DBRS: Pricing Gains and Higher Volumes Drive Record Quarterly Revenues at Avis Budget

Summary:
• Recent acquisitions as well as broad pricing gains and expanding volumes across most segments resulted in record Q1 revenues of $1.9 billion.
• Vehicle costs were higher year-on-year (YoY) as expected, but remain well-controlled in DBRS’s view.
• 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) solid 1Q14 financial results as demonstrating the strength of its global franchise and that the benefits of strategic initiatives implemented to enhance revenue generation are being captured. Despite heightened geopolitical uncertainty and abnormally severe winter weather in much of the U.S., Avis Budget reported sound revenue expansion, which was partially offset by further normalization in North American vehicle costs. For the quarter, on a U.S. GAAP basis, Avis Budget generated pre-tax income of $5 million compared to a $17 million pre-tax loss, excluding the cost of early extinguishment of debt, a year ago. As 2014 progresses, DBRS will look for sustained expansion in revenues and margins as evidence that the Company’s efforts to improve efficiency, lower funding costs and capture more volume from higher yielding channels, while shifting the mix of volumes to more profitable products are being realized.

Total revenues grew 10% YoY to $1.9 billion with solid revenue expansion across all segments, except Truck Rental, which was largely stable. Solid pricing gains in a highly competitive market and volume growth in more profitable channels contributed to double digit growth in North American revenues. Importantly, Avis Budget’s actions designed to improve pricing in the commercial segment is beginning to bear fruit with commercial pricing up 2% YoY. Commercial pricing benefited from the Company’s efforts to increase rates on its existing book of corporate business while volumes in the higher yielding small business channel grew. Higher leisure rates resulted in the level of commercial travelers flipping to leisure rates to be the lowest experienced by Avis Budget in five years, supporting commercial pricing.

Leisure pricing improved YoY, reflecting the positive impact of Avis Budget’s newly integrated yield management system, which is active in more than 70 markets in the U.S. Revenues also benefited from a shift in volume mix to higher margin specialty and premium vehicles. Further, higher pricing and volumes in the more profitable channels targeted by Avis Budget, including off-airport, relationships with associations, and international inbound supported revenue expansion.

Within the International segment, revenues improved 7% YoY to $551 million. Stabilization in many European economies, higher ancillary revenue and record utilization supported a 3% improvement in European revenues. In Latin America/Asia-Pacific, continuing expansion of the Company’s Apex deep-value brand in New Zealand and actions taken to counter the soft economic environment in Australia resulted in a 10% increase YoY in revenue. For the quarter, adjusted EBITDA, was flat YoY, at $17 million, as revenue expansion and cost synergies realized from the continuing integration of the European operations were offset by currency exchange movements.

As expected, vehicle costs continue to normalize, with Avis Budget reporting a 7% YoY increase in North American fleet costs. However, Avis Budget expects fleet costs for full year 2014 to be flat to up modestly.

Liquidity continues to be solid, while funding is well-managed with funding costs remaining favorable. During the quarter Avis refinanced high cost legacy debt with significantly lower cost funding, which will support earnings in coming quarters. Also, Avis expanded its share repurchase program by $235 million, which is in addition to the existing $200 million share repurchase authorization announced last August. Through 1Q14, Avis has repurchased $125 million of shares under the prior authorization.

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

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