we model the corporate interest expense going forward? And then, my final question will be around your target leverage ratio. How much room do you think you have? While we get to that, how much room do you think you have at the corporate level to continue to lever up in light of eventually some downturn in EBITDA as things normalize?

Sure. In terms of how to model it going forward, I think your best bet is to look at where we stand today, which I mentioned. You can take a look at our corporate capital structure; 75% of that debt is fixed. If you factor in our $1.2 billion term loan, I think we actually stated in our 10-Q that roughly $700 million of that has been hedged from floating to fixed. So a good chunk of it is stable. What's uncertain is which debts we choose to call and pay down, and what that looks like. I can't provide guidance on that because, like I said in the past, we will be nimble about how we utilize our free cash flow and allocate that to our balance sheet. Concerning the target ratio, I don't believe we've given any guidance since our historically targeted three to four times net debt to EBITDA levels from the past, but clearly, we're well below that right now. We're at 1.3 times net debt to LTM EBITDA, so there is some room, but we will approach this with prudence. That's how we addressed that.

Okay. And just one final question. You talked about monthly straight-line depreciation. Is that a new accounting policy, or did you just analyze the likely residuals, 16 months to 24 months, whatever your disposal period is? And on the new vehicles, are you putting in bumped up, reducing the spread a bit?

This is not new at all. I think there hasn't been a lot of questions about it because typically what we try to do is maintain our gains and losses to zero. We're in a period where that's not happening right now, given changes that have occurred in the used car market since we purchased the vehicle and began our straight lining, but it's in the 1Q every quarter. I forget if it’s exactly note eight, note seven, or something like that; it's in there. But typically you will see our overall gross depreciation costs, then a small portion of leases, and then our gain and loss per vehicle. If you look at our 10-Q issued earlier this morning, you'll see that if you take away the gain on vehicle sales this quarter, which Joe mentioned at $300 million, we're still gross depreciating our vehicles at over $230 a month. That's roughly 10% below where we were in 2019, and this is due to two major factors. One, our vehicles are older, indicating we are at a flatter part of the depreciation curve. Two, we are getting more efficient concerning both disposition timing and channels. I do believe we'll continue to see gains on vehicles we dispose of through the balance of the year, but as Joe indicated, we will see fewer of those vehicles come to fruition in the coming quarters. So you’ll see depreciation levels normalize to where we're straight lining around that $230 as the year progresses. However, we probably won't get all the way there due to the built-in gains we have in our model year 2021 vehicles.

Our next question comes from the line of Hamzah Mazari with Jefferies. You may proceed with your question.

Hi. This is Mario Cortellacci on for Hamzah. I guess maybe just going into the current unit fleet costs. Should we be modeling or should we be thinking about that returning to maybe our original expectations or our original path or any trajectory for the rest of the year of getting to around $250 exiting the year or beginning in 2023? Should we expect something with a two-handle on it starting in Q2? Just maybe help us with some of the modeling there.

Sure. As I mentioned in the previous question, we’re straight lining at the $230, so I think that’s closer to where we will be exiting in Q4. You can take your perspective on how we normalize to that. But I’d say that will be around the $200 level next quarter, possibly something slightly lower. It’s dependent on how many cars we end up selling in the second quarter and throughout the remaining year. However, I do think that the $230 level is where we will be exiting the year.

On fleet growth, how are you all thinking about that? I know you have your demand fleet pricing system and are trying to maintain high pricing, but could you also comment on your visibility to demand as of today? Has that changed at all over the last few months compared to your experiences in 2021? Are people booking further out than they did over the past year or has it been consistent with what you have seen?

I will take that. This is Joe. When you examine demand, let's start with what occurred in the first quarter. We witnessed a basic step change in what the demand was materializing at the end of February, as Brian mentioned on the last earnings call. We observed solid demand through the President's Day holiday. That continued into March. This was coming off of a period where things were rather stagnant. You saw the TSA volume of passengers who went through the airports down about 25% in January, around mid-20s in February, and suddenly that started showing promise in improving, and it has been improving throughout April. So when you have that type of step change, you have to react based on what you observe closer in. To get to your point about demand going out, if you consider the reservations that are being booked, we have a higher percentage of reservations booked more than 30 days in advance than we had actually in 2019. What this shows us is that consumers have confidence in their ability to travel while also preparing for a season where they want to take vacations. As I previously stated, after spending a long time in video conferencing, staying home, and entertaining at home, people are certainly back on the road, which is clear in our forward-looking demand. For instance, in March, I mentioned earlier that we had more cars on rent during the peak in March than at any time during the summer of 2021. So that should give you an indication of where we believe demand to be headed.

Our next question comes from the line of Chris Woronka with Deutsche Bank. You may proceed with your question.

Hey, guys. Good morning. Congratulations and thanks for the data points thus far. I was hoping maybe you could give us a little bit of color on the different buckets of demand between leisure and corporate and just maybe how they trended through the first quarter, and what you're seeing seasonally because Q2 could be a little bit different than Q3. And then just directionally, what the pricing behavior is for those buckets? Thanks.

Sure, Chris, this is Joe. In the early part of the first quarter, there was really no commercial and leisure business worth discussing. As you remember in the fourth quarter, we noted that the commercial business rebounded, especially in October and early November before Omicron materialized. We've observed robust leisure demand and significant leisure activity moving forward. Moreover, I must mention that in the latter part of the first quarter, we've also seen commercial demand improve, reaching points above 2019 levels during the same period of the quarter. Moving forward, I believe you will see a good mix, especially in the second half of both commercial and leisure. We said during the last call that commercial business is beneficial for our company as it creates a mid-week peak, allowing us to utilize the fleet more effectively. This way, a car becomes available for rental during the leisure periods that occur more on weekends. The commercial business we've seen has come from sectors you might expect: defense contracting, healthcare, travel, entertainment, and logistics. We observe a lot of travel activity. Furthermore, it seems that commercial consumers are keeping the cars longer. I think they've augmented their safety service, which makes their choice for us revolve around whether or not they have a car. Prices have risen for commercial business. Last but not least, we've also observed incredible growth in what we call leisure; individuals renting a car for days and then keeping it over the weekend. Think of a business traveler attending a conference in Las Vegas who then stays for a concert on the weekend. We’ve noticed a good deal of that, and our split bill technology, introduced a number of years back, allows consumers to use their corporate card for midweek rentals and charge it to their private card for weekend rentals. We've also seen strong numbers surrounding leisure from various holidays, including festive weekends, President's week, and even early Martin Luther King month.

Okay. Very helpful. Thanks, Joe. And then, just as a follow-up, I don't know, maybe it's too early to tell, but do you think there's any structural change in the hold period for your vehicles? Obviously, mileage is going to factor in at some point, but you guys have been able to stretch the hold period to meet the increased demand and address the availability issue. So looking forward, do you think there will be a structural change or will the hold period revert back?

Listen, when you consider how we operate our fleet, there are three vital aspects to concentrate on: how you buy it, how you use it, and how you sell it. We’ve refreshed our fleet in the first quarter and have worked extensively to remove higher mileage vehicles that I believe would have lasted throughout the summer peak, while augmenting some of our fleets in different areas with both new and used vehicles. Currently, due to high residual values, we’ve had no trouble selling cars. The demand remains strong, and given the strong residual values, I believe we will take a measured approach moving forward to observe what the new situation will look like as we progress to peak season, making decisions accordingly. We remain very aware of mileage and age, and the residual values that vehicles hold, and will adjust accordingly based on those metrics.

Chris, just to add to that, some of this is the fact that we’ve been discussing all last year. The constraints we have regarding purchasing new vehicles this year. As we enter into our 2023 model discussions, that constraint will continue into next year as well. The industry supply will face challenges, and since rental car demand is at peak, that will lead to slightly older vehicles. However, the upside is that we're improving our management of these vehicles. We're seeing benefits from being on the flatter part of the depreciation curve, while also maintaining our out-of-service levels at historic lows and seeing our NPS scores from customers higher than in 2019. So I think this is something that we believe is sustainable moving forward.

Our next question comes from the line of John Healy with Northcoast Research. You may proceed with your question.

Thank you. I want to ask a question about capital allocation. Brian, you guys have been really bold and thoughtful with the buyback over the last couple of years, but I found your comment about future allocation interesting. And we've seen some transformational M&A in the re-marketing sector recently. Just curious to get your thoughts about M&A and if you could potentially look to M&A as a way to innovate this business even further in terms of retailing on the auto side or even deeper into the mobility landscape. Just wanted to get your thoughts and appetite and interest level there.

Okay. Sure. Look, John, we take a holistic view when it comes to capital allocation. Yes, we consider share repurchases; we also examine debt payoff and look at the M&A landscape, which is becoming increasingly attractive. However, the reason why we've been aggressive with repurchases is that we had an opportunity to buy back stock at levels we believed were undervalued relative to our fundamentals surrounding our current and future earnings trajectory. You can certainly argue that our shares were undervalued. We’ve been active in April as well; we repurchased 1.5 million shares last month at an average price of $270. This indicates we still regard share repurchases as an exceptional use of free cash flow at these levels. Depending on where the share price moves forward, we may adjust our decision there. Regarding debt payoff, we are precisely monitoring that now, particularly in a rising rate environment, while also considering M&A opportunities. We’ve previously stated we won't pursue M&A for the sake of M&A; we will be extremely thoughtful in our approach to possible additions.

I wanted to get a big picture question. Your fleet was up, I want to say 10% over 2019 levels, and the unit economics have been remarkable this quarter. But I would love to know where you think you've gained share in the industry. Are there any specific channels or verticals? Additionally, would that share position that you've gained, how durable do you think that is for the company?

I'll address that. When you consider our company, we cater to various segments and have multiple brands that attract consumers to us. We offer three brands: Avis, Budget, and Payless, which draw different types of consumers. Avis is more commercially oriented and caters to those who expect superior service, Budget appeals to leisure travelers, and Payless is for those looking for value. Additionally, something we don't discuss often is that we have a growing ride-hailing segment. We've operated in that space for several years. Our cars are located in urban centers and areas near colleges, alongside our burgeoning last-mile delivery business through our Budget truck operations. Coupled with our one-way products and short-term leases, we likely cover a broad range of mobility needs. Furthermore, you will see us gradually transitioning to more electrification within our fleet. Having solid relationships with our OEM partners provides us with tremendous variety and diversity within our fleet, catering to consumers’ needs.

John, to add to that, we don't track market share here at the company. We are focused on meeting the demands of our customer base. The experience of 2020, when our volumes dropped 80%, is still fresh in our minds, a traumatic event that leaves a lasting mark. At Avis, we firmly believe that our return on assets is more vital than absolute asset size. So it's not market share we're pursuing; it’s addressing our customers' needs in a thoughtful manner that optimizes our returns on capital deployed.

Our last question comes from the line of Ryan Brinkman with JPMorgan. You may proceed with your question.

Great. Thanks. With regard to capital allocation, I think you've made it pretty clear in your communications, including on the call just now, and in your actions that you are laser-focused on share repurchase, while also considering other opportunities with shares proving particularly attractive right now given valuation. I just want to follow up on other opportunities, including I heard you mention, in response to Joe's question, bolt-on acquisitions to complement core competencies. I guess in addition to a buyback and inorganic expansion, the other bucket really is the incremental organic investments you could push on. So just wanted to get your appetite around boosting core competencies through more organic or step-change activities—perhaps delaying or pulling forward inorganic opportunities. For example, with direct-to-consumer, what's the math or strategy there—do we have cash to invest in building out stores, or do we buy somebody that is already selling cars to consumers? Maybe we can start there.

I'll begin and then hand it over to Brian. When we consider capital deployment, we evaluate how to enhance our operations. We're investing in processes and procedures to improve efficiency, including productivity systems to navigate our operating environment. We've discussed the Avis app and our QuickPass system that allows customers to interact with our service in a self-service manner. We’ll roll that out more forcefully as the year progresses. Additionally, we are assessing how we sell cars, including the concept of parcel lots. We strongly believe that if we dynamically allocate more cars to customers, it will benefit our company. Lastly, we need to prepare for vehicle electrification. We are actively engaging with our OEMs whose fleets will include electric vehicles. We need to be ready for that.

Sure. I think you touched on all the points. There's a third option when it comes to bolting on and strengthening our core competencies. We can also build ourselves organically. We can dedicate more resources to build them ourselves. Alternatively, we can pursue M&A opportunities, as you mentioned, inorganically. Or we can partner with best-in-class individuals whose expertise lies in those areas. We are evaluating all three approaches, particularly in direct-to-consumer, where we're significantly concentrating our efforts. We're also exploring supply chain advancements and electrification as Joe mentioned. So we're assessing possibilities across all sectors.

Okay. Very helpful. Thank you. And then just the last question—big picture—how are you thinking about travel during the middle part of the year? You provided some information on the second quarter, but how significant do you think the catalyst of removing mask mandates on planes will be in the U.S.? Furthermore, what are you seeing regarding the international restrictions within Europe being lifted, and how might those have a disproportionate impact on leisure travel from Europe to the U.S.?

I understood your question. We've seen our travel data for the first quarter reflect a step change, and we believe there is robust travel demand, particularly tied to the summer season ahead. Five months ago, we noted several factors that were not apparent last year, especially regarding inbound international traffic. We've certainly observed changed booking patterns as those countries lift restrictions. Be it Canada recently or Europe, those changes have materialized. While international business has been down quarter-to-quarter, we've seen a rise in bookings following the guidelines. Just to illustrate, the bookings that held going out for the first four weeks of March remain positive compared to 2019, largely due to these lifted restrictions and mask mandates.

While we’re not providing guidance regarding anything beyond the second quarter right now, as Joe stated in his prepared remarks, there's an extraordinarily robust demand environment we’re witnessing. Every leading indicator we follow—prepaid leisure bookings, corporate travel, cancellation rates—you name it—points to the strongest demand environment we've ever encountered, significantly more robust than previous periods. After two years of a pandemic, as Joe mentioned, there is tremendous latent demand for travel right now, and we feel very positive about our position. But we won't elaborate on potential third-quarter performance.

The airlines are expressing very similar sentiments.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Joe Ferraro for closing remarks.

Thank you. To recap, we reported our best first-quarter earnings in our company's history. The Americas and international teams delivered record quarters from increased volume and improved pricing. We continue to expand our Avis QuickPass offering for our preferred customers utilizing technology for effective, contactless rental experiences. Most importantly, I want to acknowledge and thank all the employees for their continued tireless efforts in helping us achieve these results, and we're not done. As I continue to challenge the entire team to keep the streak alive, I believe we can deliver the highest full-year adjusted EBITDA in our company's history. With that, thank you for your time and interest in our company.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.