DBRS: Avis Budget 2Q14 Solid Results on Higher Volumes and Pricing Gains

Summary:
• Despite a challenging operating environment due to a record level of manufacturer recalls, Avis Budget reported pre-tax income of $48 million in 2Q14 compared to a pre-tax loss of $38 million a year ago.
• Revenues were higher year-on-year (YoY) by 10%, reflecting an increase in volumes and pricing gains across brands and channels.
• DBRS’s Issuer Rating for Avis Budget Group, Inc. is BB (low), Stable trend.

DBRS, Inc. (DBRS) views Avis Budget Group, Inc.’s (Avis Budget or the Company) 2Q14 financial results as solid with good revenue growth and operating costs well-managed, while fleet costs normalized. The high level of vehicle recalls created an operational headwind for the Company resulting in lower utilization, missed opportunities to dispose of fleet during the seasonally strong spring used vehicle market, and higher employee maintenance costs reflecting overtime by staff to address the recall issues and return the vehicles to the active fleet. Despite this operational challenge Avis Budget reported sound results, with adjusted EBITDA 19% higher YoY to $213 million. DBRS sees the financial results as demonstrating the benefits of the Company’s prior acquisitions, as well as the continuing progress on executing on its strategic initiatives to grow volumes from more profitable channels while realizing early benefits of technology investments.

Company-wide rental volumes were up 6% YoY due to accelerating growth in North American and modest growth internationally. North American volumes improved 8% YoY with 3% due to incremental volumes from the Payless acquisition, and 5% of organic growth in Avis and Budget. Growth in Avis and Budget were primarily driven by the Company’s focus on more profitable channels as well as by the Company’s successful efforts to shift volumes from opaque websites to proprietary websites. Strengthening consumer confidence as well as business sentiment also underpinned the expanding volumes in North America. Overall, International segment volumes were up 2% YoY. In Europe, volume growth was mixed reflecting the uneven economic recovery within the region. Weak economic growth in Australia, the Company’s largest market in Asia Pacific, resulted in subdued volume growth in the region. However, DBRS notes that the Company’s Apex brand continues to report significant volume growth as the deep-value discount brand expands into markets outside of New Zealand.

Total revenues were 10% higher YoY at $2.2 billion with net revenues improved across both North American and International Car Rental segments, while Truck revenues were modestly lower primarily due to a 12% reduction in the fleet. Importantly, North American pricing was up 4% YoY, the sixth consecutive quarter of price increases demonstrating that the Company’s efforts to drive pricing higher is sticking. Also of importance, DBRS notes that the improvement in North American pricing was broad based across both brands, on and off-airport markets and in both commercial and leisure travel. DBRS views the trends in pricing as demonstrating the strength of the Avis Budget franchise and evidence of the early benefits of the Company’s new yield management system. As a result, DBRS-calculated revenue per unit per month improved to $1,353, a 2.5% improvement from the comparable period a year ago.

As expected, fleet costs continue to normalize as used vehicle residual values moderate. On a per month per unit basis, North American fleet costs were slightly higher YoY at $306. Avis Budget continues to execute on strategies designed to mitigate the impact of lower residual values including expanding the utilization of alternative disposition channels and cascading fleet to Payless from the Avis and Budget fleets. Finally, over the past year, Avis Budget has implemented a new fleet optimization system, which affords management the ability to take greater advantage of seasonal patterns in the used vehicle market as well as adjust the fleet mix on a local market level to meet shifts in demand patterns.

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.