DBRS: Avis Budget FX Headwinds Mask Solid Underlying Results; Sound Demand and Lower Fleet Costs

Summary:
• For 3Q15, Avis Budget reported U.S. GAAP pre-tax income of $312 million, up 2% from the year ago period, supported by sound growth in demand across most parts of the business and lower per unit fleet costs.
• Reported revenues were a record $2.6 billion, up slightly year-on-year (YoY), but 8% higher on a constant currency basis.
• 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) 3Q15 underlying results as solid in the face of a strong U.S. dollar. For the quarter, on a U.S. GAAP basis, Avis Budget generated pre-tax income of $312 million, compared to $306 million in the year ago quarter. On an underlying basis, DBRS-calculated adjusted pre-tax income was $326 million, up 2% YoY, excluding transaction related costs, restructuring expenses, and the cost of debt extinguishment. Volume growth across the Company’s global operating footprint, stable pricing, and lower fleet costs and the benefit of recent acquisitions drove the expansion in underlying results.

Avis Budget’s focus on growing revenues from the most profitable segments and channels and recent bolt-on acquisitions, especially internationally, continue to support positive trends in underlying revenues despite the strengthening U.S. dollar. Total revenues for the quarter were a record $2.6 billion, slightly higher YoY, but 8% higher on a constant currency basis. On an underlying basis, revenue generation was supported by healthy volume growth across most parts of the business and higher utilization rates, which offset a soft pricing environment. Revenues in the Americas segment were up 2% YoY on solid volume growth in leisure while commercial volumes were subdued, and overall pricing was stable. Positively, the Company’s utilization rate improved more than 200 basis points. Importantly, the Company reported good revenue growth from those more profitable customer segments and channels that are core to its operating strategy including non-core vehicles, international in-bound travel, and ancillary products. Excluding the impact of foreign currency movements and the Maggiore acquisition, International revenues were 10% higher YoY on a constant currency basis. Volumes were up 12%, excluding Maggiore, as good demand was evident across leisure and commercial in Spain, Portugal and Germany, while France and Italy experienced double digit YoY growth in leisure volumes. Importantly, DBRS notes that to date, Avis Budget sees the performance of Maggiore as exceeding the expectations that were in place at the time of acquisition.

Vehicle depreciation and lease charges were 5% lower YoY at $555 million. Fleet costs in America were 6% lower YoY at $304 per unit per month. From DBRS’s perspective, the reduction in costs reflects prudent fleet management by Avis Budget as the Company sold vehicles in North America ahead of schedule to take advantage of the still healthy used vehicle market in the U.S. Moreover, Avis Budget continues to expand the use of alternative disposition channels, which allows the Company to capture a higher gain on disposition than through the traditional wholesale auction channel. In the International segment, per unit vehicle costs were 7% lower YoY, on a constant currency basis.

Additionally, the Company announced that it had agreed to acquire its Avis Poland licensee for a purchase price of approximately $25 million plus the cost of acquired fleet. DBRS views this bolt-on acquisition as consistent with Avis Budget’s strategy to grow internationally by expanding into attractive markets with good growth opportunities and that offer cost synergies. Moreover, Poland is a market that is geographically contiguous with Avis Budget’s current operating footprint in Europe.

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.