Synopsis of Avis Budget's Q2 Earnings Conference Call

Avis Budget Group reported second quarter revenues of $1.5 billion. Year-to-date pre-tax income was $44 million and second quarter pre-tax income was $38 million.

General Trends
From Avis Budget's acquisition of Budget to Enterprise’s acquisition of Vanguard, it is clear the larger players are getting larger. Competition is getting more intense. In a period where Avis Budget's primary cost element, fleet, has gone up nominally some 40 percent, CAR is struggling to get price increases that simply cover its fleet, let alone the costs of operation.

The other mandate that this new world order poses is optimizing the pricing and fleet management, growing revenue and profitability. Even the slightest inefficiency is a competitive disadvantage. Pricing and fleet management has to become more dynamic and more tailored to local market and channel dynamics. It is no longer sufficient to manage it on a regional but on a national basis or manage it across the different channels without understanding the unique cost implications.

Avis Budget launched two important initiatives in 2Q07: “performance excellence” and “optimization.” In case of performance excellence initiative, Avis Budget has taken some of the best and brightest from each discipline in Avis Budget and assigned them the task of examining every process throughout operations.

First, to be sure Avis Budget is doing it as efficiently as it can possibly be done. Second, to ensure that every location does it exactly the same way. With this initiative, Avis Budget is targeting a $100-150m of cost reduction to be realized over the next three years.

The optimization initiative is certainly about more sophisticated and integrated fleet and pricing systems. It is also about creating specifically tailored decision rules to act more quickly and more locally than in the past. In addition, there is a wealth of knowledge about CRM and booking curve management from other industries that will drive an additional contribution from this initiative.

These two projects, along with the primary strategic initiatives will be the foundation for earnings and margin growth in the future and should helps to insulate earnings no matter what pricing does.

Pricing Environment
While contracted commercial pricing was up right around 2 percent in 2Q07, other commercial business and insurance replacement growth brought overall commercial pricing to flat YoverY. Leisure pricing was soft in 2Q07, so Avis Budget's blended time and mileage for rental day was down 3 percent vs. 2Q06, although Avis Budget still is up 7 percent vs. 2005 rentals.

2Q07 displayed some interesting dynamics, which is believed to reflect to a degree the industry shift towards a smaller percentage of short-term program cars. In particular, this change in Avis Budget's and its competitor's suite composition altered the decision CAR and presumably its competition would have previously made to de-fleet following Spring Break and Easter.

With fewer short-term program cars, cars that would have otherwise been turned back to the manufacturers now need to be retained to meet the summer peak. The consequence: the industry was probably somewhat over-fleeted from mid April to mid June. When the industry is over-fleeted, prices often declines as it did in 2Q07 as Avis Budget tried to drive volume and utilization given the extra cars. The alternative would have been to de-fleet and risk of having too few cars to capture the premium price demand during the summer months.

It would appeared that some of this occurred anyway as industry fleet level seem to be relatively tight during the summer peak. Experience in July and forward resbill through Aug. suggest that this in fact was the right decision. YoverY "3Q" pricing is currently tracking well ahead of what was experienced in "2Q".

Leisure Pricing
As discussed in the last few calls, commercial pricing environment remains mixed as the price increases Avis Budget achieved on commercial renewals in 2Q07 were typically between 2-4 percent. Corporate account retention rate continued to be in the high 90's. The biggest disappointment this year has been leisure pricing. Avis Budget has seeing intense competition for transactions and for affiliate relationships generate reservation volumes.

2Q07 results and current trends for leisure pricing have caused CAR to reduce its outlook for full-year 2007 pricing growth. Because of cost reduction initiatives, Avis Budget is still forecasting growth and earnings in 2007 and a strong domestic car rental result in 3Q07.

Last week, Avis Budget initiated the leisure price increase of $5 per day and $20 per week, beginning in mid Sept.

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