Executives
H. Clifford Buster - Chief Financial Officer, Senior Executive Vice President and Treasurer
Vicki Vaniman - Executive Vice President, Secretary and General Counsel
Scott L. Thompson - Chief Executive Officer, President and Director
Analysts
Christopher Agnew - MKM Partners LLC, Research Division
Michael Millman - Millman Research Associates
Fred T. Lowrance - Avondale Partners, LLC, Research Division
Stephen O'Hara - Sidoti & Company, LLC
John M. Healy - Northcoast Research
Dollar Thrifty Automotive Group (DTG) Q3 2011 Earnings Call November 1, 2011 9:00 AM ET
Operator
Welcome, and thank you for joining the Dollar Thrifty Automotive Group's Third Quarter Financial Results Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. And now, I'd like to introduce your host for today's call, Vicki Vaniman, Executive Vice President and General Counsel. Ma'am, you may begin.
Vicki Vaniman
Thank you. Good morning, and welcome to the Dollar Thrifty Automotive Group Third Quarter 2011 Earnings Release Conference Call. The host for today's call are Scott Thompson, President and Chief Executive Officer; and Cliff Buster, Chief Financial Officer.
Some of the comments contained in this conference call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed as forward-looking statements due to many factors. These factors include, among others, matters that Dollar Thrifty has noted in its latest earnings release and filings with the SEC. Dollar Thrifty undertakes no obligation to update or revise forward-looking statements.
Today, the company will use certain non-GAAP financial measures, all of which are reconciled with GAAP numbers and can be found in today's press release or posted to the company website at dtag.com under the Investor Info tab.
And now I would like to turn the call over to Scott to discuss our third quarter earnings.
Scott L. Thompson
Thank you, Vicki. And good morning, everyone. We are pleased to report the company's highest quarterly profit in its 61-year history. Growth, profitable revenues, productivity initiatives, cost controls and disciplined fleet management combined with a strong used vehicle market to produce another record quarter. This in spite of a somewhat sluggish travel market and a competitive rate environment.
Now for a few overall comments. Rental revenue for the third quarter of 2011 increased 2.4%, driven primarily by a 4.1% increase in rental days, partially offset by a 1.7% decrease in revenue per day. You might note that the decline in rate per day on a sequential basis is trending favorably, as we believe the excess fleet carried by the industry over the summer is diminishing.
Fleet costs were certainly a highlight for the quarter. Fleet cost per vehicle for the third quarter of 2011 declined to $186 per month compared to $262 per vehicle per month in the third quarter of 2010.
Lower based depreciation rates combined with an increase in risk vehicle gains of approximately $7.4 million (sic) [$17.4 million] on a year-over-year basis drove the decline. As we have stated numerous times in the past, a predominantly risk fleet will result in some degree of volatility in our operating results at the timing of vehicle sales and the strength of the used car market will vary.
Corporate adjusted EBITDA for the third quarter of 2011 totaled $117.6 million compared to $81.8 million in the third quarter of 2010. There were no merger-related expenses in the third quarter of 2011 compared to $11.9 million in the third quarter of 2010.
Now Cliff will review the financial details for the quarter.
H. Clifford Buster
Thank you, Scott. Non-GAAP net income, excluding merger-related expenses, totaled $66.9 million for the third quarter of 2011 compared to $52.8 million in the third quarter of 2010.
Again, excluding the impact of the merger-related expenses, non-GAAP diluted earnings per share for the third quarter of 2011 totaled $2.14 per share compared to $1.74 per share in the third quarter of 2010.
Consistent with our comments in the second quarter, I need to point out that there have been no significant equity grants since 2010, although our diluted share count did increase by approximately 1 million shares compared to the prior year period. This is the result of the applications treasury stock method for accounting purposes in computing diluted shares.
Due to the increase in the company's stock price since 2010, approximately 200,000 fewer shares are assumed to be repurchased from the proceeds of option exercises. Additionally, approximately 800,000 fewer shares are assumed to be repurchased attributable to the inability to benefit the tax deduction arising from those assumed option exercises under the treasury stock method, as the company does not expect to be a cash tax payer in 2011. When the company becomes a cash taxpayer, the situation is expected to reverse, thus reducing diluted shares outstanding.
Now turning to Table 1 in the press release. Rental revenues for the third quarter of 2011 were $435.6 million, an increase of 2.4% from prior year levels. Fleet utilization matched prior levels as the increase in our fleet size was closely aligned with the increase in rental demands.
Selling, general and administrative expenses, or SG&A, in the third quarter of 2011 decreased $11.5 million from prior year levels, primarily attributable to an $11.9 million decrease in merger-related expenses on a year-over-year basis. Direct vehicle and operating expenses, or DVO, in the third quarter of 2011 increased $10.3 million compared to the third quarter of 2010, attributable to the overall growth in our fleet size and direct costs associated with the increased sales of ancillary products such as prepaid fuel and toll road products. The costs associated with the ancillary products are more than offset through increases in rental revenues, although their growth does negatively impact the ratio of our operating expenses to total revenues on a comparative basis to prior year.
Vehicle depreciation expense for the quarter decreased $22.4 million, or 26.2%, from $85.7 million in the third quarter of 2010 to $63.3 million in the third quarter of 2011. The decrease is attributable to the factors Scott mentioned earlier in the call, with respect to base depreciation rates and vehicle gains, partially offset by an increase in depreciation as a result of the 4.2% increase in average depreciable fleet operated during the period.
During the third quarter of 2011, the company sold approximately 15,400 vehicles at an average gain of $1,125 per vehicle compared to approximately 15,800 vehicles sold in the third quarter of 2010 at an average gain of $632 per vehicle. Overall, our fall feeding defleeting has gone well.
Interest expense, net of interest income, totaled $19.6 million for the third quarter of 2011, down from $22.3 million for the same period last year. During the quarter, we deployed $143 million of our excess cash to eliminate our corporate indebtedness. You should note that the company continues to have significant excess cash on hand that is negatively impacting our return on assets.
Now moving to key balance sheet items on Table 2 of the press release. Cash and cash equivalents totaled $499 million as of September 30, 2011, compared to $563 million at December 31, 2010. The decline in unrestricted cash since year end is primarily attributable to the equity financing in our Canadian fleet during the second quarter, the repayment of all the company's outstanding corporate debt in the third quarter and seasonal investments in our fleet for collateral enhancements. These uses of cash were partially offset by significant cash flow from operations.
Direct investments in the Canadian fleet funded from unrestricted cash totaled approximately $88 million as of September 30. The Canadian fleet can be releveraged in the future if the company needed additional liquidity.
Restricted cash totaled $201 million as of September 30, 2011, down from $277 million as of December 31, 2010. The decrease in restricted cash is attributable to the seasonal investments in our rental fleet.
Revenue-earning vehicles, net of depreciation, totaled $1.6 billion at September 30, 2011, an increase of approximately $260 million from December 31, 2010 levels. The increase in the book value of the fleet since year end is attributable to seasonal fleet increases in addition to a 4.3% increase in our average fleet compared to the third quarter of 2010 to meet increased rental demand.
Our ending fleet as of September 30 was up 5% compared to the third quarter of 2010. Vehicle debt increased approximately $65 million from December 31, 2010, to September 30, 2011, with vehicle debt now totaling $1.3 billion. The increase in vehicle debt resulted from borrowings to support seasonal fleet investments, partially offset by the repayment of our Series 2006 medium-term notes in the Canadian financing facilities.
Now turning to liquidity and capital resources. The seasonal fleet investments I previously mentioned were funded utilizing a combination of restricted cash, borrowings under our fleet financing facilities and unrestricted cash. As of September 30, we had excess cash enhancement in the securitization of approximately $42 million. These excess enhancement represents cash that could have been moved to unrestricted cash as of quarter end.
Since December 31st, the company has significantly improved its fleet financing structure completing the following long-term fleet financing facilities. $500 million and 3-year medium-term notes issued in July at an average annual coupon of 2.81%, the $600 million 2-year conduit facility that bears interest at 130 basis points over the applicable lenders cost of funds, and $400 million and 3-year medium-term notes issued in October at an average annual coupon of 3.21%. All 3 of these facilities have advanced rates of 69%. With these facilities in place, the company has effectively pre-funded all of its debt maturities in fleet financing needs for 2012 and has significantly extended its fleet debt maturity profile. The cost of funds on the new facilities is lower than the majority of the company's existing fleet financing sources and substantially lower than the company's existing medium-term notes, which vary fixed rate of interest of 5.16% and begins scheduled amortization in February 2012.
Overall, with these fleet financing modifications, we expect interest expense to be down in 2012 by approximately $20 million when compared to full year 2011.
We ended the quarter with tangible net worth of $647 million.
I will now turn the call back to Scott.
Scott L. Thompson
Thank you, Cliff. I want to make sure that we're clear on the liquidity that is currently in the balance sheet at quarter end. I get a lot of questions in this area.
As you can see, we have approximately $500 million in unrestricted cash at quarter end. And looking at our liquidity, I think it's appropriate to add the $88 million invested in the Canadian fleet as it could be easily financed in the normal course of business. We have simply chosen to use equities to support this fleet at this time because of our excess cash position and for tax efficiencies.
If we were to releverage the Canadian fleet, we will have unrestricted cash position of approximately $519 million, or approximately $19 per diluted share, at quarter end. With this level of liquidity, no corporate indebtedness and a corporate adjusted EBITDA run rate north of $250 million, we feel very good about our competitive position.
Turning to merger activity, or maybe, I should say lack of merger activity, I really have nothing new to report. We've attempted to keep all of the interested parties informed on a timely basis, as we've navigated complex issues.
As needed, we will continue to try to communicate timely and appropriately with all of our stakeholders.
Now I'd like to briefly discuss our share repurchase, which is the topic that we frequently discuss with shareholders and an area that management and Board of Directors have spent a good deal of time evaluating. As announced today, the company expects to invest $100 million towards share repurchases beginning November 7. We will utilize a forward stock repurchase agreement executed with a third party. We believe this is an appropriate first step in rationalizing our capital structure and appropriately returning cash to shareholders. While we expect to complete additional share repurchases, the timing and amount of future share repurchases will be based on market conditions and other factors.
Turning to some management changes. Scott Anderson, Senior Executive Vice President of Operation and Global Sales and Marketing, has advised me that he plans to retire effective December 31, 2011. Scott has been with the company since 1987 in a variety of leadership roles. He has agreed to facilitate a transition and has agreed to a 1-year consulting agreement. We will miss him and truly wish him and his family well.
Jeff Cerefice, one of our Senior Vice Presidents, will assume responsibility for rental operations. Jeff has been with the company since 1992, and has proven himself in numerous areas, the last being fleet management. The 5 officers in rental operations that will report to Jeff have an average tenure with the company of 17.5 years. Interestingly, Scott actually hired Jeff and actually officed next to each other. I'm confident that we'll have a smooth transition.
Global sales and marketing will report to me. The 3 officers in this area have an average tenure of 15.5 years with the company, and I've been working with them for the last 3 years. Our team approach to management and seasoned officer corp here at Dollar Thrifty facilitate this type of normal personnel move. Again, I want to thank Scott for his years of noteworthy service to the company.
Turning to 2011 outlook. We expect single-digit rental revenue growth in the fourth quarter, with slight downward pressure on rate per day. Accordingly, we are targeting rental revenue growth of 1% to 2% for the fourth quarter, which will result in a full year 2011 rental revenues being up approximately 1%.
Our near-term outlook for the used vehicle market is that we'll continue to be favorable, but due to normal seasonality, less robust in the last 9 months. Additionally, as we discussed last year -- last quarter, we expect that used vehicle market will moderate slightly in 2012. We're using unassumed Manheim Index in the low 120s, for long-term planning and residual value assumptions. Based on these factors, our full year 2011 fleet cost target remains unchanged at a range of $215 to $225 per vehicle per month. Based on all known factors including our current healthy forward reservation book, we continue to target exclusive merger-related expenses, corporate adjusted EBITDA of $270 million to $290 million for the full year 2011.
I should mention that one of the real challenges in estimating the fourth quarter each year is our insurance reserve true-up, which is based on third-party actuarial analysis. We do not receive this information until quarter end, and the impact on the fourth quarter results can be very volatile, with historical adjustments of $5 million to $10 million.
Although we have not yet provided 2012 earnings guidance, I would like to point out a couple of key items for consideration as people begin modeling their 2012 expectations. As I previously stated on last quarter's conference call, we expect a headwind in fleet cost in 2012 compared to our 2011 expectations of $215 to $225 per vehicle per month. The extent of these headwinds will be dependent on our average fleet level, robustness of the used vehicle market, timing of vehicle sales and the overall execution of our Remarketing department. We anticipate this forecasted fleet cost increase will be somewhat mitigated by revenue growth and the approximately $20 million in interest saving Cliff spoke about earlier in this call.
In conclusion, the cornerstones of our strategy to maximize return on assets are profitable revenue growth, cost control, productivity initiatives and finally, disciplined fleet management. We've combined that operating approach with a very conservative management of our balance sheet, which we believe is appropriate in uncertain macroeconomic times. We are thrilled with this quarter's performance and are optimistic about our future as a standalone company.
Thanks certainly go out to our 5,900 employees for their efforts everyday in helping the company achieve its goals. Additionally, I'd like to thank our suppliers, lenders and shareholders for their ongoing support. Lastly, I'd like to say a special word of thanks to our top shareholders who have been great to work with over the last 6 months during these complex times, providing us valuable input and feedback to me and the Board. That concludes our prepared remarks. Operator, please open the call for questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question today comes from Chris Agnew with MKM Partners.
Christopher Agnew - MKM Partners LLC, Research Division
First question. I wanted to ask about sort of looking ahead, I think some of the airlines are talking about trimming capacity going into next year, and I wonder what your thoughts are on, maybe with respect to your geographic mix and if you've been tracking what the airlines have been saying?
Scott L. Thompson
Certainly, we track with what the airlines are saying. I think as we mentioned in the script, we're expecting revenues to be up next year, we're not in a position to give guidance. But I wouldn't expect revenues to be up a lot. We've looked at this economy over the last few years to be what I call kind of a slow slog back with 1% or 2% GDP growth. And I guess we're doing our long-term planning, expecting that we will continue to have kind of a slow slog back.
Christopher Agnew - MKM Partners LLC, Research Division
And on the -- just last question on -- you gave us some earlier expectations on fleet costs. But what are the some of the moving pieces that you're thinking about in terms of, is SAR started to increase, and you continue to have I think vehicles coming off lease declining next year. How do a couple of the moving pieces fit in to your thoughts, early thoughts on fleet costs next year?
Scott L. Thompson
Well, I don't think you'll get more off lease vehicles probably 2013, and although I would expect the SAR to increase, I don't think it's going to increase nearly enough to provide the used car market, the number of used cars they're going to need to support the market. If you look at used car at the retail level, we're still seeing incremental growth being reported by retailers in used car volume. And so we feel we're actually very good about the used car market, although we would expect it to come down a little bit from what we believe was what I call a Japan-impacted 2011. But we continue to be very bullish about the used car market overall the next few years.
Operator
Our next question comes from Michael Millman with Millman Research Associates.
Michael Millman - Millman Research Associates
Could you rank us some of the potential initiatives that you might have and give us some sort of rough growth impact to some of those initiatives? And then, just touching on the interest, is that $20 million -- what's that $20 million reduction assumed in regard to share repurchase expenditures?
Scott L. Thompson
I'll let Cliff talk about the interest expense item, and then I'll cover the other part of the question, Michael.
H. Clifford Buster
Yes, right now, Michael, the interest expense reductions really have to do with the decline in the interest cost on our existing fleet financing facilities. If you were to look at the interest rate that's earned on excess cash, you're talking in the teens in terms of basis points. So even if you spend the entire $400 million, it's very nonimpactful to the overall $20 million number. That has more to do with the replacement of the old higher cost financing facilities with lower-cost facilities.
Scott L. Thompson
Okay. And then, Michael, on the growth initiatives, and ranking them up, be kind of careful because you're going to walk me into giving your 2012 guidance, which you reported early on that. I think I would have say is consistent with what I said just earlier is that we expect some revenue growth next year. We expect single-digit kind of increase in deployments. Although we expect it to be a slow slog back. On the internal items that we're forecasting for cost reductions and those kinds of things, as you know, we don't forecast those. We give them to the market as they're achieved each quarter.
Michael Millman - Millman Research Associates
I was hoping but -- initiatives, talk about things you might not be doing currently.
Scott L. Thompson
We're not in a position to talk about 2012 yet.
Operator
Our next question comes from John Healey with Northcoast Research.
John M. Healy - Northcoast Research
Scott and Cliff, I was hoping we could talk a little bit more about the vehicle depreciation expense. If you look at what you're running right now, the Manheim Index at where it is today, what sort of base rate depreciation expense are you assuming? The more recent purchases in the fleet. I wasn't sure if we could just take the back out the games and look at that number, if you could kind of help us get to what the base rate assumptions are and at the used car market stay where it is today, how do we think about per unit costs?
H. Clifford Buster
Yes, I think what you have to realize on the fleet cost, John, is that the cars that we are running now, that you're seeing, $186 depreciation cost. On a lot of those cars, we started depreciating back in 2010, when the Manheim was nowhere near the 120 levels, that was back at -- between 115 and 118 when those cars came into the fleet. And so you have a similar situation to what we ran into last year, which is based on the significant rapid improvement in the Manheim, we've had the lower depreciation rates on those. The things that we can tell you is, I think, we said on the last quarter's conference call, we don't expect cap cost to meaningfully increase on a year-over-year basis on the new cars that will be coming into the feet. And then we're going to be assuming a low 120s Manheim for depreciation purposes going forward, and that's pretty much all I can give you right now.
Scott L. Thompson
Yes, the only other thing I'd add to that is, I think, on the last conference call, just for round numbers, and it's a little early to get too tied down on the numbers. That we said we expect the fleet costs to be, call it a $40 million to $45 million headwind in 2012 versus 2011. And then that's going to be offset by some operational improvements in the interest expense savings that Cliff talked about earlier. That's what we can do at this point.
John M. Healy - Northcoast Research
And then one last, Cliff, when you mentioned the interest expense savings, was that just fleet that you're talking about or is there incremental interest expense saving to what the retiring the corporate debt.
H. Clifford Buster
Certainly, the $20 million encompasses the repayment of the corporate debt as well as the 4 months worth of outstanding debt on the Canadian facility before it was paid off in April.
John M. Healy - Northcoast Research
Okay. And then just one last clarification question I had to -- for the cash at the end of the year, I would assume that there's probably restricted cash that will go to the holding company level, cash that you don't -- end of the year cash that you may be looking at?
Scott L. Thompson
The only other thing I can think of, is clearly, we're going to be doing some share repurchases. And you'll need to take that cash off the balance sheet.
Operator
Our next question comes from Steve O'Hara with Sidoti & Company.
Stephen O'Hara - Sidoti & Company, LLC
Could you just talk about the new debt, obviously its at lower rate. Is that primarily all variable rate interest?
H. Clifford Buster
No, the majority of it, of the $1.5 billion of new debt, $900 million of it is at fixed rates of interest and then $600 million of it is at conduit facility that varies 130 over the lenders cost of bonds.
Stephen O'Hara - Sidoti & Company, LLC
Okay, great. So the -- okay, all right. That's helpful. And then second, was there any impact in the hurricane -- Hurricane Irene in the quarter?
Scott L. Thompson
No. I would consider the weather events in the quarter to be normal.
Operator
[Operator Instructions] Our next question comes from Fred Lorenz with Avondale Partners.
Fred T. Lowrance - Avondale Partners, LLC, Research Division
Just a couple of questions, if I could. The first one, sort of the longer lines of an earlier question. Just looking at airline capacity, it's already started to decline as these guys tighten up the number of seats for the post-Labor Day period. Yet in the third quarter, you still put up a nice top line number driven by volume growth, still expecting some modest volume growth next year. I'm just wondering where the volume is coming from? Is this -- are you taking market share? Are these new growth opportunities? Just any color you can talk about that, please.
Scott L. Thompson
Great question to me. That has been one of the interesting things I've been looking at this year, is what I call the decoupling of some of the deployment numbers for what I've seen in the rental day numbers. Rental days in the industry appear to be growing faster than the deployments. And when I look at it in detail, I think what's going on is that people are keeping the cars longer. I think during the downturn, people kind of shortened up their trips. And we saw a little bit of contraction link the rent. And recently, we've been seeing an increase in length of rent. As I mentioned on the call, part of the confidence we feel is a very strong forward reservation book. As we sit here today, even though the market has clearly absorbed some uncertainty in Europe, we look at our inbound business coming from continental Europe. It continues to be solid. So I think some of it has to do with just length of rent, and some people are feeling okay about the economy, no matter what we see on television.
Fred T. Lowrance - Avondale Partners, LLC, Research Division
Okay, and then just switching gears just a little bit here. Just wondering if you could talk about your fleet? I know you won't talk about pricing too much and specifics. But with fleet, what did you see at the industry level in the third quarter? Seems like the second quarter over-fleeting due to Japan, some of that may have lingered because demand was so strong. So was that -- was that probably the primary driver of the softness in pricing? And then, looking forward, how would you characterize your current fleet levels based on what would be the normal seasonal levels? Are you tight, are you loose or just right? How would you think about that?
Scott L. Thompson
You want me to kind of set the framework. I mean, In the second quarter, I mean, clearly, the industry was long fleet and we talked about the reasons why we were, as an industry long fleet, as we protected ourselves from supply disruptions. Once you carry the fleet in the second quarter, quite frankly, you're glad to have it when you get to the third quarter, it's our peak season. And I suspect, although everyone hasn't had their earnings conference call, I suspect most people kept most of their fleet where they access fleet in the third quarter. Because there was demand and there's always good demand in the third quarter. And that's what we did. And then went through a rapid defleeting afterwards, which is what we've done. And if Cliff said on his portion of the call, our defleeting went well this year. Which is another way of saying it's kind of over and It's complete. And we feel good about where we are from a fleet standpoint. It's probably a little early to know where everybody else is in -- from their defleeting standpoint, but my perception is that the industry did a good job defleeting. But I also mentioned to you that our expectation is, is that we would have some slight pressure on rate during the fourth quarter. So maybe that's an indication that there's still a few too many cars out there, I don't know.
Operator
At this time, we have no other questions in queue.
Scott L. Thompson
Great. Well, thank you for your attention today. And operator, that concludes our call today.
Operator
This concludes today's conference. Thank you for joining. You may disconnect at this time.
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