DBRS Comments on Dollar Thrifty’s 3Q12 Results, at B (high), UR - Positive

DBRS, Inc. (DBRS) has today commented on the 3Q12 results of Dollar Thrifty Automotive Group, Inc. (DTAG or the Company). DBRS’s Issuer Rating for DTAG is B (high). The ratings remain Under Review with Positive Implications, where they were placed on August 28, 2012. For the quarter, DTAG reported net income of $55.5 million compared to $66.6 million in 3Q11 while corporate adjusted EBITDA of $98.2 million in the quarter was 16% lower than a year ago. The lower results reflect merger-related expenses of $5.7 million compared to no such expenses a year ago and $5.2 million in gains on sale of risk-vehicles as compared to $17.4 million in 3Q11.

Despite a tepid U.S. economy, DTAG’s solid quarterly results were underpinned by expanding rental volumes driven by increasing leisure travel demand as consumer confidence strengthens. Moreover, DBRS views DTAG’s results as demonstrating that the benefits of the Company’s focus on improving operational efficiencies and profitable transaction channels are being captured.

Vehicle rental revenue grew 2% year-on-year (y-o-y) to $442.3 million as rental demand increased, and improved fleet utilization largely offset the softening in price. In the quarter, transaction days increased 7.1%, illustrating that demand continues to recover from the recession while pricing (revenue per day) was lower by 5.1% YoY, reflecting the competitive marketplace. Despite the average rental fleet expanding 6% compared to 3Q11, fleet utilization was 84.7%, up from 83.9% a year ago, illustrating good fleet management. In DBRS’s view, DTAG’s results evidence management’s continued focus on cost containment. Excluding merger-related expenses, direct vehicle, operating expenses and SG&A expenses declined to 57.4% of revenues compared to 58.1% a year ago. Margins remain solid. Corporate adjusted EBTIDA margin stood at 21.3% in 3Q12.

As expected, given the significant fleet refresh cycle completed by DTAG in 1H12, fleet costs were higher YoY. For 3Q12, vehicle depreciation per unit increased 32% to a still historically low $246 per month. The higher per unit fleet cost reflects the aforementioned lower gains on sale of risk vehicles despite the disposal of a comparable number of risk vehicles as in 3Q11. The lower gains on sale are the result of the Company’s ongoing refinement to base depreciation rates designed to lower gains and reduce volatility in fleet costs. Further, the YoY increase reflects a sizeable number 2010 model year vehicles which were in the fleet in 3Q11, and at the end of their useful lives, required minimal depreciation in the year ago period as the residual values were higher than the net book value of the cars.

DBRS views DTAG’s liquidity and funding profile as well-managed. To this end, available liquidity at quarter end totaled $1.1 billion, including cash, restricted cash and capacity available under the revolving credit facility. Demonstrating prudent management, this solid liquidity position has been achieved despite DTAG’s investment in its fleet increasing by $410 million since year-end 2011 owing to the fleet refresh cycle and seasonal investment in the fleet. DBRS notes that the Company expects the investment in fleet to be substantially reduced through the remainder of 2012 resulting in an increase in cash, further supporting its liquidity profile. At September 30, 2012, tangible net worth was $725 million and the Company had no corporate debt outstanding.

The Under Review with Positive Implications reflects the announced agreement by the Company to be acquired by the higher-rated Hertz Corporation (Hertz). DBRS rates Hertz BB, at the issuer level. Under the terms of the definitive agreement, at closing DTAG will be become a wholly-owned subsidiary of Hertz. Additionally, Hertz will assume, or refinance DTAG’s fleet debt. The proposed transaction is also subject to customary closing conditions, DTAG’s shareholder approval, and regulatory approvals.

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: Alan G. Reid
Initial Rating Date: April 22, 2010
Most Recent Rating Update: August 28, 2012

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