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    AVIS BUDGET GROUP (CAR)

    CAR Q2 2024: Disposed 70% of Fleet Early to Boost Margins

    Reported on Aug 6, 2024 (After Market Close)
    Pre-Earnings Price$86.27Last close (Aug 6, 2024)
    Post-Earnings Price$88.08Open (Aug 7, 2024)
    Price Change
    $1.81(+2.10%)

    What went well

    • Fleet Optimization & Pricing Strategy: Executives emphasized effective fleet rightsizing—disposing of approximately 70% of annual fleet sales early—which, coupled with a focus on prioritizing price over volume, is expected to drive enhanced utilization and margin improvement.
    • Robust Liquidity & Financial Flexibility: The leadership highlighted strong liquidity with over $800 million available and additional borrowing capacity, providing a cushion of more than $1 billion and enabling flexibility in fleet investments and margin management.
    • Resilient Demand Environment: Despite potential recessionary concerns, the executives noted strong rental demand and robust forward bookings, particularly during the summer peak, which supports pricing stability and continued record demand.

    What went wrong

    • Exposure to Used Car Market Volatility: Management’s Q&A revealed concerns that, in a recessionary scenario, a significant decline in used vehicle values could worsen depreciation and holding costs, thereby pressuring unit economics and DPU performance.
    • Macro-Economic Uncertainty Impacting Demand: Executives noted uncertainty regarding forward bookings and potential impacts of a recession, suggesting that weaker travel demand and an unpredictable economic environment could limit revenue growth and strain profitability.
    • Risk from Aggressive Fleet Rightsizing: The aggressive disposition of roughly 70% of the anticipated fleet in the first half of the year raises the risk that a rapid rebound in demand might find the fleet inadequately sized, potentially leading to missed revenue opportunities.

    Q&A Summary

    1. Liquidity
      Q: How is liquidity and debt cushion maintained?
      A: Management noted they have over $800 million in liquidity with borrowing capacity of about $2.9 billion, and they can issue more than $1 billion of debt, providing ample protection and flexibility.

    2. Liquidity Flexibility
      Q: How does the cushion benefit capital usage?
      A: They emphasized the cushion not only offers protection but also gives them the leeway to optimize fleet investments and maintain flexible financing strategies.

    3. Fleet Rightsizing
      Q: Is the fleet rightsizing complete?
      A: Management explained they have disposed about 70% of their anticipated fleet sales so far, with ongoing adjustments to ensure the fleet remains optimized relative to demand.

    4. Utilization Outlook
      Q: What is the ideal fleet utilization rate?
      A: They believe utilization is stable and see opportunities to improve further through advanced analytics and machine learning to match supply with demand more efficiently.

    5. Losses & DPU
      Q: How are losses and depreciation being managed?
      A: Despite nominal per-unit losses due to higher depreciation costs, their proactive fleet dispositions have helped mitigate impact, stabilizing net debt targets near $350.

    6. Capital Allocation
      Q: Will the company resume share buybacks?
      A: They maintain that share buybacks will be timed with cash generation and are part of a disciplined capital allocation strategy, as they believe the stock is currently undervalued.

    7. Forward Bookings
      Q: What are the trends in forward bookings?
      A: The management reported robust forward bookings with a strong summer season, indicating healthy demand despite potential economic uncertainty.

    8. Used Value Protection
      Q: Can DPU be protected if used values decline?
      A: They noted that recessionary pressures often lead to lower interest rates, which benefit used vehicle values, and with over $1 billion cushion, they are well positioned to manage any short-term shocks.

    9. Industry Dynamics
      Q: Are competitors shifting fleet strategies?
      A: Management did not observe a seismic shift in the industry; their fleet downsizing has been a deliberate measure, aligning with their overall demand-driven strategy.

    10. New Fleet Buys
      Q: What is the status of model ’25 purchases?
      A: They are about halfway through the model '25 buy, remaining fluid to take advantage of favorable pricing while ensuring the fleet mix meets customer preferences.

    11. EBITDA Guidance
      Q: What is the clarified Q3 EBITDA outlook?
      A: Management confirmed a Q3 adjusted EBITDA guidance in the range of $500 to $600 million, reflecting continued positive trends from the summer peak.

    Analyst Coverage

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