How to Explain Car Rental to Banks and Investors Scott White Senior Managing Director, Head of Investment Banking C.L. King & Associates March 8-9, 2011 Las Vegas Hilton 1
My Background 18 Years Advising Car Rental Companies Investment Banker for 20+ Years 17 Years at Large Banks Advisory Assignments PHH Europe EVP Corporate Development Capital Raising Team Rental Group 2
Common Car Rental Biases at Banks 3
Fear of Exposure to Auto 30 Years of Auto Industry Troubles Resulting in Well-Known Bankruptcies 4
Car Rental Revenue is Driven by Travel Spending Not Related to the Automotive Cycle ($ in billions) U.S. Business and Personal Travel Spending (1988 2020) $2,000 1,600 1,200 800 400 0 1988 1992 1996 2000 2004 2008 2012 2016 2020 Source: World Travel & Tourism Council 5
Travel Spending Driven by Economic Activity Ever Rising Travel Spending, with Recent Exceptions (Arrivals in millions) International Visitors to the U.S. (2000 2015 Projected) 83 80 60 40 51 47 44 41 46 49 51 56 58 55 60 63 67 71 76 20 0 2000 2002 2004 2006 2008 2010 2012P 2014P Source: Office of Travel & Tourism Industries 6
Car Rental Revenue Has Grown for Decades Notwithstanding Recent Exceptions ($ in billions) Car Rental Revenue in U.S. Market (1991 2010) $20 15 $13 $13 $15 $16 $17 $18 $19 $18 $16 $16 $18 $19 $20 $21 $21 $20 $21 10 $10 $11 $11 5 0 1991 1994 1997 2000 2003 2006 2009 Source: Auto Rental News 7
What is Car Rental? Finance business + rental service No connection to auto issues Manufacturing Unions Foreign Competition 8
Car Rental is an Essential Service Key part of the transportation network Utility-like quality of predictable and recurring revenues Can t outsource it overseas Can t replace it with the Internet 9
EBITDA is Huge Wrong 10
Car Rental Cash Flow Definition of EBITDA Net Income ( Earnings ) + Income Taxes + Non-Fleet Interest Expense + Non-Fleet Depreciation and Amortization = Adjusted EBITDA, aka, Corporate EBITDA 11
Car Rental Cash Flow Said Another Way Revenues - Operating Expenses - Selling, General and Administrative Expenses = EBITDA (Gross) - Fleet Depreciation and Interest (roughly 35% of Revenues) = Adjusted or Corporate EBITDA Adjusted / Corporate EBITDA available to service non-fleet debt (but beware non-fleet debt) Fleet depreciation and interest are COGS in a car rental company 12
Exposure to Used Car Prices NOT Used Cars?! OMG!!! Sense that used car risk is not manageable Worry about bottomless pit exposure Answer: Used Car Market is a Plus for Car Rental Huge (several hundred billion dollars) Efficient (can t game it) Liquid (easy to turn cars into cash) Affects everyone equally (no one has an advantage) Car rental companies average gain on sale of a few hundred dollars per risk car 13
Used Car Market is Huge Over $300 Billion ($ in billions) Dollar Volume of Used Car Market, annually (1990 2009) $350 300 250 200 1990 1993 1996 1999 2002 2005 2008 Dollar Volume of Used Car Market Source: U.S. Department of Transportation, Bureau of Transportation Statistics 14
Used Car Market is Efficient Over the past 58 years, used car prices have tracked inflation, with some year-to-year variation Real Growth: Consumer Price Index vs Prices of Used Cars and Trucks (1952 2010) 30% 20 10 0 (10) (20) (30) 1952 1960 1968 1976 1984 1992 2000 2008 Real Growth Linear (Real Growth) Source: Bureau of Labor Statistics 15
Used Car Market is Liquid Around 40 Million Transactions Annually Annual Volumes and Prices (# in millions) Used Car Average Price and # of Vehicle Sales (1990 2009) 45 $10,000 9,000 40 8,000 35 7,000 6,000 30 1990 1993 1996 1999 2002 2005 2008 5,000 Used Vehicle Sales Average Price Source: U.S. Department of Transportation, Bureau of Transportation Statistics 16
Too Capital Intensive Not really Fleet is largely debt-financed Fleet is liquid Can de-fleet to pay-off debt Non-fleet capex relatively modest Hard to go bankrupt unless you have non-fleet debt Highly variable cost structure Reduce fleet and headcount in a downturn 17
Fleet is Debt-Financed / Assets Largely Cars + Cash Illustrative Car Rental Balance Sheet Total Assets Total Capitalization Cars + Cash 90% Fleet Debt Secured by Cars 75% 10% PP&E and Other Equity 10% 15% Fleet Debt Not Secured by Cars 18
Dollar Thrifty Exemplifies Strength of Car Rental Business Model Pure-Play Public Car Rental Company Stock Price and Trading Volume (March 2009 May 2010) $60 Return from March 09: +6,379% 50 40 30 Equity Market didn t fully understand strengths of pure car rental model with no non-vehicle debt 20 10 DTG shrunk to meet lower demand and stock rocketed when investors realized it wouldn t go bankrupt (and Hertz might want to buy it) 0 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Source: Factset Closing Price 19
Dollar Thrifty 13 Years of Solid Earnings Performance Net Income and Net Income Margins (IPO 1998 Q3 2010) ($ in millions) $140 8.9% 120 100 80 60 40 20 4.2% 6.0% 7.1% 1.3% 4.2% 2.2% 4.8% 5.5% 3.4% 3.1% 0 0.1% (20) (40) (60) (2.5%) 1998 2000 2002 2004 2006 2008 LTM Q3 2010 Source: Capital IQ 20
There s No Free Cash Flow...... because you always have to plow cash back into the fleet. See prior graph! Net Income = Free Cash Flow (over time) Car rental has lots of moving pieces it s complicated Financial models must be carefully done Decades of demonstrated performance Net Income margins generally 5-10% Can run it to generate cash Or grow it by reinvesting cash 21
Commodity Service vs. Brands Matter On-Airport Market Share (2009) 26.1% 19.2% Hertz Avis Budget 1.4% 1.4% 4.7% 10.4% 8.7% Enterprise Alamo/National Dollar Thrifty 7.6% Advantage 20.5% Other Source: Wall Street Research 22
Commodity Service vs. Brands Matter Total Market Share (2010) 20% Enterprise (Alamo / (Alamo National) / National) Hertz 48% Avis Budget 19% Dollar Thrifty 6% 7% Other Source: Based on 2010 Revenue from Auto Rental News Fact Book 2011 23
Relatively Stable Market Shares Over Time Established Brands Attract the Business 100% 75 50 25 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Avis Budget Hertz Dollar Thrifty Alamo/National Enterprise Other Source: Data from Hertz 10-K Filings 24
Pricing is Not Rational Long-term price trends among the brands are consistent with the brand images Type Off Terminal Off Terminal In Terminal In Terminal In Terminal In Terminal In Terminal In Terminal In Terminal Economy $30 $45 $46 $55 $63 $63 $64 $70 $70 Compact $30 $45 $46 $55 $63 $63 $64 $70 $70 Midsize $30 $46 $47 $56 $65 $65 $66 $72 $72 Standard $35 $67 $67 $68 $74 $74 Full size $37 $60 $50 $60 $67 $67 $68 $74 $74 Premium $87 $64 $64 $69 $69 $72 Source: Orbitz snapshot mid-feb 2011, for Orlando in late March 2011. 25
What About Insurance Exposure? Not an Insurance Play Products Below Best Thought of as Extra Price SLI Supplemental Liability Insurance LDW Loss Damage Waiver CDW Collision Damage Waiver PEC Personal Effects Coverage PAI Personal Accident Insurance 26
The Equity Story 27
Financial Leverage Magnifies Returns to the Equity No Leverage $10,000 Money Invested = Equity $10,000 x 5% Growth Equity grows $500 $10,000 Money Invested = Equity $100,000 x 5% Growth Equity grows $5,000 28
Operating Leverage Also Magnifies Returns to the Equity And Price Changes Everything! 29
Car Rental is a Bet on Economic Activity and Wanderlust Ever Rising Travel Spending Makes Car Rental an Attractive Investment ($ in billions) Worldwide Travel and Tourism Spending (1988 2020) $6,000 5,000 4,000 3,000 2,000 1,000 0 1988 1992 1996 2000 2004 2008 2012 2016 2020 Source: World Travel & Tourism Council Personal Travel & Tourism 30