Avis Budget Group, Inc. Q4 FY2024 Earnings Call

Greetings, and welcome to the Avis Budget Group's Fourth Quarter and Full Year 2024 Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce David Calabria, Treasurer and Senior Vice President of Corporate Finance. Thank you, David. You may now begin.

Good morning, everyone and thank you for joining us. On the call with me are Joe Ferraro, our Chief Executive Officer, Izzy Martins, our Chief Financial Officer and Brian Choi, our Chief Transformation 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 fourth quarter and full year results. For the quarter, we delivered revenue of $2.7 billion and an adjusted EBITDA loss of $101 million. And for the full year, we achieved $11.8 billion of revenue and adjusted EBITDA of $628 million. Let me start by providing additional color around the $2.5 billion non-cash asset impairment and other related charges we disclose in our earnings release. Izzy will go into the accounting implications surrounding the charge. I want to explain the business rationale for recently accelerating our fleet rotation strategy, which resulted in this impairment. As you are aware, the auto industry had seen significant movement in price on both new and used vehicles over the post-Covid period in the last few years. The strong retail market for model years '23 and '24 forced us to purchase these vehicles at higher prices than historic norms. Our strategy to address this challenge was to hold these vehicles for a longer period of time. This would have allowed us to depreciate vehicles across a flatter portion of the residual value curve and manage our fleet purchase to an appropriate return on invested capital. However, when we saw prices for model year '25 vehicles return to normalized levels, we had a new decision to make. One option was to hold the course with a fleet largely comprised of model year '23 and '24 vehicles. This would have kept depreciation levels closer to our original assumptions, but we would not be taking the opportunity to continue to acquire new vehicles at lower cost base. The other option was to pivot strategies and refresh our Americas fleet by exiting model year '23 and '24 vehicles aggressively and replacing them with new cars purchased at sustainably better prices. We believe accelerating our fleet rotation is the right strategy for our company, creating greater certainty on our fleet costs back to normalized levels and positioning us to increase utilization and reduce maintenance and repair costs, provide an enhanced customer experience while sustainably growing adjusted EBITDA in 2025 and beyond. Now, none of us took this situation lightly. And for those of you who have followed Avis for some time and are familiar with our company's culture, you can probably surmise that there was only one acceptable option for us. We're not happy taking this impairment, but accelerating our fleet rotation now allows us to position ourselves to better manage our fleet costs and maximize our earnings this year and the years to come. Now let's move to our segment results, beginning with the Americas segment. The Americas generated more than $2.1 billion of revenue in the fourth quarter, with an adjusted EBITDA loss of $63 million or an adjusted EBITDA of $156 million if you exclude the year-over-year increase in fleet cost. Rental days in the Americas were consistent with the fourth quarter of 2023. We did see some volume impacts during the week surrounding the hurricanes and the national election. However, our strategy for the quarter was to maximize revenue over the peak leisure periods of the holiday season. The Thanksgiving and December holidays were strong, with Christmas in the U.S. being a record for our company. Pricing was down 2% compared to the fourth quarter of 2023, but improved sequentially throughout the quarter, with December finishing flat to the prior year period, showing improving exit trends. In January, we saw a continuation of strong leisure demand associated with the longer holiday season as well as a robust MLK weekend. As we look further into the first quarter, there are year-over-year comparisons to take into account with the loss of a day due to leap year and Easter falling in April. However, we view a later Easter season as an overall positive because Easter is traditionally much stronger in April due to warmer weather that opens up more destinations for our rental customers to travel than you would have in March. As always, we strive to keep our fleet inside of demand which allows for the most optimal price outcome. This strategy has resulted in ongoing improvements in our vehicle utilization. For the quarter, our utilization in the Americas was over 67%, which is more than two points higher than the fourth quarter of 2023, with December finishing at the high end of our historic norms. For the Christmas holiday period, vehicle utilization averaged 4 percentage points higher than last year's Christmas in our U.S. rental business. Transactions for Christmas far exceeded last year's Christmas peak, which I had mentioned was a record in the U.S. We believe we can continue to improve our vehicle utilization as we implement further transformational enhancements to better understand vehicle dispositions and actions to support more available fleet to optimize supply and demand opportunities. We expect the first quarter of 2025 to continue to show strong vehicle utilization as we started the year with substantially fewer cars than we started in 2024 and we will continue to aggressively exit vehicles while rotating in newer, more cost-effective units. Earlier I discussed the recent change in our fleet strategy, but I want to take this time to discuss our model year '25 buy in greater detail. The 2025 buy is virtually complete, although we believe we could still take advantage of some attractive spot buys throughout the year, which will also help us cycle in new cars faster. The use of data analytics and enhanced residual value modeling have benefited us in our fleet negotiations. The new '25 model year vehicles are more affordable than in recent years, allowing us to reach more normalized vehicle costs as they rotate into our fleet throughout the year. As we discussed, we will aggressively accelerate our disposal plans on our 2023 and 2024 higher-cost vehicles to make room for the new model year 2025 vehicles in our rental fleet and by year-end, we expect the average age and miles of our Americas fleet to be back to pre-pandemic levels. So to recap, the travel environment demand is robust. The leisure holiday of Thanksgiving and Christmas was strong and we saw this continue into January with the MLK holiday weekend. The extra day last year and the calendar switch of Easter will impact the quarter, but we believe will be more than made up next quarter with Easter falling in April. And while the results of this quarter were negatively impacted by the non-cash charges we recorded in connection with the recent change in our fleet strategy, we believe these actions create more certainty surrounding future fleet costs and position us for sustainable growth going forward. Our model year 2025 fleet buy is well positioned with lower holding costs and will continue to accelerate our fleet rotations as we transition through the first quarter and beyond. As always, our goal is to be disciplined in aligning our fleet size with demand driving higher utilizations in the first quarter and throughout the year. The Americas is well positioned to take advantage of we believe to be a strong travel environment and an enhanced summer peak. Let's shift gears to international. International generated over $590 million of revenue and a loss of $11 million for adjusted EBITDA in the fourth quarter largely due to non-recurring higher vehicle-related operating costs as we accelerated rotating out a fleet in the region. As a result, vehicle utilization was over 68%, up nearly 3 points compared to last year. This allowed us to start 2025 with fewer cars than we did in 2024. Revenue was down 1% compared to last year driven by a 1% decrease in rental days. Price was flat in the fourth quarter as compared to the same period last year which is an improvement from the negative 4% year-over-year in the third quarter of '24. We continued our strategy that we discussed on previous calls to build on the robust international inbound and inter-European cross-border leisure travel as it generates higher margin business while exiting lower price volume. This drove a year-over-year increase in our leisure business which helped propel our overall revenue per day. As noted on our previous call, our proprietary demand fleet pricing system is fully operational in our European business which allows for improved contribution margin by generating increased vehicle utilization and improved revenue per day. We're in the process of implementing this system in our Pacific region and expect to see similar benefits there as well. Our international regions continue to be a popular destination for cross-border travel and I believe we are well positioned here to capture this demand. Moving on to Technology and Marketing. As I mentioned on our last call, we launched a new customer app in October. This new app offers a more dynamic user experience providing our customers with a new rental dashboard as well as quick and easy access to their trip details on their travel journey. We're getting a lot of great customer feedback so far and are planning further app enhancements in the first half to 2025 which we will integrate with our touches, rental and ancillary product offerings. We are confident this new app makes our customers' car rental experience smoother and more enjoyable and will continue to differentiate our company in the market by delivering exceptional customer service. With that, I'm also proud to mention we finished the full year with record net promoter scores. In addition, following Xander Shopley's successful 2024 season where he won two major PGA championships as an Avis Ambassador, we're expanding our partnership with the launch of Xander Embedded, an exclusive content series presented by Avis. This monthly series premiered in December 2024 and will air throughout the 2025 PGA season, offering a behind the scenes look at Xander's life and the planning and preparation that fuels his success. Aligning with our Avis Plan on our brand campaign. We've also continued the development of proprietary in-life fleet technologies which will drive operational efficiencies. As I've discussed before, we've been piloting digital tools in key cities throughout the U.S. that we believe will drive better vehicle utilization. These pilots have gone well and we are operationalizing these tools with the intent to continue to scale across the U.S. These tools will allow for a better understanding of vehicle dispositions, drive more timely repairs and improve vehicle movements, all designed to create more available fleet. So, to conclude, we took the necessary actions to create more certainty around future fleet-related expenses and best position us for sustainable growth going forward. Our 2025 model year buy came in much closer to pre-pandemic levels. Leisure peak period travel was especially strong around the holidays with the US. recording a record at Christmas and we saw this strength continue over the MLK holiday weekend. Overall, travel is strong, and we expect this to continue into the summer peak, and our brands are well positioned to take advantage of this. Year-over-year pricing in the fourth quarter sequentially improved for the Americas allowing us to exit December flat to prior year. We will continue to aggressively rotate our fleet by adding lower-priced new model vehicles while exiting older, more expensive fleet. We expect utilization to be well over prior year in the first quarter, and we expect to continue to see improved utilization throughout the remainder of the year. Izzy will address more about our future outlook, but I want to affirm that based on our strategy and current line of sight, we expect to generate no less than $1 billion of adjusted EBITDA in 2025. Now before I turn it over to Izzy, I want to comment on a succession plan announcement of last evening. I've had the privilege to work at this company for the past 45 years and the honor of being the CEO for the last five. After careful consideration and conversations with our Board, I will be transitioning out of my current role on June 30 and stay on as an advisor to the Board. Brian Choi, the company's Chief Transformation Officer and previous CFO, who I've worked with for many years now, will take over as CEO effective July 1. Jagdeep Pahwa, who served as a Board member since 2018 and as Chairman since 2024 will become the Executive Chairman. I will continue to run the company as CEO through June and will ensure an orderly transition to Brian as he takes over effective July 1. These succession planning actions will position us well to drive performance throughout 2025 and beyond. I'll now turn it over to Brian to say a few words.

Thank you, Joe. Everyone at Avis owed you a debt of gratitude for the contributions you've made to the company throughout your 45-year career here. You've always led from the front and personified our mode of trying harder. It's a legacy I hope to continue. I'm very grateful for the opportunity to serve as Avis' next CEO and fully appreciate the responsibility that comes with stewarding the global brands we've built over decades. The next leg of our journey holds tremendous potential, and I am certain that Avis' role in the evolving mobility ecosystem will translate to significant value creation for all of our stakeholders.

Thank you, Brian. 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 Joe mentioned, the results in the fourth quarter were impacted by a noncash impairment and other related charges of $2.5 billion. The impairment charge was due to a recent operational change in strategy implemented in the fourth quarter to significantly accelerate our fleet rotation in the Americas. This affected the vast majority of our Americas fleet and the size of the impairment reflects that. Let me provide a bit more color on how we came to this decision. If you recall, coming out of COVID, there was a shortage of fleet supply and the vehicles we obtained over the past few model years were purchased at elevated prices. In order to achieve an appropriate return on invested capital on these higher-cost vehicles, we intended to elongate the holding period to capture a flatter part of the depreciation curve. However, as the competitive landscape shifted and new vehicle incentives returned closer to pre-pandemic levels, we came to the conclusion that aggressively rotating out of these higher-priced vehicles was the optimal long-term economic decision for our company. This ultimately required us to reassess the valuation of our fleet from an accounting perspective. Since we are depreciating the vehicles over a shorter period of time, the straight-line depreciation curve is steeper than we initially modeled. We adjusted our fleet valuation to their current fair market value to reflect this recent change. The impact consisted of a $2.5 billion impairment for our rental fleet and other related charges recorded in the fourth quarter. We expect an additional noncash charge in the first quarter related to the disposition of vehicles as part of our accelerated rotation strategy. To avoid any confusion, let me be clear, we expect no further fleet charges beyond the first quarter of 2025. While this noncash impairment and related charges fully reflect current market prices, our go-forward depreciation will be impacted by the shortened holding period until these higher-priced vehicles are disposed of. This created noise in our fourth quarter results, and we expect some residual impacts in our first quarter, where we will also see elevated monthly depreciation levels in the first quarter. Once we are past the peak vehicle selling season in April, we should see depreciation levels normalizing beginning in the second quarter of 2025. The decision to accelerate our fleet rotation was not taken lightly. Even though this resulted in an impairment, we are confident that this strategy puts us in the best position for adjusted EBITDA growth in 2025 and beyond. We will provide more guidance around this in our outlook section. Overall, our adjusted EBITDA for the quarter was a loss of $101 million or adjusted EBITDA of $118 million, excluding the fleet cost variance as compared to $311 million in the fourth quarter of 2023. It is challenging to compare these results to last year due to one-time impacts and uncharacteristic expenses associated with the impairment. Our full-year reported adjusted EBITDA was $628 million. However, if you exclude our losses on sale and additional incremental depreciation associated with our change in fleet strategy, our adjusted EBITDA would have been approximately $850 million. We feel confident that with the actions we have taken and the impacts that occurred this quarter, that we are set up for a much stronger 2025. Let's move on to capital allocation. We made the decision to repurchase approximately 450,000 shares of common stock for $37 million in the fourth quarter. As always, we will continue to balance our capital allocation between reinvesting in the company and returning capital to our shareholders. As we mentioned on the last call, we issued $700 million of senior notes in the third quarter and used the proceeds in the fourth quarter to repay outstanding borrowings under our secured term loan C. This allowed us to reduce our secured borrowings and provide us more flexibility in our ability to refinance in the future. In February, we issued $500 million of a secured term loan A and used the proceeds to pay down fleet indebtedness. We view this as a temporary issuance and as such, structured a maturity for this term loan A to be repaid no later than December 2025. We wanted this term loan A to ensure we were in a position to opportunistically evaluate model year '25 spot buys in the first half of the year, giving us the flexibility to further accelerate our fleet rotation. As of December 31, we had available liquidity of over $1.1 billion, including committed and uncommitted facilities with additional borrowing capacity of approximately $2.8 billion in our ABS facilities. Our net corporate leverage ratio was 7.8x, this is temporarily elevated given the effects of the impairment discussed earlier. By the end of 2025, we expect our net corporate leverage ratio to be back closer to normalized levels. When you look at our total net debt leverage, the ratio remains relatively unchanged at under 5x as our corporate debt issuances were used to pay down fleet debt. Additionally, we are in compliance with all of our financing facilities. We will continue to evaluate the best use of our capital, and we anticipate being more balanced capital allocators going forward as we look to repay debt and return capital to our shareholders. Let's move on to outlook. As we mentioned earlier, we did not take the change to our fleet rotation strategy lightly. But the biggest benefit going forward is more certain outcomes for our fleet costs. That, along with infleeting more cost-effective model year '25 fleet during the year gives us confidence that the fleet cost per unit per month will significantly reduce throughout the year. Due to the fleet rotation we previously spoke about, the first quarter will still show lingering effects on our fleet costs. In the first quarter of 2025, we expect all-in fleet cost per unit per month to be approximately $400 for the total company. However, as we stated, we expect this to significantly drop and our second quarter all-in fleet cost per unit, per month will be under $350. This will continue to optimize throughout the year as we rotate our fleet and anticipate our fleet costs as we exit the year to be around $300 per vehicle per month. In the first month of 2025, as Joe stated, we saw a continuation of leisure holiday travel as well as strength in the MLK holiday weekend. We expect this strength to continue, but it will be offset by one less day in the quarter and Easter shifting into mid-April. As we mentioned, we anticipate that having Easter in April will more than offset the loss of Easter in March as the warmer weather allows for more robust travel. Although we expect revenue per day in the first quarter to be down slightly year-over-year, we anticipate pricing trends to improve compared to prior years as we move into April. For the first quarter, we expect an adjusted EBITDA to be approximately a loss of $100 million largely due to the elevated fleet costs and the calendar shifts previously discussed. However, we expect the healthy demand we are seeing around travel, combined with fleet actions and improved operational efficiencies will more than make up for the slow start to the year and gives us confidence that we will generate no less than $1 billion in adjusted EBITDA in 2025 and beyond. With that, let's open it up for any questions.

Thank you. We'll now be conducting a question-and-answer session. Thank you. And our first question today will be coming from the line of John Babcock with Bank of America. Please proceed with your questions.

Good morning. First, congratulations to Brian on his new role, and best wishes to Joe on your future endeavors. For my first question, I would like to discuss cash flow. While you provided some guidance on DPU and EBITDA, I am interested in understanding how we should approach cash flow from quarter to quarter as we progress through the year.

Hi, John, thank you for the question. I think the first point in cash flow is really starting with what our earnings are we expect it to be. As I said, we're confident in being able to generate no less than $1 billion. So, when you keep that in mind, really the only things taken away from cash flow will be our interest expense, our investments in capital and obviously, our tax payments. And actually, this year, we expect our working capital to be positive. So, I would expect our free cash flow to be really, really solid in 2025.

Okay. Thank you. And then I guess just my follow-on question here. With the fleet rotation, have you had any change in mix? And then also, if you have, will this have any notable impact on our RPD earnings, or will this be more on the margin?

Yeah. Hi, this is Joe. No, we've had no change in mix. So the fleet rotation is going to be purely taking out the higher-priced vehicles. And as I said earlier, very aggressively, as we change our hold periods and our rotation strategy. So, there will be no change. So, it's not like we're buying smaller cars because they’re less expensive. Our fleet size has always looked at what our demand is, what our customer demand is, what the reservations are like. And over the years, we've managed to increase the size of our vehicles because they bring us a better price, even with maybe lower utilization. So no, there's no change in how we look at our fleet size.

Okay, thank you. Appreciate it.

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

Good morning everyone. Izzy, I would like to clarify the firm's guidance for the first quarter, which includes some smaller impairments and the timing of Easter. We are looking at a $100 million loss, and we have a cautious outlook for the full year, expecting no less than $1 billion. I'm interested in understanding your perspective on the quarterly cadence of adjusted EBITDA. It appears that the guidance may be more weighted towards the second half of the year. I would like to reconcile that with my understanding of the typically shorter booking window for rentals, which is usually around 30 to 40 days. Thank you.

Hi, Chris, thank you for the question. I'll take the first part of your inquiry. Regarding DPU and our expectations for the first quarter, you should consider the depreciation costs in the first quarter to be quite similar to our exit trends, landing close to the 400 mark as we did in the fourth quarter. We have a one-time impairment charge and other related charges, with another anticipated charge in the first quarter due to our accelerated fleet rotation. However, there will be no additional charges related to this strategy after the first quarter. It's also important to note that while we might have a slower start compared to the previous year, we should normalize fleet costs going forward, making it feasible to achieve the $1 billion target.

I can provide some insights on the business outlook moving forward. The first quarter is typically not our strongest period due to the winter season, which only affects certain states. However, I was very encouraged by the demand during the holiday season, which was quite strong. In fact, we recorded a remarkable December in the U.S., with rental days exceeding TSA volume. We also experienced positive pricing during the holiday season, which is expected to carry into Martin Luther King Jr. Day. We do face a challenge in the first quarter because we have one less day, and with Easter moving to April, the second quarter is likely to outperform our earlier expectations for this year. We are optimistic about the upcoming summer season, which is historically our peak period, and we anticipate strong performance during that time. The summer traditionally sees our highest operating levels, followed by a transition into the fourth quarter. Last year, we encountered some difficulties due to hurricanes in Florida, particularly during October, which is usually the state's busiest month; this pushed our recovery timeline longer than anticipated. In summary, we expect a seasonal pattern moving forward with a strong summer, an improved second quarter due to the holiday shift, and a solid finish to the year.

So, if I put that all together, as I think about volumes, pricing and DPU relief after we exit 1Q, would seem that it's more on cost side and the pricing now is your better size inside of demand. Are you baking in any sort of seasonal plus on volumes or the base case sort of seasonally in line as we work through the year?

Yes, listen, as I would say, I think our - what we're seeing, and you're right about reservation demand kind of close in our industry. But basically, what we're seeing is we're seeing reservation demand. We got presence suite coming up next week, seemingly is pretty good. And like I said, the Easter holiday, but the summer, we believe will be strong. And yes, that's where the majority of our volume and our rate differential will be and our EBITDA. And that's been the case for as far back as I recall. But I see us transitioning we're going to have RPD kind of a little down in this quarter, but transitioning up as we get to the peak periods. And the thing about our fleet and what we've done, even with this accelerated fleet rotation is keeping it well inside of demand. So, we think that offers us the best price opportunity, and you'll see that as we go forward as well because we're saying that our utilizations are going to be strong going out.

Okay. Joe, if I could get one more in. How are you thinking about the tariffs potential impact? So, there was a comment, I believe, from Ford and one of the OEM yesterday that the tariffs are wreaking havoc on the industry. It would seem at first blush that higher new vehicle prices could spur demand or spur demand for used car markets. And typically, that would be good as we think about residual values in RPD. I realize it's still early, but initially, how are you thinking about pluses and minuses around the tariffs should these move forward?

Yes, that's an important question. We've been considering this a lot recently because the situation is quite dynamic and constantly evolving. Our role is to anticipate potential outcomes and remain agile enough to respond. We have vehicles being manufactured in areas affected by tariffs, but they are all expected to arrive soon. I don't foresee this posing a major issue for us in the short term concerning potential price increases that might affect our agreements with original equipment manufacturers. Looking ahead, we need to consider what might transpire. Generally, elevated new car prices should positively influence used car prices, and that tends to be the case in times like these. Moreover, we need to consider the future of new car production. Will manufacturers maintain their current production rates? They cannot simply pass additional costs onto consumers, which could lead them to produce less. These two factors could have a favorable impact for us in the near term. As we look further out, we'll need to monitor the situation. Fortunately, our fleet management is highly adaptable, and we've learned to respond swiftly to macroeconomic changes, especially during the uncertainties of the COVID period. I am quite confident that we will navigate these challenges effectively.

Thank you. Our next questions are from the line of Stephanie Moore with Jefferies. Please proceed with your questions.

Hello. This is Harold Antor standing in for Stephanie Moore. I know you incurred some charges this quarter, but could you give us an idea of how you expect things to improve in 2025? Is there anything specific you can share that would assure us of a significant improvement in 2025? Thank you.

Good morning, Harold, thank you for the question. As you saw in the fourth quarter, our operating expense increased slightly. What we didn't mention was that while we experienced significant changes in our fleet costs due to the strategy we implemented in that quarter, it also had lasting effects on our operating expenses. This impact was felt in both the Americas and international regions. Although we recorded a charge in the Americas, we did see an acceleration of fleet rotation globally. The issues related to preparing the cars for sale and handling some salvages contributed to the notable rise in operating expense. Moving forward, as Joe mentioned, we are focusing on various improvements. We've observed benefits from our operational efficiencies and anticipate even greater improvements in 2025. We expect our operating expenses to return to normalized levels, with the fourth quarter reflecting mostly nonrecurring items. I hope this information is helpful.

Thank you for the information. Can you share your insights on the fleet refresh happening throughout the industry? Additionally, congratulations on your new role, Brian. What will your main priorities be as the new CEO this year?

I appreciate your question. I can only speak to our efforts regarding fleet rotation. The impairment was a serious consideration for us, and we deliberated extensively on it. The 2025 model year purchase turned out to be more favorable than expected. In previous discussions, I mentioned that it was more economical, and now I can confirm it's better than in 2024 and 2025. After concluding our fleet negotiations, we see costs returning to pre-pandemic levels. This situation necessitates a more accelerated fleet rotation, which not only benefits our fleet costs but also positively impacts variable vehicle expenses and parts costs since the vehicles are less aged. We believe this will enhance utilization, customer experience, and also yield an EBITDA benefit. Comparing to 2019, we are a larger company now while potentially maintaining similar fleet costs. This justifies our approach. In the upcoming months, our focus will be on rapidly rotating these cars. Others may have their strategies, but I believe our actions will provide us with a competitive edge. Regarding the CEO transition, our company has a history of nurturing talent internally while also bringing in external hires. This creates a unique stability. Brian, who has worked with me for five years, shares our vision and goals. While there may be differing actions, this leadership transition offers a sustainable path that benefits our team, our customers, and ultimately our shareholders.

Thank you for the color.

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

Hi, good morning. This is Jash Patwa on for Ryan Brinkman. Thanks for taking my question. I just wanted to start with a question on your disposition mix and how that has changed over the past few years. As you accelerate fleet rotation and a share, is that potential to incrementally lean into a direct to retail or direct to dealer channels. It would also be great if you could remind us on the difference in remarketing outcomes between the direct retail and direct dealer channels as opposed to the auction channel. And I have a follow-up.

Over the past number of years, we've always talked about alternate channel as a differentiating factor for us because of the cost base entails. I think 70% of our cars, give or take, go through non-auction related channels, some of which are retail, is arguably a smaller portion. We announced that we have this online brand called Ruby Car, which we're starting to generate some activity for us, but the majority of our sales are done through non-auction related activity. The auction provides you a way to get out of course quicker, but we look at how we do in compared to MMR very seriously, and that's always a KPI that we manage closely.

Understood. That's helpful. And I think you alluded to this in your response to the prior question, but I would imagine that the certainty around fleet costs also yield incremental benefits with regards to revenue optimization especially in terms of pricing management and volume optimization. Curious if you could speak to how this increased certainty around fleet costs could potentially drive efficiencies across the different operational aspects within your business model? Thank you.

Sure. Listen, I think first thing, when you change your rotation and you get new cars in, you have an immediate impact on utilization, right? More available cars, the frequency of repair isn't quite needed as necessary. So, I think that adds to the revenue lines, more available fleet. We have our demand fleet pricing system, which allows us to understand supply and demand, and it really focuses on contribution. One of those contributions is utilization, and this allows for a high propensity of car use. As far as some of the downstream effects, which I talked about earlier, there's going to be a lot because, again, newer cars, less parts, less maintenance, less turnover, and I think that positions us well from a variable vehicle point of view in that, that you have cars that are not in need of oil changes and repairs quite as frequently as the cars that we've had in our fleet. I think it leads to productivity improvements overall for operationally because, again, the less downtime and as far as revenue goes, having more available cars at the point of sale to take reservations will certainly allow us to benefit in the revenue streams.

Very helpful. Thank you, so much and good luck.

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

Hi, good morning. Thank you for taking questions and congratulations to both Joe and Brian. I wanted to first just follow up on the fleet rotation. And really what I want to try to get to is the rationale because I think I'm hearing two things. You're talking about the opportunity to normalize your DPU and DOE, but you're also giving some comments about sort of ancillary benefits to RPD. So, I'm trying to understand, is more of the rationale on this to normalize those expenses? Or was this really more a reaction to the competitive environment that we saw her refreshing their fleet and potentially enterprise going out there, and refreshing this is just what's required given the competitive environment to have a much fresher.

Our objective is to maintain the best fleet possible for our company. Given the cost structure associated with the upcoming '25 models, we made a quick decision to proceed with this direction. This move will alter our cost trajectory. I’ve stated before that we aim to be a company with no less than $1 billion in revenue, and I completely believe this for two reasons. First, we anticipate a reduction in fleet costs, freeing us from the constraints of older, high-cost vehicles impacting our future. This offers a significant advantage for our business. Secondly, we expect operational efficiencies due to the newer vehicles. As I mentioned regarding the holding costs, we will gain from that, as our utilization will improve, reducing downtime and enhancing productivity. Consequently, we will be able to offer a better experience for our customers. These factors are crucial for our success, which is why we decided to act now instead of delaying until '26 or later. We expect a substantial impact this year that will propel us in the coming years. Regarding competition, we take pride in delivering the best mobility solutions to our customers, which is a fundamental aspect of our business strategy. While taking this impairment was not pleasant, the future benefits are considerable.

Great. Thank you. As a follow-up, I wanted to double-click on one of the earlier questions that was asked on cash flow. And maybe if you could just talk about the vehicle programs line in the cash flow bridge. In the last few years, it's been anywhere from $500 million to $800 million drag pre-COVID but it was actually more sort of neutral. So, as you are doing this fleet transition, what should we expect on that piece of the cash flow bridge in '25? And at what point does it normalize to being more of a neutral?

I think the first thing that I would mention is on that line, the vehicle programs and related that you see that we report on Table four. Remember, that is all discretionary. That's not required. So, as we continue to determine how to allocate our cash, we will make the decision as to how to best utilize it and to for your modeling purposes, I think for now, you could just assume what we've traditionally done to continue. But once again, I think the most important point is the fact that it's discretionary.

Okay. But regarding the transition of the fleet, please go ahead.

No, no. I was just going to say earlier, there was a free cash flow question. I think I want to make it clear as well that we're expecting our free cash flow to be by year-end, no less than $500 million.

Okay. Thank you.

Thank you. Our final question is from the line of Chris Woronka with Deutsche Bank. Please proceed with your questions.

Good morning, everyone. Joe, congratulations on your impressive tenure at Avis, and congratulations to Brian on taking over. My first question is about the normalized hold period moving forward. If I may elaborate, assuming the fleet refresh is mostly complete by April, and considering that you typically increase your fleet in the summer, we have an understanding of your vehicle purchasing strategy. You mentioned that the exit rate BPU would be around 300. If the hold period continues to be at least 18 months, what could potentially lead to fleet costs exceeding the benchmark of 300 next year? It seems logical that the run rate would likely be around or below that figure. Would that be a reasonable way to approach it?

Yes, Chris, thank you. You are correct. The entire period you mentioned aligns closely with our historical performance. I believe we will maintain that trajectory moving forward. We are working to restore our age and mileage metrics to those levels. The period you referenced, along with the DPU you discussed, is a reasonable indicator of what we can expect in the future.

Okay, thanks Joe. And then a follow-up. This might be a little bit for Brian. Maybe is the CTO role, is that something that's going to be refilled after Brian takes over as CEO? And then along those lines, Brian, I know you've worked on a lot of stuff in the role. And is there any high-level thoughts going forward? Any targets you guys are looking at on BOE, whether it's index to inflation or just an absolute number you'd like to get below a per transaction basis or anything like that, that we can think about?

Chris, thanks for the good wishes. In terms of the transformation role, I don't think that, that’s something that we see immediately filling right now because our whole company is in a transformation mode right now. I think there are a lot of initiatives that we've put in place that we'll be executing on throughout the year. And I totally appreciate where you're coming from with your question, but I don't think it's time to dive into that yet. Joe is the CEO through June. We have a thoughtful transition laid out. And I think it will be more appropriate to get priorities and initiatives when we report our second quarter earnings.

Okay, thank you. So to recap, the travel environment demand is robust. We finished 2024 with record December holidays, and we saw continued strength in January with the MLK holiday weekend. We took the necessary actions to create more certainty around our future fleet-related expenses and the best position us for sustainable growth going forward. The new '25 model year buy is more affordable, allowing us to reach more normalized vehicle costs and we'll continue to accelerate our fleet rotations as we transition through the first quarter and beyond. Our ongoing goal is to be disciplined in aligning our fleet size with demand driving higher utilizations, allowing for the most positive price outcome. And I want to thank all our employees for their continued dedication to our organization we are positioned well for a very successful 2025. And as always, 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.