DBRS: Avis Budget’s 4Q Adjusted Results Increase on Margin Expansion and Volume Growth

Summary:
•Record Q4 revenues of $1.85 billion on higher volumes, flat pricing and Zipcar acquisition
•Margins expand on growth in more profitable channels and solid cost control
•DBRS’s Issuer Rating for Avis Budget Group, Inc. is BB (low), Stable trend.

DBRS, Inc. (DBRS) considers Avis Budget Group, Inc.’s (Avis Budget or the Company) 4Q13 earnings as solid, underpinned by good volume growth across all regions and key channels and improved margins. For the quarter, on a U.S. GAAP basis, Avis Budget generated a loss of $28 million primarily due to restructuring costs in Europe and debt extinguishment costs. However, on an underlying basis, the Company reported adjusted EBITDA, excluding restructuring costs, of $114 million, a 46% year-on-year (YoY) improvement and a record for the quarter.

Volumes were higher across all geographic regions and brands evidencing good progress on the Company’s strategies to expand in higher growth markets and the benefits of recent acquisitions. Excluding the Payless acquisition, North American volumes were up 3% YoY. Commercial demand was strong at the Avis brand while Budget’s on-airport leisure volume grew 10% YoY driven by growth in international inbound, small business, and the Company’s exclusive agreement with AARP. Despite a still subdued economic environment in Europe, Avis Budget reported a 6% increase in volume, supported by the expanding presence of the Budget brand in the European market. Indeed, Budget’s volume in 4Q13 increased 70% YoY with particular strength in Italy and Germany.

Reversing three consecutive quarters of margin compression due to the normalization of fleet costs, adjusted EBITDA margins in 4Q13 improved 160 basis points to 6.2%. Higher volumes in more profitable segments, good cost control and synergies captured in the Company’s European operations drove the margin expansion. Margins in North America improved 190 basis points (bps) YoY reflecting pricing gains in the leisure market, volume growth in international inbound and small business, and improved operating efficiency. The International segment experienced a 180 bps expansion in margins on higher revenues, cost reductions, and higher fleet utilization. In 2014, DBRS will look for sustained improvement in margins as evidence that the Company’s efforts to improve efficiency, expand in volumes from higher yielding channels and actions to lower funding costs are being captured. Sustained improvement in margins would be viewed favorably by DBRS and an important consideration in the ratings.

Cost control continues to be a key focus of Avis Budget through its Performance Excellence program. Additionally, the Company continues to capture cost synergies from the integration of its operations in Europe and the acquisition of Zipcar. As a result, Avis Budget was able to improve its operating efficiency despite the increase in volumes. For the quarter, the Company’s DBRS-calculated operating efficiency stood at 67.2%, a 180 bps improvement from 4Q12.

Liquidity remains sound underpinned by $693 million of cash, $1.0 billion of availability on its corporate revolver and $3.6 billion of capacity under various vehicle funding programs. DBRS notes that Avis Budget has no corporate debt maturities until 2018, excluding $66 million of convertible notes that the Company anticipates will convert to equity in October 2014.

DBRS rates Avis Budget Group, Inc.’s Issuer Rating at BB (low) with a Stable trend.

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

The principal applicable methodology is the Rating Finance Companies Operating in the United States. All DBRS methodologies and criteria can be found on 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: 16 December 2009
Most Recent Rating Update: 28 June 2013

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