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Q3/11 earnings review: stable results; uncertain outlook

Yesterday, Europcar released good Q3 earnings with stable revenues (+0.2% YTD y-o-y) despite the challenging market environment. Management claims to have had the right fleet size for the summer period and certainly fleet utilization has held up (74.7% vs 74.3% in the prior year). Revenue per day remains solid as well at EUR 35.8, up 1.1% y-o-y, although management indicated that is has started to make more price concessions in selective markets where it makes sense to do so (i.e. where revenues cover fixed and fleet costs). Further, the growth option (car2go) appears to be progressing well.

LTM EBITDAR (pre leases and fleet costs) is estimated at EUR 731 mn, largely flat since December (EUR 729 mn). However, management refused to comment on many of the issues on bondholders’ minds:

i) refinancing of UK fleet facility, where the company says talks are progressing well but without indication of likely terms and pricing,

ii) rating by agencies of the Senior Asset Revolving Facility, where management simply indicated talks were on-going, with hopes of “progress” by Q1/12, and

iii) leverage, where CEO Philippe Guillemot indicated that in a downturn, Europcar wouldn’t look to walk away from business by simply de-fleeting, but to compete for profitable business (i.e. to size the fleet such that prices cover fixed and fleet costs) and therefore de-fleeting should not be viewed as a mechanical, defensive exercise.

That said, Guillemot also indicated that a contingency plan was in place in the form of a cost savings program in order to maintain margins and “financing flexibility” in a downturn. Many commentators took this to mean that Europcar intends to remain disciplined on price and to maintain its margin (and fleet utilization), however, a large de-fleeting exercise should not be expected. Given very high leverage, bondholders continue to carry a large degree of risk, particularly as the outcome of current refinancing plans remains uncertain.

However, at least it seems that the company continues to perform well operationally and was resilient through the previous downturn. Further, there are hints of better terms from OEMs providing some uplift in 2012 despite pressure on prices. Cost savings may also provide support.