Avis Budget Group, Inc.
Q4 2011 Earnings Call Transcript

Published: 16 Feb 2012

[Operator:]

Good morning, and welcome to the Avis Budget Group's Fourth Quarter Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to Mr. Neal Goldner, Vice President of Investor Relations. Please go ahead, sir.

[Neal Goldner:]

Thank you, Tanya. Good morning, everyone, and thank you for joining us. On the call with me are Ron Nelson, our Chairman and Chief Executive Officer; and David Wyshner, our Senior Vice President and Chief Financial Officer. Before we discuss our results for the fourth quarter, I would like to remind everyone that the company will be making statements about its future results and expectations which constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Such statements are based on current expectations and the current economic environment, are inherently subject to economic, competitive and other uncertainties and contingencies beyond the control of management. You should be cautioned that these statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements. Important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements are specified in our earnings release, which was issued last night, our Form 10-K, and the other SEC filings. If you did not receive a copy of our press release, it is available on our website at ir.avisbudgetgroup.com. Also, certain non-GAAP financial measures will be discussed in this call, and these measures are reconciled to the GAAP numbers in our press release. Now, I'd like to turn the call over to Avis Budget Group's Chairman and Chief Executive Officer, Ron Nelson.

[Ronald L. Nelson:]

Thanks, Neal, and good morning to all of you on the call. As we sit here today, not only is Avis did group a bigger company than it was a year ago, it's a stronger one. That position to compete in the global vehicle rental industry. We strengthened our company throughout 2011 by focusing our efforts to grow disproportionately in the most attractive segments of the market, while completing a transformational acquisition that's a global leader in the vehicle rental market. In our existing businesses, we implemented a multifaceted strategic plan last year, designed to profitably accelerate our growth, improve our customer experience and strengthen our brands and competitive position. I'm delighted to report that we achieved measurable success against every one of those objectives. We saw top line revenue growth in all of our operating segments without the benefit of price and against the backdrop of tepid employment growth. We expanded our margins and delivered strong year-over-year increases in adjusted EBITDA, excluding certain items, which is our primary measurement of profitability. We enhanced the vehicle rental experience we offer to our customers in numerous ways, as evidenced by increased in ways [ph] that the customer scores and in winning 8 world travel awards, including World's Best Business Car Hire. And we invested in our world-class brands with a national ad campaign for Avis and a highly successful direct response advertising campaign for Budget among other things. Looking beyond the walls of our preexisting businesses, we also had a productive year in 2011 with the acquisition of Avis Europe, which has long been a strategic objective for us. This transaction reunites our brands globally under the Avis Budget Group umbrella, better positioning us to compete in the global vehicle rental industry. But with virtually all of our investor feedback over the past quarter being laser-focused on Europe, let's begin there. The strategic rationale for the acquisition of Avis Europe is as we've discussed

[David B. Wyshner:]

Thanks, Ron. And good morning, everyone. Today, I'd like to discuss our fourth quarter and full-year results, our Performance Excellence process improvement initiative, our balance sheet and our outlook. My comments will focus on our results excluding certain items. As Neal mentioned, these results are reconciled to our GAAP numbers in our press release and on our website. Our acquisition of Avis Europe closed on October 3, and that fourth quarter 2011 is the first full quarter of consolidating Avis Budget EMEA into our reported results. These results are now included in our international segment and our Canadian operations, which were previously reported as part of our international segment, are now reported within our new North America segment. We know that segment realignments can be confusing. Unfortunately, we are required to move Canada out of international to align our segment reporting to our new regional operating structure. We provided supplemental information on table 3 of the press release and on our website, as well as in the 8-K we filed to try to make our reporting changes as transparent as possible, and we're prepared to work with you to help clarify these issues. Turning to our results, in the fourth quarter, revenue increased 33% to more than $1.6 billion, primarily due to the inclusion of Avis Europe. Excluding Avis Europe, revenue was up 4%. Adjusted EBITDA increased 19% to $64 million in the fourth quarter, including a $5 million contribution from Avis Europe. Results benefited from organic revenue growth and lower per-unit fleet cost. Our direct operating cost decreased 120 basis points as a percentage of revenue in the fourth quarter. Excluding Avis Europe, direct operating expenses declined 20 basis points as a percentage of revenue and SG&A was up 130 basis points, primarily reflecting our strategic decision to increase marketing investments to support our brands. For the quarter, net income declined $8 million and earnings per share declined $0.08, primarily due to incremental debt used to fund the acquisition of Avis Europe. For the year, revenue increased 14% to $5.9 billion, including $359 million from Avis Europe. Adjusted EBITDA grew 49% to $610 million, making 2011 the most profitable year in the company's history. All of our operating segments reported significant growth in adjusted EBITDA for the year, reflecting strong rental volumes, a robust used vehicle market and savings from our company-wide productivity improvement efforts. Net income increased 93% to $206 million and earnings per share increased 83% to $1.65. Excluding the transaction-related charges we incurred, our 2011 results show what our businesses is capable of earning, even before the contribution that EMEA can make going forward. In our North American segment in the fourth quarter, revenue increased 3% to $1 billion, reflecting a 5% increase in volume and a higher penetration of ancillary products and services, partially offset by a 3% decline in pricing. Volume growth was strong throughout the quarter, and we saw good increases both on- and off-airport. In addition, our average length of rental increased 3% year-over-year, reflecting both the modest change in customer demand and actions we've taken to attract longer length transactions. Leisure volume was up 9% in the quarter, driven by our marketing partnerships, partially offset by a 4% decline in pricing. Commercial volume was up 1%, with growth in our corporate accounts, small business and inbound commercial, partially offset by decline in insurance replacement as we continue to focus on growing in our most profitable channel. Commercial pricing was down 2% in the quarter, consistent with the full year, while commercial account retention remained north of 99%. Ancillary revenues increased 10% in the quarter, 5 points ahead of volume growth, reflecting the benefits of our continued sales training. Penetration rates for damage waivers, insurance products, portable satellite radio and roadside protection all increased, while GPS take rates remained fairly constant. Adjusted EBITDA was $18 million in the quarter, down $5 million year-over-year. The decline was due to a $15 million increase in marketing spending to support our brands, partially offset by increased ancillary revenue per rental day and a 5% decline in per unit vehicle depreciation. In our international segment, revenue more than doubled in the fourth quarter, primarily due to the inclusion of Avis Europe. Excluding Avis Europe, fourth quarter revenue increased 11% year-over-year, driven by a 7% increase in volume and a 3% increase in price due to exchange rates. Australia and New Zealand each experienced good growth in the fourth quarter, with New Zealand benefiting from stronger pricing and increased demand due to the Rugby World Cup. Adjusted EBITDA increased 29% to $40 million in the quarter, driven by a $5 million contribution from Avis Europe and organic revenue growth. As Ron mentioned, Avis Europe's fourth quarter results were largely consistent with our expectations, with revenue declining less than 2%, driven by a 3% decline in volume, partially offset by a 1% improvement in pricing. On a pro-forma basis, Avis Europe's adjusted EBITDA was within $1.5 million of the prior year. In our truck rental segment, revenue increased slightly in the fourth quarter, driven by 3% growth in pricing. We benefited from a trend toward online holiday shopping, as our volume in rentals to package delivery companies in December increased 35% year-over-year. Adjusted EBITDA from truck rental tripled to $9 million in the quarter, our best fourth quarter since becoming a standalone company. Utilization improved 4%, driving significant margin improvement. Volumes in our truck rental segment have fully recovered from prerecession levels, while our average fleet has declined 14%, driving a 900-basis-point improvement in margin. Turning to our car rental fleet, we continue to expect the North American used car market to remain strong in 2012 and possibly longer. In fact, Manheim and ADESA each believe used car market conditions can remain healthy beyond this year for many of the reasons we've talked about in the past

[Operator:]

[Operator Instructions] Our first question comes from John Healy with Northcoast Research.

[John M. Healy:]

Wanted to ask about the fleet holding cost. I appreciate the disclosure in North America. But I was hoping to get a better understanding of the fleet cost anticipated increase for the European fleet. Is there anything to think about specifically to that? And how much does that normally increase on that annual basis there?

[Ronald L. Nelson:]

We were expecting a year-over-year decline in our international fleet cost, and I think we feel good about how the negotiations for per fleet have gone both in Europe and in other parts of the world. So we're looking at this year at a reduction in international fleet cost of several points on a per-unit basis.

[Operator:]

Our next question, Afua Ahwoi with Goldman Sachs.

[Afua Ahwoi:]

I just had a question on 4Q pricing and your commentary in January. Is there anything specific you can point to that drove the, I guess, worse than expected pricing in North America that we had expected? Is there any competitor action? Or is it some Avis-specific initiatives that drove prices down and if there's an opportunity to have a second one?

[Ronald L. Nelson:]

If you'll indulge me, let me sort of give you some background and describe what I think is going on in terms of pricing. First, you can't separate price from fleet. You can have a discussion on our price, you always going to talk about fleet. The second point I'll make is we always try to optimize price. We are not in the business of cutting price to gain share. Now that being said, I think, one of the things that you need to consider is that the entirety of the story in terms of revenue generation isn't in just T&M RPD, and it's particularly in driving eligible volume, which I would call leisure volume, where you have the opportunity to upsell your customer either with an upgrade in car class or insurance or GPS' or Emergency Road service. Those products generates 75% to 90% margins, depending on what they are. And on eligible volume, our per capita rate is somewhere in the $7 to $8 range. So selling ancillary has offset a lot of pricing issue. Now, if you have in the fleet, then obviously ancillary sales is the same as price cutting. But the point I want to make is that if you adjust your fleet and take yourself out of the volume business, you're giving up an opportunity to sell ancillaries, which I think is an important piece of the puzzle. The other thing that I would say about fleet is that I know that a couple have noted that our utilization was down. We're actually not too troubled by that. I think what you'll hear from us over time is that we've increased our fleet in our higher-end cars a fair amount. The metric that you follow there is revenue per unit, not utilization. We're finding these to be very profitable rentals, and so the decrease in utilization is partly explained by the increase in fleet in areas which drive more revenue. That said, I think, the fourth quarter is really sort of a tale of 2 cities, if you will. From October to Thanksgiving, that is predominantly a commercial period. Pricing in the commercial business has been soft for a couple of years now. And it's a period where the industry is de-fleeting. So at some measure, everybody is a little overfleeted and competing for volume. And I think that sort of drove pricing in the first half of the quarter. I think in the period from Thanksgiving to really February 13, which is when we announced the price increase, it's really a different issue. Last year, we took several thousand turndowns because our fleet was short, and this year, we decided that we would hold on to additional fleet to go after those turndowns. Because primarily, most of those turndowns are in Florida. And so we held fleet and I think what happened and what's really continuing to happen is the weather was pretty good over the course of December and early in January. And so the volume didn't materialize, and I think it's one of the reasons why our marketing spend was up in the fourth quarter. We had the fleet. We decided to spend some additional marketing to drive it. And I think that really drove more pricing competition over December and early January than we would have expected. And I think being short-fleeted last year, we probably -- we're getting something like $600 a week for rentals in Florida, being long-fleeted now as we come in to the Florida season in February. Maybe that drops to $450, but I'd rather have 10,000 rentals at $450 than 6,000 at $600. And I think we're starting to see fleet to tighten up a fair amount in Florida. So I think, really the general answer is that pricing was influenced by weather in December and by commercial business in February. But I don't want anybody for a minute to think that -- I know this is on everybody's mind about pricing discipline. We continue to maintain our discipline on pricing. We initiated 2 price increases in February and March. But I just thought a full discussion of what really influence pricing in the fourth quarter was worth taking up a few -- a little bit of your time. So anyway that's the answer to your question. Thanks for giving me the opportunity.

[Operator:]

Our next question, Michael Millman with Millman Research Associates.

[Michael Millman:]

Assuming normal conditions, you can define what that may mean, can you compare what the European versus North American markets should generate in ROA and EBITDA margin and revenue growth, maybe in the free cash flow?

[David B. Wyshner:]

Sure. I think one way to look at it is certainly in terms of margins. And when you look at our margin last year, overall, it was right around 10%. And then when you look at Avis Europe, they generated for us about $180 million of pro forma EBITDA on about a little over $1.6 billion of revenue. So they also worked out to be in the 10% to 11% range. And so we see the margin contributions and returns on assets, things fairly similar between the 2 businesses. You obviously get there in slightly different ways with Avis Europe having the benefit of some incremental high-margin licensing revenues. But they really are quite similar. And our expectation is that the cash flow attributes of the business will also be quite similar. The nature of our business is that it's a cash business. We expect to make some investment in capital spending and integration this year. But over time, we would expect pretax income to be a proxy for free cash flow from our acquired business, the same way it has been for our existing business.

[Operator:]

Our next question, Chris Agnew with MKM Partners.

[Christopher Agnew:]

I was wondering if you could help us think about OpEx and SG&A for the combined entity. I know with the inclusion of Avis Europe, it's a little more complicated, and we don't quite have pro forma the numbers. But can you may be split out or help us about variable versus fixed cost for the combined company? And should we be thinking about either of those items as a percentage of revenues or maybe based on rental day growth or even on absolute basis?

[Ronald L. Nelson:]

Sure, Chris. I can try, and we can follow up as well to walk you through some of the pro formas we provided. And generally speaking, I think operating expenses will be a fairly consistent portion of revenues, still in the 50-ish percent range, the same 50-ish percent range that we see for our existing businesses. SG&A will, at this point, is tending a bit higher and I think this is an area where will hope to see some of these synergies have a favorable impact, information technology costing a good example of that. And I think as we look at the operations in Europe, the difference that we deal with is the fact that the average location across Europe tends to be smaller than what we have in the U.S even some of the largest airports in Europe are significantly smaller than what we would see for a large airports here in the U.S. in terms of their revenues. And so we have a lot of locations that have somewhat higher percentage of fixed cost than in the U.S. And I think as we look at the business and the integration opportunity, getting at fixed cost on a company-wide basis becomes a key to achieving synergies. Because to the extent, we can make administrative and back-office and information technology more efficient that will create opportunities for us to bring SG&A down as a percentage of revenue.

[Operator:]

Our next question, Brian Johnson with Barclays Capital.

[Brian Arthur Johnson:]

Just want to follow-up on the pricing and fleet discussion. Thank you for kind of tying some loose ends together. So as we look at the minus 4%, a couple of questions on the leisure side. First, does that include your off-airport initiative? Do you roll that into leisure? Did you incorporate it or is it just a separate category? And was that influencing that? And then second, if you kind of take Florida and give it back to Spain, and just look at the rest of the country, how was leisure pricing through the quarter?

[Ronald L. Nelson:]

A couple of things, Brian. Don't make pricing any worse than it was. I think it was only down 3%.

[Brian Arthur Johnson:]

Okay. Yes, excuse my [indiscernible]. I was thinking of the -- now, excuse me, didn't you say leisure down 4%, pricing down overall?

[Ronald L. Nelson:]

Our composite pricing was down.

[Brian Arthur Johnson:]

Yes. I just wanted to drill down within that leisure number.

[Ronald L. Nelson:]

And our off-airport business is really a mix of both commercial and leisure. It all depends on how the reservation is made if somebody uses an AWD number or through an affinity channel, then we know that it falls into the commercial area. If they don't, then it falls into leisure. It's not a precise calculation or precise determination, but it's the best we have. So I think that that's the way it works. In terms of Florida actually, this past week, things have gotten very tight. I think every car rental companies on suspend or LRR restrictions. The typical season in Florida runs from Presidents' Day until Easter. And we're just looking this morning at our res build and we're actually, I think on suspend in every market we have in Florida. The irony is we're probably reporting an RPD decline, because last year, we were short-fleeted and getting very -- creating high weekly rates for this year. We're still getting high weekly rates, but they're not going to be as high as last year, just simply because we're getting more volume. But it will clearly be compensatory. And then you have question about Spain, Brian? Was that...

[Operator:]

Our next question, it's Yilma Abebe with JPMorgan.

[Yilma Abebe:]

Two questions. One, can you tell us what the gains on risk cars was for the full-year 2011? And two, in terms of the balance sheet, you mentioned that paydown as a potential use of cash, can you give us a little bit more context around that either how much debt you expect to pay down or where you expect leverage to be?

[David B. Wyshner:]

Our gains in full year 2011 were right around $230 million. To be clear, though, we're expecting the year-over-year impact on fleet cost and associated with the benefits we realized following the earthquake in Japan to be $120 million to $140 million. And some of this will come through in depreciation, some of it may come through in gains. But I think the important number to use from a modeling perspective is really the $120 million to $140 million because that's sort of the year-over-year impact that you need to model in. But the gains that we actually realized were about $230 million because I think in hindsight, we ended up having been conservative in our depreciation estimates. With respect to deployment of free cash flow, I don't have a particular or specific number for debt paydown at this point. We will look, as we said in the past, to keep our leverage in a range of 3 to 4x, and we're much more comfortable in the lower 1/2 of that range than in the higher 1/2. And so that will be part of our thinking. And I think the fact that we ended 2011 with north of $530 million of cash on our balance sheet does give us some flexibility.

[Operator:]

Our next question, Steve O'Hara with Sidoti & Company.

[Stephen O'Hara:]

You talked about the amount of cash you have on the balance sheet. Maybe you could just talk about is that high, I mean, what kind of a good cash level that you're comfortable with running the business maybe on a yearly basis or on average?

[David B. Wyshner:]

I think generally speaking, the minimums required to run the business have obviously increased a bit as a result of having a global organization now. I would estimate it to be in the $150 million to $200 million range. I think our level of comfort, given the nature of our business, is probably to have a higher cash balance than that, a fair amount of the time. But based on what we've seen so far that's sort of the estimate that I would use.

[Operator:]

For closing remarks, the call is being turned back over to Mr. Ronald Nelson. Please go ahead, sir.

[Ronald L. Nelson:]

Thank you. Just so given [indiscernible] we're very excited about the investments we're making to integrate Avis Europe, to profitably grow our revenue and reduce our cost not just for 2012, but we really feel like we're making all the right decisions for the long run. As we complete our integration, we're going to leave no stone unturned to find ways to drive true differentiation for our customers and the value for our shareholders. We will be presenting at a number of conferences this quarter and hope to see many of you there. Until then, thank you for your continued support and confidence. And we look forward to talking to you on the April call, and we look forward to seeing you in Investor Day in May, which we will announce shortly. Thank you.

[Operator:]

This concludes today's conference call. You may disconnect.