AVIS PLUNGES ON HUGE MISS - MARGIN COLLAPSE - GUIDANCE CUT - "OVER-FLEETING"
While the growing woes facing the auto sector are well-known by now (see "Carmageddon: Ford & GM Sales Tank Despite Record July Incentive Spending") and boil down to excess capacity, insufficient demand and just a tiny - if one listens to the experts - subprime lending bubble, one key culprit has emerged as the biggest catalyst behind the chronic weakness among US carmakers: a moribund fleet, or rental, industry which has been devastated in recent years from Uber's juggernaut of disruption.
A painful reminder of that was presented moments ago when Avis Budget reported its Q2 earnings. The company reported Q2 revenue of $2.24 billion, just barely making the low end of the consensus range, while earnings were slashed in half, tumbling from $0.63 a year ago, to just $0.30 in Q2, a huge miss to the $0.52 expected. Also, that was non-GAAP: the company's GAAP EPS was barely positive at $0.04.
Making matters worse, while CAR reported a modest 2% decline in revenue in the Americas, adjusted EBITDA in the same region crashed by 41% to $96MM from $163MM a year ago, leading to a 31% drop in overall company EBITDA, from $204MM to $140MM.
In the company's discussion of Q2 results, the CEO did everything he could to sound upbeat, but he didn't quite get there. In a nutshell, everything that could go wrong for CAR did:
- Excess capacity or "industry over-fleeting",
- Surging costs i.e., "higher per-unit fleet costs", and
- A plunge in used-vehicle prices.
“Our second quarter results in the Americas reflected both a 4% reduction in pricing resulting from industry over-fleeting and higher per-unit fleet costs due to lower used-vehicle values. Consequently, we have identified $25 million of additional savings opportunities globally, bringing our total expected savings this year to $75 million, and have lowered our full-year earnings guidance to reflect the difficult first half,” said Larry De Shon, Avis Budget Group President and Chief Executive Officer. “Industry fleet levels in the Americas normalized to demand towards the end of the second quarter. This enabled us to transition to improved pricing, with revenue per day up more than 1% in July. Looking forward, I am now more optimistic that the industry issues we’ve been contending with should be behind us.”
Reported revenue of $2.2 billion was unchanged compared to the prior year, with an increase in overall rental days being offset by a decrease in pricing. Strong International revenue growth offset lower revenue in the Americas. The pricing environment together with higher per-unit fleet costs in the Americas, net of early benefits from the cost reduction initiatives, resulted in a $33 million decrease in net income to $3 million (or $0.04 per share). Adjusted EBITDA was $140 million compared to $204 million in the prior year, and adjusted net income was $25 million ($0.30 per diluted share) in the quarter.
“Our recently announced partnerships with both Waymo and RocketSpace are providing opportunities to pilot scalable new business models as we start to execute on our strategy to leverage our fleet management and logistics capabilities in the rapidly developing mobility space,” said Mr. De Shon. “I'm also excited about all of the innovative growth initiatives we've announced this year, including enabling Avis customers to transact with us through Amazon Alexa and Google Home.”
If that's what Larry is excited about we would hate to ask him what he thinks about Uber, which has led to a dramatic collapse in Avis (and Hertz') pricing power as he himself admits. As much is evident from the company's downward revised guidance, which sees FY adjusted EPS $2.40 to $2.85, sharply down from $2.85 to $3.50, and below the consensus estimate of $2.78, despite keeping its revenue guidance flat at $8.80 billion - $8.95 billion, and above the consensus estimate of $8.78 billion.
Needless to say none of the above bodes well for the US OEM sector as the fleet segment will be focusing on "rationalizing", i.e., hacking and slashing, existing business for months if not years to come, removing virtually all fleet demand from US automakers for the foreseeable future.
And as the market digests the combination of collapsing margins, lack of pricing power, "over-fleeting", higher per-unit fleet costs, and tumbling used-vehicle values, it is not happy as the plunge in both CAR and HTZ stocks demonstrates.