DBRS: Avis Budget’s Results Solid; Good Cost Control and Fleet Discipline Offset by Soft Pricing

Summary:
• For 2Q15, Avis Budget reported U.S. GAAP pre-tax income of $82 million in 2Q15, up from $48 million a year ago supported by operating margin expansion and solid volume growth.
• Reported revenues were slightly lower year-on-year (YoY) at $2.2 billion, but on a constant currency basis revenues were 5% higher.
• DBRS’s Issuer Rating for Avis Budget Group, Inc. is BB (low), Positive trend.

DBRS, Inc. (DBRS) considers Avis Budget Group, Inc.’s (Avis Budget or the Company) 2Q15 underlying results as solid in a challenging pricing environment. For the quarter, on a U.S. GAAP basis, Avis Budget generated pre-tax income of $82 million compared to $48 million in the year ago quarter. On an underlying basis, DBRS-calculated adjusted pre-tax income was $126 million, up 11.5% YoY, excluding transaction related costs, restructuring expenses, and the cost of debt extinguishment. Sound organic volume growth along with the benefit of recent acquisitions and solid margin expansion drove the improved underlying results.

Avis Budget’s continuing focus on cost control, still healthy residual values, and improved fleet utilization supported margin expansion despite a soft pricing environment. For the quarter, the Company’s Adjusted EBITDA margin improved by 70 basis points (bps) YoY to 10.4%. Avis Budget continues to capture cost synergies from recent European acquisitions resulting in the DBRS-calculated operating efficiency ratio (Operating expenses and selling, general and administrative expenses as a percentage of total revenues) improving by 20 bps YoY to 63.2%. Fleet costs in the Americas were 2% lower YoY reflecting a used vehicle market that remains above historical long-term averages and the Company’s increasing usage of alternative disposition channels for the selling of risk-vehicles.

While the strengthening U.S. dollar impacted reported revenues, DBRS sees the underlying trends in revenue generation as demonstrating that Avis Budget is executing on its revenue growth initiatives and the benefits of recent bolt-on acquisitions. Total revenues for the quarter were $2.2 billion, slightly lower YoY, but 5% higher on a constant currency basis. On an underlying basis, revenue generation was supported by healthy volume growth and higher utilization rates, which offset a challenging pricing environment. Revenue in the Americas was up modestly YoY as volumes grew driven by strong leisure demand and higher ancillary revenues mostly offset lower YoY pricing. Excluding the rental volume mix impact from growth of the Payless brand and foreign currency movements, pricing in the Americas was slightly lower YoY. Excluding the impact of foreign currency movements and the Maggiore acquisition, International revenues were 2% higher YoY on a constant currency basis. Competitive pressures resulted in lower pricing while positive demand trends were seen in most major European markets as well as Australia and New Zealand.

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.