DBRS: Avis Budget’s 4Q Results Solid; Strong Performance in North America Drives Record Revenue

Summary:
• Strong performance in North America with higher volumes and improved pricing drove record Q4 revenues of $1.9 billion.
• Adjusted EBITDA and margins higher year-on-year (YoY) across all segments.
• DBRS’s Issuer Rating for Avis Budget Group, Inc. is BB (low), Positive trend.

DBRS, Inc. (DBRS) views Avis Budget Group, Inc.’s (Avis Budget or the Company) 4Q14 earnings as solid, demonstrating the benefits of the Company’s sound pricing discipline, actions to drive volumes to higher margin channels, and expanding international footprint. For the quarter, on a U.S. GAAP basis, Avis Budget generated net income of $23 million compared to a net loss of $28 million a year ago. Improved bottom line results reflect good revenue growth, reduced restructuring expenses, and lower operating costs as the Company continues to advance efficiency initiatives in Europe. Earnings were also supported by the Company’s prudent refinancing activities, which resulted in lower funding costs. On an underlying basis, the Company reported adjusted EBITDA, excluding restructuring costs, of $129 million, a 13% YoY improvement and a record for the quarter.

In a competitive market, the Company’s North American segment reported strong performance with adjusted EBITDA and margins expanding YoY for the fifth consecutive quarter. Margins in North America improved 10 basis points (bps) YoY reflecting pricing gains and volume growth in more profitable channels, partially offset by normalizing fleet costs. Volumes were higher across both commercial and leisure markets underpinned by strengthening U.S. economic activity and improving consumer confidence. Excluding the Payless acquisition, North American volumes were up 6% YoY. Importantly, volumes expanded by double digits YoY in higher margin channels including local market, specialty and premium vehicles, and in-bound international, while small business volumes were up a very solid 7%. For the fourth consecutive quarter, Avis Budget achieved pricing gains with the Company seeing pricing improvement in both the on- and off-airport markets and across all brands. DBRS considers this performance as evidence of the strength of the Company’s franchise and multi-brand strategy, as well as the continued success of its focus on expanding volumes in higher yielding channels.

Uneven economic growth outside the U.S. and the strengthening U.S. dollar were headwinds and impacted the International segment results. Revenues were 7% lower YoY at $555 million, but essentially stable after adjusting for the impact of movements in foreign currencies. Volumes were modestly lower due to weaker demand in Europe and Australia, while pricing was up slightly on a constant currency basis. Nevertheless, DBRS sees positive underlying trends in the international segment including improved fleet utilization and lower selling, general and administrative (SG&A) costs. Overall, despite macroeconomic challenges, the International segment generated its fourth consecutive quarter of YoY growth in adjusted EBITDA and a fifth consecutive quarter of YoY improvement in margins. Margins benefited from lower vehicle insurance costs, increased ancillary revenue, employee productivity improvements and higher utilization rates in Europe.

Earnings continue to benefit from the Company’s ongoing efforts to operate more efficiently. 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 64.9%, a 210 bps improvement from the comparable period a year ago.

Consistent with the Company’s strategy of acquiring licensees that provide Avis Budget the opportunity to expand the presence of its brands in strategic markets and reduce costs, Avis Budget completed the previously announced acquisition of its Budget licensee for Southern California and Las Vegas in 4Q14. Further, the Company completed the acquisition of its Avis and Budget licensee for Norway, Sweden and Denmark in January 2015.

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

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