DBRS Comments on Dollar Thrifty’s 2Q12 Results, at B (high), Positive

DBRS, Inc. (DBRS) has today commented that the ratings of Dollar Thrifty Automotive Group, Inc. (DTAG or the Company), including its Issuer Rating of B (high) are unaffected following the Company’s announcement of 2Q12 results. The trend on all ratings remains Positive.

In a slowing economic environment, DTAG reported record second quarter profits reflecting the benefits of the Company’s focus on profitable transaction channels, sound fleet management, and management’s focus on cost containment initiatives, all of which were aided by a strong used vehicle market. For 2Q12, DTAG reported net income of $49.4 million, up from $42.5 million in the comparable period a year ago. Revenues were stable year-on-year (YoY) at $395.4 million as higher rental volumes and improved fleet utilization largely offset the softening in price. DBRS sees DTAG’s ability to offset weakness in pricing without increasing fleet incrementally as demonstrating sound fleet management. For 2Q12, fleet utilization was 80.3% compared to 77.4% a year ago. Direct vehicle and operating expenses increased to 61.7% of revenues compared to 60.7% a year ago reflecting less favorable loss experience on its vehicle insurance programs compared to 2Q11. Corporate adjusted EBITDA of $88.3 million the quarter was 9% higher than a year ago, on higher margins. To this end, Corporate-Adjusted EBITDA margin expanded to 22.3% in 2Q12, 180 basis points higher than a year ago, primarily reflecting the higher gains from vehicle sales. DBRS considers DTAG’s 2Q12 results as demonstrating the solid earnings ability of the franchise and the benefits of improving industry fundamentals.

Fleet cost trends remain favorable. For 2Q12, vehicle depreciation per unit stood at $162 per month, 14% lower than a year ago. The lower per unit depreciation costs reflects lower base depreciation rates on the fleet due to the current strength of the used vehicle market and higher gains on sale of risk vehicles. For the quarter, DTAG disposed of 18,700 risk vehicles compared to approximately 8,400 in the year ago quarter as the Company continued the significant fleet refresh begun in 1Q12. As a result, gains on the sale of vehicles totaled $22.5 million in the current quarter compared to $17.8 million.

Total vehicle rental revenue was stable YoY at $378.9 million, as an increase in rental demand was offset by lower pricing reflecting the competitive rate environment. Transaction days increased 4.2%, demonstrating the rebound in leisure travel demand as consumer confidence recovers from recessionary lows. However, pricing, revenue per day, was down 3.8% lower from the comparable period a year ago.

From DBRS’s perspective, DTAG maintains a well-managed liquidity and funding profile supported by good access to the capital markets. Demonstrating the Company’s prudent management of liquidity, in 2Q12, DTAG utilized excess cash to provide collateral enhancement under its fleet financing facilities in lieu of incurring additional interest expense by using letters of credit. DBRS notes that DTAG has the flexibility to replace a portion of the cash collateral with funds borrowed under its revolving credit facility or with letters of credit. Available liquidity at quarter end totaled $869 million, including cash, restricted cash and capacity available under the revolving credit facility. At June 30, 2012, tangible net worth was $663 million and the Company had no corporate debt outstanding.

Notes:
All figures are in U.S. dollars 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 company documents. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: David Laterza
Approver: William Schwartz
Initial Rating Date: April 22, 2010
Most Recent Rating Update: April 5, 2012

For additional information on this rating, please refer to the linking document under Related Research.