Avis Budget Group Earnings Call Insights: Leverage in Capital Allocation, Corporate Pricing
Leverage in Capital Allocation
John Healy – Northcoast Research: Wanted to ask a big picture question to you Ron and David about leverage in capital allocation going forward. The leverage ratio of the company has come down pretty meaningfully and I also imagine by your comments you are feeling pretty good about the EBITDA trajectory of the company. Maybe you can walk us through where you’re at in terms of comfort with the balance sheet and confidence in the cash flow generation of the company and how you might be feeling about deployment of cash flow over the next two years. I imagine that the couple of slides tomorrow, but I was hoping to get a sneak peek?
A Closer Look: Avis Budget Earnings Cheat Sheet>>
Ronald L. Nelson – Chairman and CEO: Let me see if I can deal with this serially. I think we’ve said in the past that we are comfortable with leverage ratios in the three to four times range and obviously where we are at now we are on the lower side of that. I think our priority is actually to get it down a little lower over the course of this year. The fair amount of analysis is to what it would take to improve our debt rating and we are not entirely sure that going much below three actually benefits us too much. So, I think that we’re going to be happy to stay right around put at the 28 to 32 range. We continue to think that pre-tax income is a good surrogate for free cash flow. We feel good about our ability to generate free cash flow. Even in our toughest year in 2008 and 2009, we generated free cash flow. So the businesses do have fairly consistent cash flow generation. I think in terms of priority uses of free cash flow, probably this year, you start with reducing debt, and right after that, as tuck-in acquisitions as we would call it, either licensee acquisitions. Then I think you get down to share repurchases and dividends, but I think that neither of those are likely for 2012.
Chris Agnew – MKM Partners: I wanted to ask about corporate pricing and just what is the headwind from contracted corporate pricing coming into the year? Is it similar to the 2% headwind you experienced in the first quarter? Then, can you describe current corporate contract negotiations?
Ronald L. Nelson – Chairman and CEO: Chris, I think there are really two reasons not any different than they have been over the last couple of years. I think the overarching impact on corporate pricing comes from just the competition in the marketplace. All three of Avis, Avis National and Hertz are competing very fervently for corporate accounts and everyone continues to be very aggressive with our pricing. So, the 2% that we saw last year I think is probably a good number for this year. The other thing that factors into this is that procurement is taking an increasingly larger role and negotiating car rental rates and travel contracts and so that tends to put a downward bias on rates. Look I think that, we can complain about corporate pricing how we want and we try to get higher prices all the time, but really the answer for us is to figure out how we change our cost structure so that we can maintain our margins in the face of a tougher market. We continue to maintain a 99% retention rate, so we’re not losing customers by this. If we do lose a customer it’s because we’ve looked at it pretty carefully and concluded that there is not an opportunity to make any money so we let it go.
Chris Agnew – MKM Partners: Could I ask a quick follow-up on Federal’s cash taxes. When do you expect to I guess start paying or become a full Federal cash taxpayer?
David B. Wyshner – Senior Executive Vice President and CFO: It’s a good question Chris and we’re spending a lot of time looking at that now in light of the fact that our earnings expectations for 2012 are higher than they had been. But at this point I think 2013 is a possibility for us becoming a partial cash tax payer and probably at an (A&T) rate at some point during the year and we’re doing additional work and analysis on that write down, but my best guess would be 2013 as the year that would become a partial cash taxpayer.