DBRS Comments on Avis Budget Group, Inc.’s 3Q13 Results; Unaffected at BB (low), 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 BB (low), are unaffected following the Company’s announcement of 3Q13 financial results. The trend on all ratings is Stable. For the quarter, Avis Budget reported pre-tax income, on a GAAP basis, of $230 million compared to net income of $260 million a year ago. The decline was driven by a $33 million impairment charge on Avis Budget’s investment in its Brazilian licensee following the Company’s acquisition of a 50% ownership position in the licensee. Excluding the non-recurring impairment charge, GAAP pre-tax income was 1% higher YoY.

Avis Budget’s solid results were underpinned by good volume growth across regions, brands and market segments, improved pricing and good cost control. Despite a quarter which saw consumer and business confidence soften, Avis Budget was able to successfully grow volumes across both commercial and leisure channels in North America. Indeed, on-airport volumes were 3% higher with good growth across both the Avis and Budget brands. Meanwhile, in the face of a still challenging economic environment in Europe, Avis Budget reported a 7% increase in European volume, supported by the expanding presence of the Budget brand in the European market.

For the quarter, Avis Budget generated record quarterly revenues of $2.4 billion, a 10% improvement YoY. Revenues were higher in both the North American and International segments reflecting not only the aforementioned increase in volumes but improved pricing as well. Indeed, on a constant currency basis and excluding acquisitions, pricing was up 1% in North America while total revenue per day was up 3% in EMEA. DBRS sees the improvement in pricing as demonstrating the Company’s success in driving volume growth from more profitable channels as well as its ability to hold pricing gains, which attributes to the strength of the franchise.

Avis maintained solid operating efficiency despite the increase in volumes, with selling, administrative expenses and direct operating costs, excluding vehicle costs relatively stable YoY at 59% of total revenues. As expected, North American per-unit fleet costs rose 15% YoY, partially offsetting the favorable revenue generation. Nevertheless, adjusted EBITDA was 2% higher YoY at $383 million, a Company record.

Meanwhile, Avis Budget continues to make progress in repositioning the Truck Rental segment. Revenues were unchanged YoY at $109 million despite a 15% reduction in the fleet and the closure of over 400 locations. Revenues benefited from a 9% increase in pricing reflecting the Company’s focus on shifting the fleet to more profitable markets and discontinuing low margin business.

In the quarter Avis Budget made a bolt-on acquisition and continued to make progress integrating Zipcar. During the quarter, Avis Budget invested $50 million to acquire a 50% ownership stake in its existing Brazilian licensee. Given the medium to long-term growth prospects in the Brazilian market, DBRS views the investment favorably as it better positions Avis Budget to increase its market presence and capture the opportunities afforded by the demographic trends in Brazil. The integration of Zipcar continues with Avis successfully lowering operating and overhead costs in the business while expanding the fleet and the number of cities in which the brand operates. In 3Q13, Zipcar contributed $82 million in revenue and $8 million in adjusted EBITDA.

Avis Budget’s liquidity position remains solid and well-managed with $3.7 billion of available corporate liquidity at September 30, 2013. Corporate debt maturities remain very manageable with less than $100 million due annually over the next three years. Further, with over $950 million of high coupon debt outstanding at quarter end, the Company still has notable refinancing opportunities available in which to enhance earnings over the medium-term. Regarding capital, in 3Q13 Avis repurchased approximately $25.0 million of common stock under the $200 million share repurchase program announced in August.

Notes:
All figures are in U.S. dollars unless otherwise noted.

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]