Avis Budget Group, Inc. Q2 FY2025 Earnings Call

Greetings, and welcome to Avis Budget Group's Second Quarter 2025 Earnings Call. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Mr. David Calabria, Senior Vice President, Corporate Finance and Treasurer for Avis Budget Group. Thank you. You may begin.

Good morning, everyone, and thank you for joining us. On the call with me are Brian Choi, our Chief Executive Officer; and Daniel Cunha, 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 are 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 on 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 make no guarantee 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 Brian.

Thanks, David, and thank you to everyone joining us today for our second quarter earnings call. It's great to be back and to have the opportunity to regularly connect with our investor community. Let me start by introducing Daniel Cunha, our new Chief Financial Officer, who joined us on July 1. Daniel started his career as a management consultant, became an investment professional in private equity, and finally settled on the operational side as the CFO for two companies prior to joining Avis. He is a strategic thinker with real operating chops, and we're thrilled to have him on the team. Daniel is less than a month in, so for the analysts on this call, please don't scare him off during Q&A. We have high hopes for him here. We're taking a slightly different approach with these calls going forward. You may have noticed; we issued a financial supplement alongside our usual earnings release yesterday. That document includes the key highlights and financial details we would typically cover during this call. You all know the format we followed in the past. This segment grew this much for an x percent increase. That line item moved slightly from here to there. But let's be honest, you can do the math. You don't need me to go through a roll call of data points. There's a better way for us to use this hour. So today, I'd like to elevate the conversation. Let's move beyond the myopic month-to-month trends and instead focus on where we're taking Avis Budget Group. What opportunities are we prioritizing? Where are we investing resources? How does this all fit into our broader strategic vision? These are the questions that truly determine whether a company is expanding its moat or simply treading water. To be clear, we fully recognize the importance of consistent financial execution, delivering on quarterly results is foundational. The sound of the cash register ringing consistently is what gives you the right to take a long-term vision. So meeting our financial expectations should be table stakes. The results of our operational performance should largely speak for itself with minimal interpretation or story to spin. I believe that's the case this quarter. So let's spend this time instead getting into how we're thinking about growth and opportunities at Avis. Let's clarify something, though. Cyclical growth and opportunity come and go as the macroeconomic winds blow. Structural growth and opportunities, though, that come from value-creating innovation. Avis Budget Group has been around for 75 years. If we want to be an enduring franchise for the next 75 years, we must take on value-creating innovation as a core responsibility today. A responsibility to our customers, who deserve better services that aren't just reliable but exceptional, a responsibility to our teams who need new tools and technology that empower their visibility and productivity and a responsibility to our industry overall, to grow the size of the pie instead of jostling year-to-year for a slightly bigger slice. These aren't abstract fortune cookie phrases to us. We're putting this commitment to practice, and we're doing it now. Let me provide a tangible example of this by introducing you to Avis First. Avis First is our new premium product offering that defines what first-class is for car rental. What does that mean? Well, picture this. You arrive at the airport, grab your bag, walk out the door and find an Avis First concierge is already there waiting for you. He comes over to take your bag, hands you a bottle of water, and walks you the 8 steps to get to the car at the curb. It's exactly what you asked for, the latest model year with low mileage and that new car smell. It's 90 degrees and humid outside, but it's a crisp 68 degrees in your car because it's been preconditioned with the air on and the seat coolers running. The concierge makes sure that your phone's Bluetooth connects seamlessly and the car play screen pops up on the dash with your map and playlist ready to go. Before you leave, he reminds you to save yourself the hassle of filling up the tank. We only charge for the gas you use at pump rates, so just drop the car off curbside with your concierge and walk into the terminal when your trip is over. You chuckle a bit, remembering the last time you were at this airport and went with the ride hail option, having to meander through a maze of walkways, elevators and parking garages, eventually going halfway back to meet your driver with whom you've been furiously texting. You realize now there's a better answer. First-class doesn't have to end at the gate if you rent Avis First. This isn't just a new business line. It's a category-defining product for the rental car industry. Historically, our sector has leaned solely on brand segmentation: Avis, Hertz, and National as premium; Budget, Enterprise, and Alamo as mid-tier; and $1.50 as value, Payless, Fox and others as low cost. But within those brands, the actual product experience is highly variable. That's no longer acceptable. Today's traveler is more discerning. Brand alone isn't enough. Customers expect clear differentiated offerings within a brand just like they do when they're flying. Everyone knows Delta is more premium than easyJet, but Delta customers also understand the difference between Main cabin, Comfort+, First Class and now Delta One. The airline industry figured out that the post-COVID traveler is happy to pay more for certainty, for quality and for experience. It's not just about the lowest price; it's about the value received. Avis First addresses that expectation head on. And while a first-class flight from New York to L.A. can cost thousands of dollars more than an economy flight, an Avis First upgrade per day costs as much as a couple of Starbucks lattes. That's why I firmly believe that you can fly any class, but always drive first-class with Avis First. Our customers are the same customers as the Uniteds and Hiltons of the world. It's already been proven that if you build a premium product, they will come. Airlines have done it, hotels have done it. Why haven't we? And I don't mean we as Avis Budget; I mean why has nobody in the rental car industry tried to offer this first-class experience in terms of both vehicle and service? The short answer is because it's hard. Your fleet has to be connected, and you need to coordinate between work groups that are spread out across acres of an airport. The only way to operationalize this is to enable the field with best-in-class technology that's purpose-built for newly structured processes that are tailored airport by airport. And that's exactly what we did. New work groups, new technology, new processes. If the consumer is paying for a seamless experience, we can't afford to deliver anything less. The behind-the-scenes list to pull this off is substantial. But we've thoughtfully put in the work to bring this to life. I believe this is the single most innovative product our industry has seen in 20 years. And while we're creating and defining this category, I do expect others to follow. And honestly, we welcome it. Our aim is to set a new standard that elevates the entire industry and increases its overall revenue and profit pools. Car rental is a mission-critical piece of the travel ecosystem, and we need to evolve alongside the airline and hotel participants in the industry to service our shared customers. It's the only way to escape the vicious cycle of solely competing on price. It's also a way to win back some of the share that has been lost to ride-hail. How many of you decide to just call a car because you don't want to deal with the busing or the AirTran? With Avis First, you get all that convenience and more with none of the awkward chit-chat from your Lyft driver. By further segmenting our customer base beyond the binary Avis or Budget, we can service the demand that we know exists, we can provide a higher-value product, and we can grow the overall size of the industry. That's what we're delivering. The price is slightly higher, but you receive so much more in return that it becomes a no-brainer that Avis First is the best value proposition in the rental car industry. So you don't need to take my word for it. Avis First is live in over a dozen locations today. And we're planning on over 50 markets being operational by the end of the year. If you find yourself going to airports like Denver or Palm Beach or if you want to get out of Manhattan in the summer and prefer to have your rental car meet you at your apartment, why not give Avis First a try? Now to the members of our team who are listening to this, I just want to say game on. It's out there in the open now, so let's show the world what excellence in our industry means with Avis First. Let's shift gears now and talk about another example of innovation that we're excited about. I wanted to provide more context around our recently announced partnership with Waymo in Dallas. I've been following the mobility ecosystem closely for nearly two decades, both as an investor and an operator. And while autonomous ride-hail may seem a world apart from traditional car rental, I always believed that Avis has the potential to be a central player in this space. Now I'll admit this isn't immediately obvious to everyone. When you break down the value chain of autonomous vehicles, it's software and hardware that comes to mind. Clearly, Avis is not developing the code base to create a driverless system. And we're also not manufacturing the vehicles to power that technology. But in a world where that software can be licensed and that hardware can be purchased, the asset management aspect of the value chain gains much more importance. Autonomous vehicle ride-hail isn't just dealing with the zeros and ones of digital logic; these are heavy assets that need to be professionally deployed and managed at scale. Avis vehicles need to be charged daily with the network of L-3 stations. They require maintenance of cameras, sensors and fluids, which need to be performed regularly by expert technicians. To minimize rider wait time, Avis vehicles need to be positioned at travel-optimized nodes, either in city centers or at the airport. They aren't cheap. Being able to finance billions of dollars of fleet with the best advance rates and the best interest rates becomes a competitive advantage. And lastly, Avis may be everywhere in the coming years, but I can guarantee you that into the future, no matter how advanced the technology gets, it is a mathematical certainty that someone will always leave a happy granola bar in the cup holder. That's why service infrastructure and the human touch still matter. Avis will need to be constantly cleaned by a team of service agents to provide an optimal user experience. At Avis, we do all of those things daily. It is our core competency. In the City of Dallas alone, we manage a fleet of over 15,000 vehicles spread across 50-plus sites maintained by dozens of technicians and serviced by a field team of over 500 individuals. We've been doing this day in and day out for over 75 years. The universe of mega fleet managers is small, but Waymo did have a few choices. Why did they go with us? Well, I can tell you how I positioned what we at Avis uniquely bring to the table. First, we are a truly global network. You can rent from Avis in 180 of the 193 countries around the world. If you're an AV player with global ambitions, we're the only mega fleet manager with that kind of footprint. Second, instead of buying electric vehicles over the past few years, we've been investing in our EV infrastructure. We've been building out charging capabilities across our real estate portfolio. We've already gone through the challenges of dealing with the long lead times from municipal authorities, both on the airport and utility side. Third, we have alignment with Waymo on how massive and attractive an opportunity this is. This partnership didn't materialize haphazardly to get a pilot up and running. No. We dedicated some of our best talent to this partnership across transformation, operations, finance, real estate and legal as a reflection of our commitment to this business line. Fourth, and I think most importantly, is the tech-forward way we intend to manage these AV assets, which build on the newly designed operating system that's foundational to Avis First. Let me close by telling you why we're so excited about this opportunity. Avis plays in a very specific niche of the mobility ecosystem today. We are a leader in a $65 billionish TAM industry that is dependent on travel. That's people taking business trips or going on vacations. Now that's a good place to be. And as I mentioned with Avis First, I think there are substantial opportunities to grow that TAM and capture value. Within an autonomous world, Avis can participate in the medium part of the mobility ecosystem where the foremost macro factor is in passenger vehicle miles driven. This is an addressable market that is hundreds of billions of dollars. Avis has honed its superpower of mega fleet management by grinding pennies in the rental car industry. But like I said earlier, that core competency of maintaining vehicles, servicing vehicles, repositioning vehicles, purchasing, financing and disposing of vehicles. All of that is fundamental to fleet management whether the vehicles are ICE, EV or now AV. We have the opportunity today to apply the skill set we've earned over decades to a much larger market with much higher growth potential. We intend to use Dallas to learn together with Waymo and to see how we can succeed in this market and future markets to come. Initial testing is already underway, and we'll update you as milestone developments take place. But here's what it all comes down to. We're building for what's coming next by launching category-defining products like Avis First and actively shaping the future of the AV landscape with our Waymo partnership. These aren't just headlines. The proof points to show that Avis Budget Group is not content with playing defense in the legacy category. We're here to win through innovation, carve out our place in the future mobility ecosystem and by doing so, create durable shareholder value. We're on that journey. We're excited for what lies ahead, and we're going to keep driving forward. Thanks for listening. With that, operator, let's open it up for questions.

Our first question comes from Adam Jonas with Morgan Stanley.

First, Brian, I love the new format. Great job. I wish more companies did it. I really hope they're listening, please do that. Also, I thought the half-eaten granola bar was like a free gift, so I'm going to miss it if you clean it up too much. Two questions, Brian. First, the Dallas Waymo agreement, can you confirm whether this was the result of a competitive process, whereby Waymo considered other fleet and fulfillment partners? And I'm curious who came to who first? And I got a follow-up.

Adam, thanks for the kind words. I really appreciate it. With the Waymo partnership in Dallas, I can't speak for Waymo. We at Avis have been in discussions with multiple AV parties. I can only imagine that Waymo, having had previous partnerships before, has been in discussions. So I do think that both parties went into this eyes wide open considering the playing field.

Okay. Brian, looking at a long-term perspective, what do you envision for Avis Budget's business model over the next 10 to 20 years? How do you see your revenue and operational model evolving? Additionally, how do you see the opportunities for growth and expansion with autonomous vehicles and your capabilities in servicing and maintaining them?

Yes. Sure. I mean this is something that we obviously give a lot of thought to. Today, tomorrow, going forward, I really do think that the beating heart of the business is what we do today. It is actually providing mega fleet management, which is providing the highest utilization, keeping the lowest number of unrentable cars in our fleet and providing high-quality service to our customers. That's what we do. We do it today in the rental car space. We're going to continue doing it in the rental car space going forward. But in the future, in this autonomous world, as we kind of utilize the core skill set that we've built across 75 years, over 75 years of history, we think that we can expand our footprint and our sphere of influence in this mobility ecosystem. So it starts here with kind of autonomous ride-hail. Like I said in my prepared remarks, a lot of the core competencies that we do on a day-in, day-out basis are very transferable to autonomous ride-hail. And as we said in our press release, Dallas, like you said, is the start. We expect to expand this to other cities, and we see a good long runway in that. Over time, like I said, autonomous vehicles are touching, like I said, the medium part of the mobility ecosystem, which is vehicle miles driven. That opens up a lot of other areas that we can play in as well in terms of expanding our horizons. So right now, like I said, the core of the business is the rental car business. But as the years progress, I think we can expand our footprint.

Our next question comes from the line of Chris Woronka with Deutsche Bank.

Brian, welcome to the team, along with Daniel. This is a follow-up on Adam's question, but perhaps phrased differently. Considering your partnership with Waymo, I heard your thoughts on how it might evolve in the long term. Looking at the shorter term, say the next 3 to 5 years, how should we view your capacity to engage in more partnerships similar to the one with Waymo, as well as explore other opportunities? How does your current infrastructure accommodate this? What additional investments are you prepared to make, and how do you evaluate the return on investment for these initiatives? I have a follow-up question as well.

Yes, sure. Chris, I think we have a lot of bandwidth to take on future partnerships, like I said, with Waymo. This is the first of what I hope is many cities. And in order to do that, we are going to have to put our balance sheet to work. That's something that we're not shy about doing. What I do want to be careful of is that we are not going to take our eye off the core part of our business, which is rental car. We want to make sure that partnerships that we do are thoughtful, that they're deeply integrated and that they're long-term. We're not here to just put out a bunch of press releases and partner with a bunch of people. We are in discussions with many people, but who we choose to partner with, we're going to make sure that we do it in a thoughtful way, in a true partnership, where a 1 plus 1 equals 3. So that's kind of how we're looking at it.

Okay. Regarding the Avis First division, which I believe is quite unique at this point, have your thoughts on the fleet changed? I understand that one of its key aspects is having the newest cars available. For your fleet strategy next year, does this lead you to consider more larger and premium vehicles, or is it simply a matter of reallocating within your existing plans?

Chris. So with regards to Avis First and the fleet, one thing that I do want to point out that the difference between Avis First and I think other offerings that have been out there is that it's not just about the car. Yes, the car is an important aspect of it, and we're going to make sure that the right car, a premium car is there for our Avis First customers. But when you think about first-class for an airline, it's not all just about the seat. It's about the whole experience, and I think that's what we're building from soup to nuts, just reimagining the whole customer journey through that lens. But to answer your question, yes, obviously, the car is a big part of that. And how we're in-fleeting cars or how we're participating in our fleet negotiations this year takes that into mind. We are going to consider more premium vehicles, but we already have a lot of these premium vehicles in our fleet. This isn't just about luxury where it has to be some German-engineered Porsche or something like that. For us, I think premium in Avis First can be a Jeep Cherokee. But we want to make sure that it's the newest model year that it is very, very low mileage. Right now, it's kind of been a random distribution at times of who gets that brand-new car. Right now, we're just trying to segment our business a little better to offer that product to the customers that are willing to pay a little bit more for that premium service.

Our next question comes from the line of Dan Levy with Barclays.

Brian, congratulations on your new position. Dan, welcome aboard. I'd like to revisit the more focused aspects of the results, particularly the guidance. Could the team discuss the projected trends for the second half? Specifically, could you elaborate on the dynamics between DPU and RPD? It appears that DPU is considerably stronger, but there seems to be some counterbalancing factor in the second-half guidance, whether it relates to RPD or costs. Could you clarify those factors in the projected guidance of $900 million to $1 billion for the second half?

Sure. Dan, let's start, I'll answer your myopic question with a high level. Let's start with the macro-overview here. So kind of what we're seeing in terms of RPD isn't all that different from what other participants in the travel industry are seeing. I think demand is firming up post the passage of the big, beautiful bill. For us, leisure is stronger than commercial right now, and pricing is more challenged than volume. And this is true in PRASM for airlines. It's true for RevPAR for hotels and RPD for us. But we do think that there are signs that things are firming up for the summer, and then think summer is off to a good start. I think one of the reasons for that and kind of why you're seeing some of these issues on the DPU side, where I think you may have expected slightly stronger DPU maybe this quarter and in guidance is that we're dealing and having to navigate with two big issues here. That's tariffs and recalls. So let's just start with tariffs. The uncertainty around auto tariffs, of course, that's lifted the used car market. That's been a clear benefit. And when you look at the asset base, the vehicle asset base that we have on our balance sheet, like it is meaningful. But I want to note, we're not changing how we account for gross depreciation at this time. We just took a write-down at the beginning of the year. So Dan, you better believe we're going to stay conservative on this front. So if you keep that gross depreciation constant, the only way to harvest used car gains is by selling the older model year vehicles. And to do that, you actually have to in-fleet the new model year vehicles, and that's where we're getting hung up. The tariff uncertainty is causing OEMs to delay production and delivery. So our in-fleet schedule is getting pushed. So we're having to hold on to the older model year cars for longer. Certain cars that were programmed that we were going to return that are a little higher priced that we're going to turn back as we are getting in new model year cars, we've been having to hold on to. So we're dealing with a fleet rotation dynamic right now. So that's a negative headwind there. And then again, on top of that, with DPU, we have an issue with recalls. And listen, I don't want to make excuses here for recalls on a normal basis because recalls are a part of doing business in the rental car industry. We deal with it every single day. But this one is different. It's massive. It affects 4% of our Americas fleet. And you know that if cars are on recall, we're not allowed to sell them. So there we're holding these on our book. And by the way, it's not just any vehicles. It's some of our highest RPD segments. These are transit vans and minivans, so they're actually more expensive to hold as well. There's also no visibility on when this gets resolved because it's a parts defect, and we've been given no visibility on delivery time for these parts from the OEMs. And lastly, like the cherry on top of this garbage Sunday is that it's hitting us in the heart of summer right now. It's a gut punch. There's no other way to describe it. So to put this all together, listen, the only silver lining with this recall and the tariffs, it's not unique to Avis. The entire industry is affected. And I think we're seeing that right now lead to some pricing recalibration. So yes, I hope that answers your question, Dan.

That's very helpful. For my second question, I'd like to discuss the AV strategy. It seems you're targeting a very large total addressable market. However, it may not be clear to some what the revenue model looks like. Could you provide some insights on the expected revenue model now and in the future? Will it be based on a per-vehicle basis, or will there be additional services involved? Also, considering one of your core competencies is acquiring and disposing of vehicles, will this eventually play a role in your revenue model? I understand this may be a long-term consideration, but I'd appreciate your perspective on the AV revenue model.

Yes, sure. Dan, I appreciate the question, and it is exactly what I'd be asking if I were in your shoes. So I'd love to get into more detail, but given how tightly integrated this partnership is, Waymo and Avis have agreed to maintain pretty tight messaging at this stage. So I'm going to give you everything that I can share right now. So some of this was already in the press release, initial mapping, the testing. It's already underway. We're going to start offering rides to the public next year. It is a multiyear agreement. We fully expect to expand into additional cities in the near future. And to your question, I think like other markets where Waymo operates, the vehicles that we're going to be starting off with in Dallas are the fully electric Jaguar I-PACE. It's powered by their fifth-generation Waymo driver. At this point, those vehicles are on Waymo's balance sheet. As the landscape evolves, as different vehicles are put into place, I don't think it's unreasonable to say that how that changes and who holds what on the balance sheet can change as well. So we're not disclosing the financial details of this arrangement, but I do want to say this. It's not like we woke up last month and said, 'Hey, we need to get into this AV game.' Like we’ve been in serious discussions with Waymo and building towards this since January of '24. So we took the time to structure this thoughtfully. We have full alignment on incentives. So the big variables that affect profitability for Waymo, that's the exact same variables that affect profitability for us. So we're going to win together in Dallas, but the framework is built to scale to future cities.

Our next question comes from the line of Chris Stathoulopoulos with Susquehanna International Group.

Brian, Daniel, it's great to have you both here. Daniel, I appreciate the vision you've shared, it's quite refreshing. There’s a lot to consider in just a few sentences, so could you summarize how we should view Avis moving forward? Is it being positioned more as a technology-enabled premium rental service with more targeted pricing around different segments, including bundling and unbundling? Also, how should we interpret the recent initiatives within the broader context of normalized earnings for EBITDA, which has been a major focus for investors since the pandemic? Do you see this evolving into a mid-single to high single-digit growth story? I'd like to connect these two aspects, and what should be the key message as we advance with this new strategy?

Yes, Chris. We see Avis' role in the mobility ecosystem as empowering mega fleet management. We've been doing this for car rental for 75 years, and we believe this is a key strength that others in the mobility space can leverage. When considering the value chain of autonomous mobility, it's clear there are software and hardware components, and many are focusing on their core competencies. However, the fleet management aspect hasn't received much attention. This isn't just about the Internet anymore; it's about the Internet of Things. It involves managing heavy assets, not just maintaining an algorithm with a few software engineers. Cleaning is one part of it, but just one among many. Having a nationwide and global real estate footprint, the ability to energize and charge these facilities, and a skilled employee base to service and maintain the vehicles are all critical components of mega fleet management, which is the value we add to the chain. Regarding your question about our steady-state run rate earnings, we haven't made any changes there. Post-pandemic, we set a minimum goal of $1 billion for a normalized year, and that's our aim going forward. While this year hasn't been particularly normal due to tariffs and recalls, we believe that maintaining a $1 billion EBITDA business is fundamental. Our focus is to generate substantial free cash flow, which positions us to participate in other areas of the ecosystem.

Okay. My second question is about the secondary or used car market. If it continues to rise due to the tariffs, how are you approaching purchases in 2026? Will the gains this year around DPU create challenges next year? Is the plan currently to hold onto older cars and be more strategic about purchases? I’d like to understand the strategies in place for managing the fleet and DPU considering the likely volatility in the upcoming 6 to 12 months in the secondary market.

Yes, Chris, we did this whole situation of holding on to the fleet for longer. It didn't work out for us. We're not going to do that. Again, I think from a customer service aspect, from a vehicle maintenance aspect, like that's not our game plan here, tariffs are no tariffs. So right now, fleet discussions are ongoing with all of our OEM partners right now. We are in the thick of it. The recent tariff uncertainty has slowed the pace. But now that we have a little more clarity around tariffs, like with Japan and the EU, we do expect things to pick up. And we've actually already signed a few deals already. But to your point, we're being cautious like that write-down we took early this year, it is still fresh in my mind, and it was driven largely by purchases made for the model year '23 and model year '24 cycles when we purchased at elevated levels. So despite tariffs coming and that having an impact on used car prices, we can't repeat that same mistake with the model year '26 buy. We have to remain disciplined. So the approach we've taken with the OEMs, like we're being straightforward and like I said, disciplined. What we're trying to do is provide them full transparency to say, this is what the market is right now. This is how we're modeling the residual values on a win-by-win basis. We have a willingness to be flexible. And we need this clear understanding both between us as car rental and the OEMs that these are long-term relationships. The deals have to work for both sides. So I think this position has been appreciated. And while we're not rushing into volume commitments, we're right now, I think we're in a good place heading into this buying cycle.

Our next question comes from the line of Lizzie Dove with Goldman Sachs.

I appreciate all the insights and welcome Brian and Daniel. I wanted to revisit the RPD aspect. I'm interested in what you've been observing there in recent weeks, and I apologize for being so focused. Additionally, what factors have contributed to your guidance for the second half of the year regarding potential RPD improvements, considering some of the elements you mentioned?

Lizzie, I’m a bit surprised it took five questions to discuss the week-by-week RPD. It's a fair question because the larger recalls have occurred recently, and we are starting to see some positive trends in RPD as a result. However, it’s important to note that we aren’t declaring this a structural change at this moment. RPD has faced significant challenges throughout this year. I believe the industry's tightening supply is contributing to an improvement in RPD. From our viewpoint, I've mentioned before that Avis does not set rental car prices but responds to consumer demand and industry supply. As I noted, the industry supply is starting to shrink a bit. Surprisingly, despite uncertainty surrounding the economy, demand remains strong. People are still traveling. We’re adapting our strategy around RPD by aligning our fleet with demand to ensure we achieve a reasonable return on investment for the cars we deploy. We hope this will have a positive effect on RPD.

Got it. That's helpful. And just one follow-up. I'm curious what you're seeing out there in the competitive environment? It felt like enterprise was pretty competitive last year, then maybe set on the gas this year. Anything that you're seeing if things kind of become a little bit more benign? Or how would you kind of characterize that side of things?

I mean, Lizzie, it is a competitive environment. It always has been, and this year is no different. But like I said earlier on the call, what we're trying to do here is to not compete on a commodity product. I feel like that's what's been happening for decades over here. Avis First is a little bit of our answer to that to say, 'Hey, how do we differentiate the offering? How do we kind of grow as an industry?' And from our perspective, we think that this is the way out of that to say we don't want to play a zero-sum game where it's competitive. So we're trying to take share here and there, like Avis First isn't about taking share, like we want to be growing the size of the revenue and profit pools of the entire car rental industry. So this is our stake in the ground saying that we're going to do that. So yes, it's competitive. It's competitive. It's always going to be competitive. I'm just saying what we're trying to do is compete at a higher level and give a little more value back to the customer.

Our next question comes from the line of Stephanie Moore with Jefferies.

Brian, you did delineate in your prepared remarks about the difference between cyclical and structural growth, and you clearly highlighted several initiatives that are starting or in place in terms of driving kind of growth going forward. So as you think about these investments as well as I'm sure others that are in the pipeline here, how do you measure the success of these investments? Are you looking for growth to outpace the cyclical aspects or the industry aspects? Are we looking at KPIs like margin, cash flow? How are you measuring the success? And in the same token, as we look at the business going forward, how should we be measuring the success from a metric standpoint?

It's a great question. We take a disciplined approach to evaluating new investments. First, they need to contribute to our business growth. We aim to pursue opportunities with higher structural growth, which is why we've initiated projects with Avis First and Waymo. We balance this with a focus on free cash flow, as our company generates significant cash flow, which was one of the main attractions of this business. Typically, pursuing high-growth opportunities can require burning a lot of free cash flow. However, we believe we can leverage our strong car rental business, which generates substantial cash flow, to invest in projects that will enhance this and contribute to additional cash flow in the long term. Free cash flow is clearly crucial. Additionally, we consider the customer experience, ensuring it remains a priority in our investments. We recognize that we may not have focused enough on this aspect in previous investments, but that will change going forward. Our goal is to grow as a company, capture more market share, and become more relevant, which we believe will translate into cash flow. For us, it's not about growth at any cost; we are very disciplined about cash flow. Revenue growth must translate into cash flow, and when we invest that cash flow, it should benefit the customer experience. We need to differentiate our business and deliver products that customers are willing to pay more for, thus earning pricing power. We evaluate investments based on these three dimensions.

Could you provide more details about the pilots of the service rollout for Avis First? Specifically, what has been the customer conversion rate for those upgrading to Avis First? Additionally, how does this impact the labor costs needed to deliver this concierge-like service to meet demand?

Yes. Sure. As I said earlier, this is a category that we expect others to enter. So I want to be pretty thoughtful about what we disclosed. And by the way, this launched 2 weeks ago at this point. So I think it's early to say. It's in a dozen markets already. We're very excited about the uptake, but I think it's too early to call a trend here in terms of the uptake. But I'll tell you kind of what our thought process here is around this. I see no reason why Avis First, as a percentage of our total rental days, can't be equal to or even greater than the share of premium seats in the airline industry. We've all seen this happen over the course of the last 10 years, like how premiumization has happened in the airline cabin. And that's gone up just to incredibly high numbers for certain airlines. I think that's what we're seeing as a potential from an uptake perspective. And in terms of pricing, like you said, there are additional costs associated with this. There's a concierge, there's the delivery. So we need to price appropriately for this. So we are pricing Avis First to be margin accretive from day one. But the incremental cost is low enough that it's accessible to almost every traveler. I think I said a couple of Starbucks lattes in the call, but like an upgrade can be as little as $10 a day for Avis First. Now our average length of rental is between 4 and 5 days. So we're just talking $40 to $50 total for a transaction. And that doesn't sound like a lot when you consider the convenience and experience of Avis First. I think a lot of people will be willing to do that. But $10 more on a $70 average RPD, that's a 14% lift. And like I said, that's just the minimum. Depending on the market, demand, or the time of the year, we think that this premium is going to be meaningfully higher. So for us, with Avis First, the constraint isn't price or demand. The constraint actually has to be self-imposed to make sure that we have the right vehicles, we have the right field resources, we have the right concierge capacity to deliver the experience the way that it's meant to be delivered. And like I said, 2 weeks ago, 1 week ago, was the hard launch. So we're encouraged by what we're seeing. I'm confident that we have product market fit here. But like I said, the challenge is to stay disciplined. The last thing that I want to do is snatch defeat from the jaws of victory by scaling too fast and compromising the experience. We can't afford to do that. So we're going to take a thoughtful approach to growing this out. Like I said, we think that this is going to be in over 50 markets by the end of the year. We think that the long-term potential of this is going to be a percentage of rental days that's equivalent to where premium is for the airlines, and we talked a little bit about the potential RPD uplift. So long-winded answer: The too long, don't read line is we think this is going to grow the pie, and we're pricing it to be margin accretive.

Our final question this morning comes from the line of John Healy with Northcoast Research.

Brian, I just wanted to ask just a little bit more about the Waymo plans. Obviously, it sounds like this was a competitive win. I think they're in 5 or 6 markets right now. How do you see the market for this solution kind of evolving? Do you see yourself going with them in future markets likely? Is this going to be an exclusive to the Dallas market? Like how do you think the business model looks as a service provider to these autonomous companies? And my sense is that the revenue model here would be probably something that evolves over time. So any way you could kind of talk to us about your use of partnership rather than just a service provider, how you see that as well?

Yes. John, to address the first part of your question, we are launching in Dallas with Waymo, and we plan to expand to additional cities in the future. Waymo is currently in talks with other providers and has previously announced partnerships in different cities. We are also engaging with other parties. However, starting this business line focused on mega fleet management for autonomous vehicles with Waymo was crucial for us. Waymo has been leading the way in autonomous ride-hailing for 20 years, and their achievements are truly inspiring. They have earned the trust of real passengers at scale, backed by a solid safety record, which is transformational. We recognize the significance of Avis being involved in this sector. Looking ahead, we hope to collaborate with Waymo in many more cities. It took considerable time to finalize the commercial terms that will allow us to scale to future locations, which we mentioned earlier regarding asset ownership and its impact on long-term profit sharing. We're open to discussions on this and willing to deploy our balance sheet, as we invest billions in fleet management each year. We are receptive to various models and are in discussions with multiple parties, but starting with Waymo was essential for us. Since this is a new venture, we needed to partner with a company that shares our philosophy and approaches this thoughtfully. We are not looking to be mere service providers like we were in 2017, where we were compensated per car cleaned. Instead, we are interested in genuine partnerships where we can share risks and co-create value. This is the type of collaboration we have with Waymo, and it is our goal to replicate this in future cities. I have a question regarding the numbers. The $900 billion EBITDA projection for the year and the fleet cost figure you provided are useful. However, I was curious if there was any depreciation gain this quarter. Also, when considering the $900 million to $1 billion range, do you expect gains to reach the $310 million to $320 million target for the year? Yes, there were gains. I believe our quarterly results will be available soon. The gains are smaller than I anticipated for the quarter. Daniel, is that correct? It was less than the previous quarter, and we are projecting a net depreciation figure. This does include gains. However, the challenge we are facing is that we are not cycling the fleet quickly enough to fully capitalize on those gains. The delivery of the model year '25 vehicles is being delayed, and we are not yet certain about the model year '26. Therefore, while there will be gains, they will not be as significant as they were in the first quarter.

And what I would just add to that, John, is it's an incredibly small percentage of the proceeds of cars that we're selling. So if you think of it from that standpoint, like we're depreciating close to a 0 gain or loss and the gains are minimal.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session, and thus concludes our call today. We thank you for your interest and participation. You may now disconnect your lines.