DBRS: Avis Budget’s 1Q Underlying Results Solid Despite Weather, FX Movements, and Discrete Items

Summary:
• For 1Q15, Avis Budget reported a pre-tax loss of $16 million compared to pre-tax income of $5 million a year ago. Excluding transaction related costs, restructuring expenses and a litigation accrual, DBRS-calculated pre-tax income was $23 million, up slightly from a year ago.
• Reported revenues were 1% lower at $1.85 billion, but on a constant currency basis revenues were 4% higher year-over-year (YoY).
• 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) 1Q15 underlying earnings as solid in the face of inclement winter weather in the U.S. impacting volumes and the strengthening U.S. dollar. For the quarter, on a U.S. GAAP basis, Avis Budget generated a pre-tax loss of $16 million compared to a pre-tax profit of $5 million in the comparable period a year ago. However, DBRS-calculated adjusted pre-tax income was $23 million, up slightly from $20 million a year ago, excluding transaction related costs, restructuring expenses, and a $7 million litigation accrual incurred in the quarter. Improved underlying results reflect lower fleet costs, improving operating efficiency, and reduced funding costs, which more than offset a slight decline in reported revenues.

Total revenues for the quarter were $1.85 billion, approximately 1% lower YoY. However, the strengthening U.S. dollar had a notable impact on reported revenues. On a constant currency basis, revenues were 4% higher on good volume growth and modest gains in pricing in a more challenging pricing environment. In a competitive market, the Company’s North American segment reported a 3% YoY increase in revenues to $1.4 billion with volumes 5% higher on strong growth in leisure volumes and a slight increase in commercial volume. Commercial volume growth was impacted by the inclement winter weather in the U.S. which largely occurred in the first half of the week on most occasions resulting in a meaningful share of business travel to be cancelled. U.S. pricing was unchanged reflecting the impact on rental volume mix associated with growth in the Payless brand. DBRS notes that Avis Budget achieved pricing gains across both the Avis and Budget brands as well as in both the airport and off-airport markets.

International revenues were 11% lower YoY, on a reported basis, at $475 million. Excluding the impact of foreign currency movements, revenues were 4% higher YoY on a constant currency basis. Demand trends in international were mix reflecting uneven global economic growth.

Cost performance was favorable across a number of key expense lines offsetting earnings pressure from the modest decline in revenues. U.S. fleet costs were 1% lower YoY on a monthly per unit cost basis, reflecting the strength of used vehicle values and the Company’s increased usage of alternative disposition channels, which allow the Company to capture a greater share of the vehicle sale. Avis Budget’s efforts to address higher cost corporate debt in the capital structure continues to benefit earnings with reduced corporate funding costs. Finally, Avis Budget’s ongoing focus on improving operating efficiency across its global operations continues to support profitability with operating and SG&A expenses 1% lower YoY.

Avis Budget continues to make strategic acquisitions that expand the Company’s worldwide operating footprint in important growth markets. During the quarter, Avis Budget completed the previously announced acquisition of the Company’s Scandinavian licensee and announced the acquisition of Maggiore Care Rental, the fourth largest rental car company in Italy, which subsequently closed in April 2015. Following quarter end, Avis Budget announced that it had acquired the remaining 50% of its Brazilian operation. The Company expects the three acquisitions to add over $300 million of revenue annually.

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.