Dollar Thrifty Automotive Group, Inc. Q3 2009 Earnings Call Transcript

| About: Dollar Thrifty (DTG)
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Dollar Thrifty Automotive Group, Inc. (NYSE:DTG) Q3 2009 Earnings Call October 27, 2009 9:00 AM ET


H. Clifford Buster III - Chief Financial Officer

Scott L. Thompson - President, Chief Executive Officer


John Healy – North Coast Research

Michael Millman – Millman Research Associates

[Yuri Wertiechowski] - GLG Partners

[Derek Winger] - Jefferies & Company

[Vlad Schteinberg] - Realm Partners


Welcome and thank you for joining the Dollar Thrifty Automotive Group third quarter financial results. Thank you for standing by. At this time all participants will be in a listen only mode until the question and answer portion of today’s conference. (Operator Instructions) Today’s conference is being recorded. If you have any objection you may wish to disconnect at this time.

Now I’d like to turn the call over to your host, Mr. Cliff Buster, Chief Financial Officer.

H. Clifford Buster III

Thank you. Good morning and welcome to the Dollar Thrifty Automotive Group third quarter 2009 earnings release conference call. Scott Thompson, President and Chief Executive Officer and I will be hosts for today’s call.

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 in 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 Automotive Group 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’s website under the Investor Information tab.

Also, as I am sure you are all aware, the company filed a prospective supplement late yesterday covering the potential issuance of common stock under our existing shelf registration statement. The company is unable to comment on that offering while it is in process; therefore we will not be discussing any matters related to it in our prepared remarks or during Q&A.

Now, I would like to turn the call over to Scott Thompson.

Scott L. Thompson

Thank you, Cliff, and good morning everyone. Turning to highlights for the quarter, we are very pleased with the company’s third quarter results. In fact, it was one of the best quarters in our last five years.

In spite of a difficult economic environment, we achieved our third consecutive quarter of year-over-year improvement in both non-GAAP net income and corporate adjusted EBITDA. We feel this quarter is evidence that our plan is appropriate for the current operating environment. We are also pleased to report continued de-leveraging of our balance sheet and historic diversification in our fleet investment.

The first highlight I’d like to point out is that our corporate adjusted EBITDA for the third quarter was $54.7 million, an increase of 26% over the same period last year. We achieved these results in spite of a 20% decline in our average fleet size. This highlights the earnings potential of our company.

Another highlight for the quarter was our 2010 vehicle purchase orders. These orders will provide significant diversity in the composition of our fleet in 2010. Fleet diversification allows us to offer our customers more options to meet their individual rental needs, mitigates the risk associated with the concentration in any individual supplier, and also allows us to better manage our fleet holding costs. We greatly appreciate the support of all of our manufacturer partners.

Our 2010 vehicle purchase orders were as follows: Ford represented 34% of our buy, Chrysler 30%, GM 20%, Nissan 6%, and other manufacturers, 10%.

The last highlight I would like to report on before turning to the details of the quarter is our current revenue trend. During the month of September we experienced a year-over-year rental revenue decline of only 3%. Additionally, October is expected to be the first month since May of 2008, a 16 month period, that the company will experience year-over-year rental revenue growth.

These trends, augmented by our visibility into Ford reservations, indicate to us that we may have seen the worst of the rental revenue declines for this business cycle. The quality of the revenues continue to be similar to those of the recent quarter with pricing up and volume down year-over-year. I should note that the level of volume decline is pacing lower than the 20% decline in the second and third quarter of 2009.

Now turning to the details of the third quarter, in line with our previously announced expectation, rental revenue for the quarter declined 12.2%, primarily driven by a 21.3% decrease in rental days which was partially offset by an 11.5% increase in rate per day. This was our second consecutive quarter of double digit rate per day growth. Also we again experienced rate per day growth in both leisure and our business markets.

We continue to focus on achieving the optimal mix between pricing and volume in order to maximize our profitability. As we have stated previously, we will at times sacrifice volume in order to maintain pricing discipline. Our results for the quarter are consistent with this approach.

During the third quarter we continue to see year-over-year as well as sequential improvement in our fleet cost. Our average fleet cost per car per month was $315, representing a 2.8% decline from the prior year’s third quarter. In spite of a one-time settlement with a manufacturer incentive in the third quarter of 2008 that favorably impacted prior year’s numbers by $12.9 million or $30 per car. On a sequential basis our fleet cost was down 13.7%.

As we discussed last quarter, there are a number of factors that are favorably impacting our fleet costs. Market recovery and residual value, the move to a mostly risk fleet, extending holding periods, new controls over inventory ordering, more effective remarketing processes, better aligning vehicle mix and demand, closing of certain locations to generate high mileage on our vehicles combined with mileage cap on selected vehicles, and improved diversity of our fleet. We continue to see these factors favorably impacting fleet costs in the future.

A quick word about one of the components of our fleet cost per vehicle. As you may know, we reset vehicle depreciation rates each month based on our view of residual values in future periods, and due to the extremely difficult conditions in the used vehicle market in the fourth quarter 2008, we increased our vehicle depreciation rate. During the current quarter the company sold approximately 21,000 risk vehicles and realized a gain of $16.8 million. Gains and loss are a component in our depreciation per vehicle as they are effectively a true up of our depreciation estimates. We expect to benefit from gains on vehicle dispositions over the next two quarters and thus expect fleet cost per vehicle per month will run well below our $350 per month target during those quarters.

During the quarter our combined operating expense, [DDO], and SG&A averaged 61.1% of revenues, up from 60.1% in the third quarter of 2008. One item which significantly impacted our operating expense ratio was the triggering of significant performance bonus accruals during the quarter which impacted SG&A and DDO. The performance bonus criteria are based on stretched financial goals for the company. Although the accrual unfavorably impacted comparisons between the period, we are pleased beyond pace to achieve these goals.

Non-GAAP income for the quarter was $1.15 per share compared to $0.98 per share third quarter of 2008, an increase of 29%.

Now I’d like to have Cliff review the financial details with you for the quarter.

H. Clifford Buster III

Thank you, Scott. Please turn to Table 1 in the press release. Rental revenues for the third quarter of 2009 were $418.7 million, down 12.2% as compared to last year’s third quarter. This decline was due primarily to a 21.3% decrease in the number of rental days, partially offset by an 11.5% increase in revenue per day.

Location closures accounted for approximately 4% of the rental day decline, while the remaining decline resulted from lower demand for our services at our current price point and the planned reduction in our fleet capacity as part of our focus on return on assets.

Fleet utilization for the third quarter of 2009 declined 100 basis points to 81.2% as we continue to focus on maintaining price and discipline. On a sequential basis, utilization was up 360 basis points from the second quarter of 2009. As you might recall, the second quarter was negatively impacted by our decision to suspend inventory dispositions during the Chrysler bankruptcy.

Turning to expenses, direct vehicle and operating expenses, or DVO, were $213.4 million down $35.7 million or 14.3% from the same period last year. As a percentage of revenue, DVO expenses declined to 48.6% from 49.8% in the prior year period as we continue to realize the benefit of cost reduction initiatives and expense control efforts.

The primary drivers of the decrease in DVO were reduced personnel expenses as a result of lower transaction levels and improved efficiencies in staffing levels, lower gasoline expense resulting from lower average gas prices in a smaller fleet, and also vehicle damage and bad debt expense incurred during the quarter.

These improvements were offset by an increase in maintenance expense during the quarter as a result of running a predominantly risk fleet with extended holding periods. Vehicle depreciation was $103 million, down $34.5 million or 25.1% from the 2008 third quarter, primarily driven by a decrease in the average fleet size and the changes Scott discussed earlier.

SG&A expenses represented 12.5% of revenue for the quarter, up from 10.3% in the prior year period. SG&A for the third quarter of 2009 reflects $4.8 million in incentive compensation that Scott previously mentioned, while the company did not incur incentive compensation expense in 2008.

In addition, SG&A is impacted each quarter by changes in the value of the assets associated with certain deferred compensation plans, although the impact to SG&A is directly offset by a corresponding amount in other revenue, resulting in no net impact to the company’s pre-tax income. During the third quarter asset valuation changes resulted in additional SG&A expense of $1 million compared to a reduction of approximately $1.3 million is SG&A in the third quarter of 2008.

Interest expense during the quarter totaled $24.5 million down from $31 million for the same period last year. The reduction in interest expense primarily resulted from a reduction in total debt of approximately $873 million on a year-over-year basis.

Now turning to Table 3 of the press release, GAAP earnings per share for the third quarter of 2009 were $1.29 per share, up from $0.87 per share in the same period last year. Results for the third quarter of 2009 were impacted by an increase in the fair value of interest rate swaps representing $0.15 per share compared to a decrease of $0.02 per share in last year’s third quarter.

Excluding the impact of changes and fair value of derivatives and a charge of $0.01 per diluted share related to long life asset impairments in the third quarter of 2009, non-GAAP EPS for the third quarter of 2009 was $1.15 per diluted share compared to $0.89 in the same period last year.

Now moving to key balance sheet items on Table 2 of the press release, revenue earning vehicles net of depreciation totaled $1.4 billion, down approximately $1.3 billion or 48% from the third quarter of last year. Vehicle related debt was $1.6 billion at September 30, down approximately $843 million from last year’s third quarter and down $708 million from year end 2008.

The company’s net scheduled debt maturity occurs in January of 2010 when $400 million of fleet financing debt begins amortizing over a six month period. The fleet financing markets have shown signs of improvement in recent months and the company continues to explore various re-financing options for its 2010 and 2011 debt maturities.

As of September 30, we had $562 million of restricted cash on hand available to retire fleet debt upon maturity or to purchase additional vehicles. We ended the quarter with tangible net worth of $237 million and no net corporate debt.

Turning to liquidity at quarter end, I would highlight that our capital expenditures for the nine months ended September 30, 2009 totaled $6.9 million, a 70% decrease from the $23.6 million incurred in the prior year. We ended the quarter with over $868 million in total cash equivalents and restricted cash or over 30% of our total assets. Cash and cash equivalents totaled $306 million while restricted cash totaled $562 million.

We are in full compliance with the terms of our various financing facilities at September 30.

I will now turn the call back to Scott for a discussion of our outlook for 2009 and 2010.

Scott L. Thompson

Thank you Cliff. During the fourth quarter of 2009 the company expects slow single digit decline in rental revenue. This is in line with the company’s previously announced guidance for annual decline in rental revenues of 8% to 10% compared to last year.

During the fourth quarter of 2009 the company expects to realize year-over-year improvement in rate per day and vehicle depreciation costs per unit per month. We expect operating results in our fourth quarter of 2009 to be significantly improved from the same period last year.

Now turning to outlook for 2010, the company expects the operating environment in 2010 to improve slightly as conditions in the overall economy and credit markets continue to recover. The company expects to realize single digit revenue rental growth in 2010 and expects its fleet cost will be below $350 per unit per month throughout 2010.

In closing, we are very pleased with the company’s third quarter accomplishments and the improving trends that we are experiencing.

That concludes our prepared remarks. I’ll remind everybody again that we are unable to comment on the proposed offering that was announced last night and are not allowed to address any questions during Q&A related to the proposed offering.

Question-and-Answer Session


(Operator Instructions) Your first question comes from John Healy – North Coast Research.

John Healy – North Coast Research

I wanted to get your guys’ thoughts kind of on the long term goals for the company. Last quarter your goal was a 4% return on asset at some point in the future. I was hoping you could just kind of update us on those goals and maybe from a time frame standpoint, how we should think about the progress towards that goal and maybe understand in what time frame that might be achievable.

Scott L. Thompson

I think as you know originally we set a goal of 4% return on assets, $350 per car per month were kind of the two main goals, and then a lesser goal but also certainly on the page to be the lowest operating cost entity in the business, at least from the public companies, we can monitor those.

In talking about those three goals, we’re moving more rapidly towards the 4% return on asset goal than we thought we quite frankly would and we’re feeling very comfortable with that goal and may have to look at that goal sometime in the future. But I think that goal is achievable within a reasonable period of time. The $350 per car per month again we set that goal when our car costs were $400 plus a month. It’s clear to us that $350 per car per month, we’re at that goal obviously at $315 for the quarter, and we expect to be under that goal in 2010. So we feel very good about that goal.

From an operating cost standpoint, we work on that every day. There are a lot of cost initiatives that are in works and that’s an ongoing cultural issue that we’re going to continue to have to work on our cost structure to keep it very competitive.


Your next question comes from Michael Millman – Millman Research Associates.

Michael Millman – Millman Research Associates

Could you talk about what your revenue per day looks like on a spot basis and in particular, give us some color on where the contract business is and what renegotiations are coming up in the near and maybe not so near term and what we can expect from those.

H. Clifford Buster III

In the third quarter the spot price RPD has been very strong. The contract piece has been flat to I’d say slightly negative. Going forward we continue to see the spot price is positive and we expect the contracted RPD to be a positive starting in the fourth quarter. I think as you know from our presentation about 31% of our business is contracted business and we’re beginning to see some firmness in pricing in that area.

Michael Millman – Millman Research Associates

Can you quantify that a little bit more?

Scott L. Thompson

Single digit increase in contracted business is what I would expect in the fourth quarter.

Michael Millman – Millman Research Associates

Can you give us an idea if that’s low or high single digit?

Scott L. Thompson

Single digit, and then you need to get back in the queue.


Your next question comes from Yuri Wertiechowski - GLG Partners.

Yuri Wertiechowski - GLG Partners

A question on the operating leverage - I think it's been held back a bit, or at least you've suggested as much in the last couple quarters with the 20%-ish declines in volumes and I’m curious if you can give us some color of the extent to which that could turn a little bit more favorable in the fourth quarter with sound to be more moderate declines and perhaps a bit less incentive comp even though I do applaud you for a job well done?

H. Clifford Buster III

Excellent point. We've had to work really hard to get operating leverage at a time when revenues have been falling and we've been able to do that. And we are certainly looking forward to a period of time when we get a little bit of help from the revenue line from an operating leverage standpoint.

I think the cost that we've taken out of the system I don't expect for the cost we took out of SG&A to come back. I think those were permanent cuts and we're not expecting, I'll say, in '10 significant inflation from that standpoint. And the DVO line, of course, that's going to be variable based on some transactions. But I've got to tell you, we're taking a deep dive into DVO every day and continue to expect to find some opportunity.

I do think the performance in the third quarter was held back a little bit in that we did set some very significant stretch goals at the beginning of the year from financial standpoint for incentive comp. And the good news is we're on pace to exceed those. The bad news is we had to accrue 100% of that in the third quarter. So we should not have any drag in operating expense in incentive comp coming into the fourth quarter as those plans are capped and they've been fully accrued as of the end of the third quarter.

Yuri Wertiechowski - GLG Partners

If I can piggyback with one more on expense side, on vehicle depreciation, clearly the depreciation assumptions going in have been too conservative as is demonstrated with the quite significant gains experienced in the third quarter on a very limited amount of vehicle dispositions. Historically the fourth quarter of the calendar year has been the largest quarter in most years that I can look back on in terms of vehicle dispositions and has been considerably greater minimums than the third quarter. So how do we think about the vehicle gains that we might see in the fourth quarter versus the third?

H. Clifford Buster III

I think we will have significant gains in the fourth quarter from vehicle dispositions and probably significant gains in the first quarter of '10 for vehicle gains. Whether they're quite as much as we had in the third quarter I don't know for sure but I would characterize them as similar and significant in the fourth quarter.


Your next question comes from [Derek Winger] - Jefferies & Company.

Derek Winger - Jefferies & Company

How much is available on the revolver facility and how many? What is the letter of credits against it and what's the capital expenditure outlook?

Scott L. Thompson

Okay, that was several questions. The total revolver capacity that we have available is about $231 million. We have available capacity left under a basket for vehicle financing enhancements of about $45 million. I don't know the number for general corporate LCs off the top of my hat. I believe it's around $30 million, incremental $30 million to $50 million, incremental with LC capacity available there.

Scott L. Thompson

And then you asked about CapEx. As Cliff mentioned in his prepared remarks, CapEx was down 70%. We think of CapEx as being around, what I call normalized CapEx, being around $20 million a year. We're running significantly below that as we're watching projects very closely. So, I mean, I don't know. Do you remember what the fourth quarter budget is? I don't know what the fourth quarter number is off the top of my head. But if you're looking for normalized CapEx, I would tell you it's around $20 million although I believe it will be less than that this year.


Your next question comes from John Healy - North Coast Research.

John Healy - North Coast Research

Cliff, I was hoping you could give us some color on the excess cash that was in the funding facility at quarter end, if there was any there and maybe how much you may have moved up to the corporate level.

H. Clifford Buster III

You're speaking in terms of the excess cash enhancement down in the securitization?

John Healy - North Coast Research


H. Clifford Buster III

That number as of the end of the quarter was between $60 million to $70 million. We did not move any of that excess cash up for this quarter end.


(Operator Instructions) We now have a question from [Vlad Schteinberg] - Realm Partners.

[Vlad Schteinberg] - Realm Partners

I wanted to get your take on the sequential price and how do you see that working out in Q4?

Scott L. Thompson

As you know we got a price increase that we realized 4% in the first quarter. We got 12% in the second quarter. We got 12% in the third quarter. And the fourth quarter is generally a weaker period for the rental car industry. But from what we're seeing so far in the quarter I would expect that we're going to have similar price increase in the fourth quarter, probably double-digit based on the early bookings.

[Vlad Schteinberg] - Realm Partners

Okay but on a sequential basis probably going to be a decline, right?

Scott L. Thompson

I don't know yet. I would…

H. Clifford Buster III

We expect it to be double digit based on what we're seeing right now.


At this time we have no further questions in the queue. I will now turn the call back over to our presenters.

H. Clifford Buster III

Thank you. We appreciate the opportunity to serve. Thank you for your time today and your continued support.

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