Avis Budget Group, Inc. Q3 FY2024 Earnings Call

Greetings and welcome to the Avis Budget Group Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. At this time, it is now my pleasure to introduce 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 Izzy Martins, 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 our 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 third quarter results, which delivered quarterly revenue of nearly $3.5 billion and adjusted EBITDA of $503 million. As we discussed on our last call, we need to separate the impacts of non-recurring fleet gains, high vehicle interest, and decisions made to improve our utilization. Our primary goal has always been to keep the fleet in line with demand. We have taken the necessary steps to adjust our fleet size throughout the year, which allowed us to continue to improve utilization, with this quarter finishing nearly two points above our prior year. Driving utilization is necessary given the high level of this year's fleet carrying costs. We are also focused on reducing the overall holding costs for the model year 2025 buy to drive a more profitable outcome going forward. The fleet buy is continuing to progress with expected holding costs well below what we have achieved in recent years. We'll talk more about this in the Americas segment. The demand for our business remains robust with global third quarter rental volume in line with third quarter 2023. We have been consistent with electing to focus on higher-margin business, particularly in an industry where we are in a high vehicle cost environment, and we believe it makes more sense to rationalize the fleet than to take a lower price incremental rental. Price was down 2% for the quarter overall, with the Americas nearly flat and the two-point improvement from this year's second quarter. We will continue to execute this strategy as necessary to prioritize higher-margin business. Before I dive into the results in greater detail, I'd like to thank our employees for continuing to deliver exceptional service during the summer peak season while driving further operational efficiencies. Through their hard work and efforts, we continue to generate record net promoter scores from our customers. With that, let's begin as we usually do with details around our Americas segment. The Americas generated more than $2.6 billion of revenue in the third quarter with $384 million of adjusted EBITDA. Rental days in the Americas were down 2% compared to the third quarter of 2023. As I mentioned earlier, this is where we made the choice to balance both price and demand. We took a measured approach to volume and focused on higher-margin business. In doing so, we elected to forego lower-margin business. As I said earlier, in times like this, with fleet costs at outliers through our historic norms, it makes more sense for us to pass on lower price business, especially from brand-agnostic customers. We believe this demand is discretionary, and we will always be able to attain this volume to meet our target vehicle utilizations and scale going forward, as fleet costs become more normalized. Keeping this in mind, we will continue to monitor our industry and make calculated decisions to prioritize price over volume when it makes sense by utilizing a proprietary demand fleet pricing system. Pricing was nearly flat compared to the third quarter of 2023 but up 28% compared to the third quarter of 2019, showing the relative strength of pricing in our industry. Price improved sequentially from the second quarter to the third by two points compared to the same period in 2023, as we transitioned into the summer peak. As a matter of fact, our U.S. business was closer to flat in the quarter. We kept our fleet in line with the demand, which allows for the most optimal price outcome. This strategy has resulted in ongoing improvements in our vehicle utilization, which in the Americas was nearly 72%, more than one point higher than the third quarter of 2023. We will continue to improve as we implement further operational enhancements and remain laser-focused on our fleet discipline. We anticipate strong vehicle utilization in the fourth quarter that surpasses any fourth quarter in our history. I want to take a moment to talk about our ongoing model year 2025 fleet buy, which is progressing well. While we're not yet fully complete, we are moving closer to our anticipated model year target. As we said in the past, we believe that new cars would become more affordable, and this has proven to be true. We expect purchase prices will be below what we achieved during the pandemic years as OEM supply constraints and production schedules have normalized. Our OEM partners are fully aware that we are in the market for vehicles. However, we also need to stay disciplined with regards to return on invested capital and only commit to fleet deals that meet our acceptable rates of return. We will continue to cycle out of older model year cars and make room for the model year 2025 new vehicles. Thankfully, there's a wide array of vehicles that meet both these criteria. The OEMs have been strong partners to our company, and our collaborative approach and similar goals allow both companies to win when deals are structured appropriately. We appreciate their support and remain committed as ever to the productive partnership we've had over the decades. Overall, I'm happy with our progress on the buy, and we'll share more details on our next call once the buy is fully completed. So to recap. The Americas had revenue of more than $2.6 billion and adjusted EBITDA of $384 million. We continue to maintain our fleet discipline by taking the necessary steps to align with demand, ensuring our fleet drives higher utilizations and allows us to maximize profitability. Based on our model year 2025 fleet buy, we are well positioned to have lower holding costs as we rotate in the new fleet. We saw a robust volume in the quarter, and we'll continue to prioritize higher-margin business as we remain selective regarding lower-margin brand-agnostic customers. As we shift into the fourth quarter, October normalized towards the back half of the month after the effects of the hurricane. However, the demand in the Americas surrounding the holiday season looks particularly strong for the Thanksgiving and Christmas holiday periods based on current reservations. We believe price will transition seasonally as it normally does from the third to the fourth quarter. Let's shift gears to international. International generated $840 million of revenue and $139 million of adjusted EBITDA in the third quarter. Revenue was up 1% compared to the prior year, driven by a 5% increase in rental days. We continue to see robust international inbound and intra-European cross-border travel as we have talked about on our previous calls. This strategy generates higher-margin business as these customers tend to book more in advance than domestic travelers, keep the cars longer, and often take additional ancillary products. This quarter, not only was our domestic travel of 3% in Europe, but our higher-margin inbound and inter-European cross-border volumes grew by approximately 14% as compared to the same period last year. This drove a year-over-year increase in our leisure business. As we transition to the fourth quarter, advanced reservations are strong and trending positively, with demand stemming from inter-European cross-border and inbound travelers once again. International's pricing for the quarter was down 5%, excluding currency impacts compared to last year, and up 25% compared to the third quarter of 2019, again showing the relative strength of pricing in our industry. However, on a year-over-year basis, pricing improved sequentially, with September showing the quarter's best improvement. We anticipate pricing to be nearly flat in the fourth quarter compared to the fourth quarter of 2023. As noted on previous calls, our proprietary demand fleet pricing system is now fully operational in our European business, and as expected, we realized both utilization and price benefits as the system focuses on contribution margin. Vehicle utilization continues to be a priority as we realize higher utilization in each of the first three quarters of 2024 compared to the same periods in 2023. This quarter's utilization was 73.7%, up over three points compared to the third quarter of 2023. We continue to believe that our fleet is adequately positioned and ready to meet the fall and winter demand and similar to the Americas, we expect our fleet size at the beginning of 2025 to be under our prior year's level, making room for new model year vehicles. Europe is a popular destination for cross-border travel, and as I mentioned before, our fourth quarter reservations showed the strength and price improvement. Technology is an integral part of everything we do and enables us to continue to enhance our customer experience, and I would like to discuss our new customer app that was launched in October. Our new app has a refreshed look and feel with a more dynamic user experience that adapts to our customers' journey, providing them relevant information at every step. The app features a new rental dashboard that will give customers quick and easy access to book reservations, track their trip details, and all of the key actions from the home screen. Customers will also be able to continue reservations from previous searches, track their loyalty points progression, choose their vehicles to better enhance their rental experience, exit the gate with the use of their phone, and manage their accounts effortlessly. We have a number of exciting new features that are planned in our pipeline to be released in the future, which we believe will enhance the customer experience further by integrating our touchless rental and other ancillary product offerings. The new app updates aim to increase app downloads, boost conversion rates, and drive revenue growth through our direct channel reservations. We are confident that these enhancements will make our customers' car rental experience smoother and more enjoyable. I also want to give an update on our progress improving our operational efficiencies. We continue to enhance our processes by leveraging our data analytics and on-the-ground systems to increase throughput and improve productivity. These systems and processes allow for better forecasting and scheduling needs by location to optimize labor mix. We continue to face wage inflation, and focus on labor initiatives helped to offset these pressures. We expect to continue to realize these savings through the remainder of the year. As I mentioned on our last call, we have set ambitious goals to target sustainable vehicle utilization performance through better understanding of the disposition of every vehicle within our control. We believe task-based analytics delivered to our operations and maintenance teams will allow us to better understand our vehicle dispositions, drive more timely repairs, and improve vehicle movements, all designed to create more available fleet. We are currently piloting these digital tools in key cities throughout the country and early results are promising. These and other operational efficiency strategies enabled us to maintain operating SG&A expenses on a per rental day basis, consistent with the third quarter of last year, a great achievement given inflationary pressures. So to conclude, we generated $503 million of adjusted EBITDA for the third quarter. We continue to maintain fleet discipline, which has allowed us to improve vehicle utilization year-over-year. We expect historically high utilizations in the fourth quarter in the Americas. Our model year 2025 fleet buy is largely complete. We have seen lower prices closer to pre-pandemic levels, which will position us with sustainably lower holding costs as they enter into our fleet. We will prioritize high-margin business while balancing a certain level of scale. The holiday demand looks strong, and we expect price will transition seasonally in the Americas and flatten out internationally. Overall, our cost efficiencies help us mitigate inflationary pressures on operating and SG&A expenses on a per rental day basis. The Americas and international teams are well positioned and prepared to close out the year strong. With that, I'll turn it over to Izzy to discuss our earnings, liquidity, and outlook.

Thank you, Joe, and good morning, everyone. My comments today will focus on our adjusted results, which are reconciled from our GAAP numbers in our press release. As usual, let me start by discussing our third quarter earnings. We earned $503 million of adjusted EBITDA in the quarter. Once again, we need to bifurcate the impact of non-recurring fleet gains and greater vehicle interest. Last year, we had more than $650 million of fleet gains, with $145 million in the third quarter alone. These oversized fleet gains were a holdover coming out of the pandemic, and as I have previously stated, the gains will not replicate given that these were a byproduct of the post-pandemic supply chain imbalance. Our ongoing priority is to consistently size our fleet in line with demand to maximize higher-margin business and strengthen revenue per day. During the quarter, as we focused on these strategies, rental days were slightly less than we originally anticipated. In order to align our fleet demand, we sold more units in the quarter than forecasted. Pulling these sales forward generated a loss of approximately $40 million as compared to $145 million of gains last year. The year-over-year quarterly variance from the disposition of vehicles alone was more than $185 million. Our straight-line depreciation increased from approximately $292 to $347 per unit per month. The increase in holding costs resulted in more than $100 million in incremental fleet expense year-over-year. As always, we constantly monitor the market and make any adjustments as needed. In the fourth quarter, we expect to have the opportunity to buy late model year vehicles at favorable prices. Assuming we take advantage of these opportunities, we anticipate pulling forward more vehicle sales into the current year. Therefore, we estimate our total company gross depreciation per unit per month will approximate $350 for the fourth quarter, but could vary based on the opportunities presented in the fourth quarter. We will continue our discipline to have the fleet in line with demand, and we will continue to dispose of the fleet as required, plus remain flexible in adding new cars. Our model year 2025 fleet purchase is more affordable. Since we are largely complete with our negotiations, we can say holding costs should improve. We believe over time, our depreciation rate will return to historic levels as we rotate out of the older fleet, which we purchased during the supply-constrained pandemic years and into the model year 2025, which represents a more normalized fleet buy. In our year-end call, we will have more to say about the impact our model year 2025 buy will have on our earnings. Now shifting gears to vehicle interest. Last quarter vehicle interest was a $72 million headwind, while this year, it was $33 million compared to the same period in 2023. We expect our interest per unit per month to be a similar amount in the fourth quarter as compared to the fourth quarter of 2023. In total, our fleet holding costs inclusive of vehicle interest expense account for more than $320 million of our year-over-year decrease in adjusted EBITDA. When looking at direct operating and SG&A expenses per rental day, our per rental day expense remained flat as compared to the third quarter of 2023 despite inflationary pressures. We continue to invest in our technological improvements to further drive cost efficiencies, generating margin contributions. We reinvested nearly $40 million into our core business or nearly $150 million year-to-date. The majority of our capital allocation strategy is designed to drive higher contribution through improved revenue and other operational efficiencies in our business. In the quarter, volume was relatively flat, but revenue per day was down 2%. The end result was nearly an $85 million reduction in year-over-year revenue. As a result of these factors, our adjusted EBITDA was $503 million for the quarter. The actions we have taken throughout this year, including reducing our fleet size and cost mitigation strategies, has positioned us well moving forward. As we mentioned on our previous calls, we are normally back-half allocators when it comes to share repurchases. We made the conscious decision to repurchase approximately 526,000 shares for nearly $43 million through October 30th. As always, we will continue to balance our capital allocation between reinvesting in the company and returning capital to our shareholders. During the quarter, we issued $700 million of senior notes and used the proceeds in October to repay outstanding borrowings under our secured term loan fee. This allowed us to reduce our secured borrowings and provide us more flexibility in our ability to refinance in the future. As of September 30th, we had available liquidity of over $1.2 billion, including committed and uncommitted facilities, with additional borrowing capacity of approximately $3.2 billion in our ABS facilities. After giving effect to a reduction in our asset-backed variable funding financing facilities effective November 1st, our net corporate leverage ratio was 4.7 times after giving effect to the term loan fee repayment. We continue to be well-laddered with our corporate debt, having no meaningful maturities until 2027. Additionally, we are in compliance with all of our financing facilities. As you can see in the first nine months and in prior quarters, our priority remains driving operational efficiencies through the appropriate capital investment plus investing in our fleet. The fleet investments are in the form of reducing the amount of debt we issue against our fleet size. In total, we have the ability to issue more than $1 billion of debt out of our ESOP financing structure, which represents further liquidity cushion for our company. This provides us strong ongoing flexibility, and we will continue to evaluate the best use of this capital going forward. Now let's move on to outlook. As Joe mentioned, our continued focus is to keep fleet in line with demand, which will allow for more efficient use of our assets, drive higher utilizations, and allow us to start next year with fewer cars than we did this year. We will maintain our flexibility to acquire new vehicles as well as dispose of others should the opportunity arise. Our 2025 buy is going well and almost complete. We expect lower holding costs as we transition these vehicles into our fleet. Demand around the holiday periods look strong and price will move seasonally in the fourth quarter as it normally does. As I mentioned earlier in the year, nothing below $1 billion of adjusted EBITDA is acceptable to us. This year, we have experienced unprecedented challenges in fleet costs and vehicle interest as they are the highest in our history and the year started with a broader industry being over-fleeted, putting pressure on revenue per day. However, despite these challenges, we have still achieved nearly $730 million of adjusted EBITDA or nearly $850 million, excluding approximately $120 million in uncharacteristic fleet losses. We remain focused on achieving $1 billion in adjusted EBITDA this year, excluding fleet losses. We will give more details regarding fleet costs and our future earnings potential in our next call. With that, let's open it up for any questions.

Thank you, and our first question comes from Chris Woronka with Deutsche Bank. Please go ahead with your question.

Good morning everyone. Thank you for taking my questions. Joe, as you just mentioned, you expect your fleet costs to start returning to historical levels, although that won't happen all at once. Regarding your comments on the 2025 fleet purchases and what you might do in the fourth quarter, I recall in 2019 your Americas BPU was below 300 per month, closer to 280. Should we consider that as a benchmark for the future? Not just for a specific period like the fourth quarter or next year, but can it trend back to that level? Is that a reasonable way to look at it?

Good morning Chris, I know you directed your question to Joe. So let me take the first half of it. I think you're thinking of things correctly, right? It's all about what we think it may be given we are materially complete with the model year 2025 buy. But I still think there's a lot to go through. There's still a lot of math to figure out in the fourth quarter given the opportunities that are presented to us. But I don't think your analysis of thinking about where we were in 2019 is entirely off base. I think though the 2019 levels were still a bit too low compared to what we're initially seeing. But anything, call it, significantly better than what we saw, for example, this quarter. This quarter, our gross depreciation was $347. I guided to $350 for next quarter, keeping in mind the most important thing for us is to keep the fleet in line with demand. And to give the business the flexibility to sell more than maybe we have forecasted right now. Make room for more to come in sooner rather than later. And last but not least, try to figure out how all that math comes down to the bottom and becomes a more normalized fleet cost. Yes, closer to 2019, but I wouldn't say at the 2019 level.

Okay, appreciate that and thanks. And then as a follow-up, there's obviously a lot of changes in the industry. We're hearing more about robo-taxis and moving a little closer to autonomous. I was hoping that you could maybe comment on what you're modeling going forward and is Avis going to be in a position to possibly participate in that? And I guess I would also extend that to ride-share. And as the industry landscape evolves a little bit, it's something you guys haven't done as much of, but is that possibly on the table as another avenue for growth? Thanks.

Joe mentioned that he would respond to the question, starting with the ride-share segment. Although it isn't frequently discussed, the company is actively involved in this area and has been experiencing significant year-over-year growth. The business is evaluated on a margin basis, and so far, the results have been satisfactory. The increase in the ride-share business contributes to rental days as customers tend to rent cars for longer periods. Additionally, on a per unit basis, this segment is profitable and continues to expand. Regarding technology, the company continuously monitors developments, including autonomous vehicles. They believe they are well-positioned to engage in this evolution since they already have the cars, repair capabilities, and a network of depots across the country, allowing them to manage logistics effectively. They are considering how to adapt as these technologies advance. More information will be provided as the situation develops.

Okay, thanks.

Thank you. Our next question is from the line of John Babcock with Bank of America. Please proceed with your questions.

Good morning and thank you for taking my questions. First of all, regarding the hurricanes, I understand you didn't mention it specifically, but I assume the impact will be more relevant in the fourth quarter. Could you explain how the Florida hurricanes will affect Avis and whether they will also have an impact on the overall dynamics of the rental car market?

Yes, sure. I'll take that. Hurricanes, when they happen, especially what happened this quarter, they start off not being very good for anybody because the airports shut down, and flights get canceled, and since we're predominantly an airport-related business, that has a challenging effect on us. In this particular case, the sequence of hurricanes was difficult because you had one that hit Florida, the end of September, which we actually took a little bit of a rental day hit in the quarter because of that. And then you have followed it up with another one a week or two later. And the rhetoric surrounding the second one was going to be historic tidal surges and things of that nature. And based on the first one, which had pretty significant damage through Florida and up into North Carolina, I think the municipalities took a very active role in making sure there were evacuations and things of that nature. So when something like that happens, you have problems three days or four days before as people start to think about not traveling, and then you have problems during the cancellation of flights, and then for a period of time later where people are unsure whether they want to go into those restricted areas. But what normally happens after that is also positive, right? As a company, we've rented many cars to people through hurricanes and other related aspects to get them back home, in this particular case, evacuate from certain areas. So you have that benefit of course, the ability to have cars leave. But we always felt like we were a car rental company; we had an obligation to the traveling public, and so we make our vehicles available, and people took them to wherever they thought was safe. The second aspect is that there comes in what normally happens is relief workers, whether that be Red Cross or FEMA or municipalities who are using cars for various different reasons. There's a number of those vehicles, which we have on the road right now and will continue for a long period of time, which helps to also mitigate the shutdowns that we've faced early on. And lastly, I think you see a dynamic that the people in those areas tend to rent cars, whether it be from the airport or in other places, which changes the dynamic of supply and demand at airports. I will tell you this, after the hurricanes hit, for example, the State of Florida, the places got tight for various reasons, and tight fleets in a place like Florida is always helpful. So while you lose initially, it's a matter of time and periods after that, that you tend to make up, whether it be through rentals in other segments or the tightness of fleet that usually occurs. Early to tell how that transition as we go through, but it will be effective throughout the remaining part of the quarter. I hope that helps.

That's perfect. And for my last question, as you consider moving forward, what gives you confidence that as DPU and other controllable operating costs decrease, pricing could remain stable? I understand you've mentioned a focus on higher-margin volume, which should provide some mix benefits, but how should we approach pricing in a lower cost environment for the broader rental car industry?

We are extremely focused on our margins. Our costs were aligned with our rental days, which is a positive outcome considering the inflationary pressures we are facing. We implement various internal initiatives daily to manage our costs. For instance, in our vehicle sectors, we analyze in-life costs related to parts and supplies. We are enhancing our efficiency in procuring essentials like parts, tires, and glass. We examine these aspects at the location level and utilize productivity systems to counter wage inflation by optimizing scheduling. We also leverage connected car technology to better manage gas recovery, ensuring we can adapt to fluctuating gas prices and improve our gas expenses. Additionally, we are undertaking a significant initiative to enhance our overall utilization using digital solutions that help us track our fleet's vehicles effectively. By utilizing text-based analytics for our management teams, we aim to increase the number of cars available on the road without needing to make further purchases. Our highly experienced teams are crucial to successfully executing these initiatives. Historically, our pricing has remained relatively stable despite the fluctuations seen before and after COVID.

Okay, perfect. Thank you.

Thank you. Our next questions are from the line of Lizzy Dove with Goldman Sachs. Please proceed with your questions.

Good morning. Thank you for taking the questions. I wanted to ask about competition in the industry. We've experienced a few quarters where our volumes in the Americas have been lower compared to PSA volumes. It seems like there is increased competition from a significant non-public competitor. Could you share your insights on this situation and how it affects your outlook on volume trends in the Americas moving forward?

Yes. Our plan this past quarter was that we wanted to focus on price, target higher-margin business, and keep the fleets tight, which drove utilization. I think when you looked at our company over the first couple of quarters, the utilization wasn't exactly where we would have wanted it. So we were able to get to that, and that drives a more certain outcome when it comes to revenue per day. And I believe in this environment, and we believe in this environment where our per-unit costs were high and rising and our interest costs as well, it would be ill-advised to pass on maybe a low-margin rental or even have an unused car in a lot. We've been discussing that on a number of calls for the quarter. Running a highly efficient fleet process is critical to our success, and we were able to do that. Our goal was to get our fleet in line with demand and also get our fleet younger, and we transitioned out a significant number of vehicles in the early part of this year. Now if you ask about competitors, and things of that nature, if we pass on business, we felt it was brand-agnostic business, business that's discretionary that we could potentially obtain at any time we want. And we are somewhat protective of our scale, and we know where we stand. If you look at it compared to 2019, our quarterly business was up double digits. We might have just taken our business different ways over the past couple of years. And if you think about TSA volumes compared to 2019, we're well ahead of that as well. So I think we are in a good spot. We took actions in the quarter because we wanted to minimize our holding costs and keep our fleet in line and going out. I'll just add one other note: everyone bought cars in 2023 and 2024 at high prices and likely went into this year with more cars than desired. Does that place pressure on things? Of course, but we made a conscious effort to get rid of our cars, and I think everyone else will also do that as well because the 2025 buy is materially better and it makes sense for us to get cars in at those lower prices and transition out the other cars. If you're asking me my opinion, while we acted this way based on how we saw things in this quarter, I think the industry as a whole will normalize over time.

That's helpful. I appreciate the color. You also gave a lot of helpful commentary around kind of the outlook for pricing, BPU, costs. I guess putting that all together, and I hope I'm not misremembering. I think you've said in the past that $1 billion to $1.1 billion is kind of the floor of how you see normalized EBITDA going forward. Has anything changed about that outlook?

Hi Lizzy, it is Izzy. Just to be clear, nothing has changed on that outlook. I'll just maybe consolidate it in the thoughts we've had in our prepared remarks and some of even the questions that came up today. As you can see, fleet and interest costs are at a historic high. So as they normalize, of course, we'll see benefits. Plus, the operational efficiencies that we've been talking about that are really underway that too will provide benefits, not to mention the improved pricing power that Joe just mentioned. And last but not least, as we said in our prepared remarks, we intend to keep the fleets tighter than where we started last year. So we'll have less cars starting the new year. So all of those things combined, we are laser-focused and have seen no issue in us being a sustainable $1 billion company.

Thank you.

Thank you. Our next question is from the line of Ryan Brinkman with J.P. Morgan. Please proceed with your questions.

Hi, thanks for taking my questions. I wanted to ask about your capital allocation strategy, especially regarding how you've managed it during the pandemic, the chip shortage, high inflation, and low interest rates. You put a significant portion of your record cash flow into repurchases, even when your shares were priced higher. Now that your share price has declined and interest rates have risen, you've shifted more towards retaining your costlier tranches of securitization to save on interest expenses. With changes happening again, like your share price being even lower and interest rates appearing to decrease, are you reconsidering your options based on your ongoing free cash flow or the equity you’ve built in your fleet facilities?

Good morning. I think when you think about it, our main theme has always been to remain flexible. So that's not going to change. We want to continue that flexibility when it comes to capital allocation. Investing in our fleet obviously was a bigger priority and always was, but continues to be a priority for us. I think the other thing to consider is as you progress through the year, we also mentioned about allocating cash to our operational efficiencies. All of those require some type of investment. I wouldn't say we just started those this year. We were heavy allocators, and call it, investing in ourselves to start reaping those rewards. We continue to do that. And as always, buying back stock will also be on the top of our list. But I think now it's also about how we invest in ourselves and really bring through more and more operational efficiencies in the future.

Okay, thanks. And I know you mentioned the hurricane. Obviously, it was a big deal. Is there anything to think about in the fourth quarter with the election, what impact has that had historically and how might that relate to sort of disruptions that could occur in the fourth quarter versus what had occurred in the third?

Yes, I'll take that. There has been a lot of talk about the election and travel-related businesses. The way I see it, there's nothing different about this national election than we've seen in the past. I think the one four years ago happened during COVID, so it may not have been relevant, but four years before that was similar to the one I suspect four years from today will be similar. I mean what happens during a national election is that people tend to stay home, either they want to vote or they want to watch the results and see what happens. There’s nothing abnormal about that; it happens every four years. But I will say, volume in general is looking good for us coming out. I like the way the calendar falls in the quarter. We have Veterans Day, which is on a Monday, and you have Thanksgiving, which is the last possible week it could be in November. Thanksgiving is a big holiday, which by having it the last week, it doesn't disrupt two weeks' worth of travel. So I think you get an extra week kind of in November. I'm pretty optimistic about the Christmas holiday and the fact that it's going to be longer. Having New Year's Day fall on a Wednesday means most people will not come back to work Thursday or Friday, which gives you a great length in terms of time for usually high demand and some good pricing. While there has been disruption this quarter, particularly from hurricanes and the national election, I believe there are some things happening that will mitigate some of those activities.

Very helpful, thank you.

Thank you. The next question is from the line of Chris Stathoulopoulos with Susquehanna International Group. Please proceed with your questions.

Good morning everyone. So Joe, of course, correct me if I'm wrong here, but this fleet buy cycle feels different from those perhaps since 2019 for a lot of reasons. Obviously, we know about the supply chain here and with the OEMs. But at this point, are we at a point, I guess, where you go into these negotiations and outcomes are kind of more predictable or kind of more where you're able to realize better outcomes? And I realize this is a very general question. I'm just trying to understand sort of the dynamics of this buying cycle versus the prior, let's say, four and ultimately, read through for kind of how we should think about holding costs for the fleet in 2025 and beyond?

I think the abnormality with the fleet buying cycles, as you mentioned, had a lot to do with the past couple of years, including supply chain imbalances, as you suggested, and the shortage of vehicles. All of our companies in our industry exited a lot of vehicles during COVID, and that put a lot of pressure on us trying to restock our inventories. Unfortunately, during that period of time, prices were more expensive than in the past. It seems like this year, however, when we went into this year, things have gotten back to more normal conditions. Does that mean the 2026 buy will be that way? I'm not sure. But it seems like the 2025 buy is significantly improved compared to the previous two and is more in line with what we've seen pre-COVID, which I think is great. What I do know is that while we are almost done with our buy, there are still vehicles offered as there are certain OEMs that have high inventory levels wanting to transition those out before the end of the year. And they're fluid with their production and delivery schedules. We’ll be in the market to keep looking at that as we proceed with our fleet rotation. So I was pleased with our buy. I like particularly the fact that the vehicles are variable in nature, with many different makes, models, and trim levels that support the rental car experience. Going forward, the speed at which we can rotate our fleets in and out, securing these lower-cost cars will positively affect our monthly costs.

Okay. And as my follow-up, I think Brian has been in this role now for about a year or so. We've seen all this workaround demand and pricing analytics, and you mentioned the app. Where are we in this journey of transformation? What are some of the initiatives looking at 2025 and beyond that we should think about as it relates to things around revenue or fleet or perhaps apps and locations? Just want to understand where we are and some of the highlights of sort of things to come? Thanks.

It hasn’t been quite a year yet, but you're right, we did put Brian in that role. I'm very pleased to have him in that role because he has this incredible ability to digest data and come up with innovative ways for us to improve our processes. If you think about what we concentrate on most critically as a company and how we want to transform, there are three elements. First is about fleet. We just talked about that a minute ago. So Brian is very much involved with the team looking at data analytics and residual value curves and things of that nature, and how it affects our balance sheet, etc., on the fleet buy. So that's number one. Number two is about operational efficiency, and someone asked me a question just a minute ago on several of the things that we are looking at, and I talked about that. There is no secret; we are extremely focused on our variable cost lines and getting them in line with our overall business. We’re working on a number of different initiatives, whether that be productivity at our stores, or in-life vehicle costs, damage and salvage recovery, and overall utilization. We’re working on several initiatives right now that look at how we can best let our operators know the exact disposition through technology of each of our vehicles. If we do that, we believe that we can move them from being in a state of disrepair to being in a state of repair and moved to the locations with the best opportunity to put them on the road. If you think about vehicle utilization, a point of utilization is worth a significant amount of operational EBITDA to our company. That's another area we're focused on. The last one is revenue, right? How we can retool our systems. A number of people are a part of that, retooling our systems so that we have the best contribution outcomes. We are continually investing in our demand fleet pricing system that will allow us to look at different business segments and business opportunities, take reservations into our funnel, and distribute them out to the appropriate locations at the exact best price opportunity and volume opportunity that we can. So you hit on it. Fleet, operational efficiency, and revenue generation through better contribution margins are the three areas, and you will see significant growth in those three over the years to come.

Okay, thank you.

Thank you. Our final question is from the line of John Healy with Northcoast Research. Please proceed with your questions.

Thanks for taking my question. I just wanted to ask you kind of a philosophical question, Joe. I think about what we're hearing on the call from you guys is optimism that the fleet cost number is going to come down next year, and that the buy is going to be better. The benefit of rate, you guys have sold off cars and it tightened up capacity. So I guess as I think about all of those things, I mean it's an encouraging backdrop going into next year. But I would love to just kind of hear how much can that fleet buy rotation truly bring down holding costs in 2025 because my thought is you're going to still have a sizable amount of cars that are higher DPU than you'd like in your fleet and just hoping you could kind of give us some direction on how much the fleet cost number could come down maybe in the 6 to 12-month period as you rotate out. So that would be helpful? Thanks.

Sure. We are in the process of finalizing our buy now, and the specific calculations you mentioned will be factored into our upcoming business plan. You're correct that one buy cycle may not provide the full picture, but it's a beginning. Earlier this year, we removed a significant number of vehicles. When you look at our average fleet size, we typically rotate out a couple of hundred thousand cars each year, so there's still quite a bit to accomplish next year. What I focus on is how agile and adaptable we can be with both our disposals and spot purchases. There are more acquisitions happening than we currently realize, which will allow us to rotate vehicles out more quickly. We began addressing some of those challenges, as you know we purchased vehicles at inflated prices during the pandemic, and we needed to offload them. We managed to clear out a good amount earlier this year, but it will take time to fully address the situation. More details will be provided as we share our expected DPU for the 2025 business plan on our next call, John.

Sure. And I guess just a follow-up kind of in the same direction. When you think about the business, if your fleet costs next year are lower, your financing costs are lower, does that create a situation where maybe investors should be thinking about you thinking about the spread in the business on rental as opposed to a metric like pricing being important next year? So if we're talking about inventory costs going lower, is it misguided for investors to have an expectation that RPD levels should be similar or going higher?

Hi there. I think the way I would think of it is how we measure the business, and call it those metrics really shouldn't change. So you're going to have to take everything in totality, right? So obviously, fleet and interest are one important thing. We also have rent expenses that increase, and although all those operational efficiencies we talk about are supposed to mitigate further into the future. I think all the components of the expense lines offset by the revenue, and most importantly, being that revenue per day stabilises. I think it's evident in the actions we've taken in the quarter that positions us for quarters to come. Our discipline around that is really going to come down to all the metrics and not over-indexing on one over the other, but importantly, how they all contribute to more margin on the bottom line.

Great, thank you.

Thank you. Our final question comes from the line of Dan Levy with Barclays. Please proceed with your questions.

Hi, good morning. Thanks for taking my question. I wanted to ask about your fleet purchase. It's clear that the auto industry currently has some automakers with higher inventory levels, particularly among the D3. I'm curious about how much more willing some OEMs might be to adopt aggressive pricing strategies. Additionally, as a follow-up, I’d like to know if there's any concern that while you are maintaining discipline with your fleet, some of your competitors might be securing exceptionally favorable deals and could potentially expand their fleet due to OEMs eager to reduce inventory.

I'll take that. We have an extremely diverse portfolio. We deal with all the OEMs, and we have different makes and models that we procure and put into our fleet. There are deals happening. That's why I say we're almost complete because there are deals that are happening as we speak; that’s my thought on the overall industry allocation. In terms of the number of vehicles, I believe it will be similar in 2025 as it was in 2024. So it's not going to be like there's an enormous amount of vehicles provided to the industry as it stands right now. There will always be outliers that suggest, hey, I have a couple of cars; you guys want to take them or not? If that happens, we'll participate in that as well. I do think there’s discipline by the OEMs and what they provide to the rental industry. You can look at the SAAR as an indication of what they believe will be sold domestically. From my perspective, the industry will be relatively unchanged year-over-year. I’m very pleased with our 2025 buy. We’ve managed to get back to historic norms, which work for all of us.

Great, thank you. And as a follow-up, somewhat related, you're clearly committed to having a tight fleet. Maybe you could just talk about what you're seeing from your competitors on fleet tightness. One is facing maybe some questions on liquidity. I don't know to what extent that's impacting their fleet; the other one is just on that, is maybe a little heavier on the fleet and it moved some cars from off-airport contracts. So just maybe the broader industry fleet tightness and any color would be appreciated?

Yes. Sure. As I said a little earlier, everyone bought cars that were highly priced in 2023 and 2024, and probably went into this year with more cars than they would have liked, largely due to the challenges of residual values towards the end of last year. We decided to get out of those cars early this year, and that was right for our business. With the new cars coming in that are more advantageous than they had in the past, it makes sense for everyone to kind of get their hands around that and do it as well. For us, we have brands that allow us to participate well in all areas of our industry. We have the Avis brand that appeals to both the business and leisure customer. We have the Budget brand that was predominantly leisure. We have Payless brand, which customers rent less frequently. I believe we have the brand and positioning, our investment in our app and our direct channels, plus the relationships with exclusive partners that provides good opportunities. I think that bodes well for our ability to put cars on the road in a meaningful way. Overall, the combination of our book of business, the brands we have, and the belief that the fleets will start to rationalize in our industry bodes well for us.

Great, thank you. That’s helpful.

Thank you. At this time, we've reached the end of our question-and-answer session. I'd like to turn the floor back to Joe Ferraro for closing remarks.

Yes. Thank you. To recap, we reported a strong third quarter with improved vehicle utilization through ongoing fleet discipline. Our model year 2025 buy is largely complete, and we expect to have substantially lower holding costs as these vehicles rotate into our fleet. We'll continue to prioritize high-margin business while balancing volume. The holiday demand looks strong, and we expect price to transition seasonally. Our teams around the world are well positioned and prepared to close out the year. And as always, I want to thank you for your time and interest in our company.

Thank you. This does conclude today's teleconference. We thank you for your participation. You may now disconnect your lines at this time.