DBRS Comments on Avis Budget Group’s 2Q11 Results; Rating Unaffected at B (high), Trend Stable

DBRS Inc. (DBRS) has today commented that the ratings of Avis Budget Group, Inc. (Avis Budget or the Company), including its Issuer Rating of B (high), are unaffected following the Company’s announcement of 2Q11 financial results. The trend on all ratings is Stable.

DBRS views Avis Budget’s results as demonstrating solid underlying momentum across the franchise with revenues and adjusted EBITDA improving across all business segments amid good underlying trends in industry fundamentals. For the quarter, Avis Budget reported a pre-tax profit, on a GAAP basis, of $89 million compared to pre-tax profit of $29 million a year ago. Revenue generation continued its recent positive trajectory. To this end, the quarter’s strong results were driven by a 9% year-on-year increase in revenues to $1.4 billion. The growth in revenues reflects higher transaction volumes across all three business segments as rental demand continues to recover from recessionary lows partially offset by a slight decline in pricing. Importantly, 2Q11 was the fourth consecutive quarter of positive year-on-year revenue growth, demonstrating that the benefits of the Company’s investment in the brands are being realized. Furthermore, the Company’s results benefited from lower fleet costs which were helped by the still healthy used vehicle market. Fleet costs per unit were a noteworthy 30% lower year-on-year, benefiting from strong used vehicle residual values and Avis’ continuing shift to utilizing alternative disposition channels. During the quarter, direct operating costs remained contained at 51% of total revenues.

EBITDA, adjusted to only include interest and depreciation expense related to the vehicle fleet and exclude restructuring and transaction related costs, increased 95% year-on-year to $191 million. Adjusted EBITDA margins grew by 600 basis points, driven by the lower fleet costs, reduced funding costs and cost containment actions implemented by management. DBRS sees the noteworthy improvement as reflecting the impact of growth initiatives implemented by management as well as the continuing strengthening in industry fundamentals. Indeed, total car rental days increased 8%, evidencing the strengthening recovery in commercial and leisure travel along with the strength of the Avis and Budget brands. Pricing, or time and mileage revenue per day, declined 2% in the United States, reflecting competitive pricing conditions, as the industry was over-fleeted as Avis, similar to its competitors, held fleet to protect against potential vehicle supply disruptions stemming from events in Japan. Moreover, the slightly lower pricing reflects the faster pace growth in off-airport and leisure rentals, which tend to have longer duration and lower pricing when compared to commercial rentals.

The positive trajectory continued by operating segment. For the quarter, Domestic Car rental revenue increased 8% year-on-year, while International Car rental revenue improved 20%. Importantly, adjusted EBITDA increased an impressive 177% year-on-year in the Domestic Car rental segment to $144 million, illustrating the improving operating environment resulting from an increase in rental demand. For the quarter, Truck Rental generated $103 million of revenue, a 3% increase year-on-year on solid 10% growth in transaction volumes, partially offset by a 5% decline in pricing reflecting a 40% increase in commercial rentals, which tend to have longer duration but lower pricing. DBRS notes that Truck Rental reported adjusted EBITDA of $18 million, a 13% year-on-year increase and the best second quarter since becoming a standalone company. DBRS sees the results of Truck Rental as indicating that the repositioning and streamlining of the segment is driving improved results.

Liquidity and funding continues to be solid and well-managed. At June 30, 2011, corporate liquidity totaled a sound $2.9 billion. Moreover, the Company has no corporate debt maturities until 2014.

Note:
All figures are in USD unless otherwise noted.

The principal applicable methodology is Rating Finance Companies Operating in the United States, which can be found on the DBRS website under Methodologies.

The sources of information used for this rating include publicly available company documents. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Steve Picarillo
Approver: Alan G. Reid
Initial Rating Date: 16 December 2009
Most Recent Rating Update: 23 February 2011