Business Review continued

CostEfficiency

Financial review

Results overview

Revenues from continuing operations grew 5.7% to €1,327 million, reflecting both volume growth and improved rental revenue per day.

Underlying profit before tax on continuing operations was €37.6 million (2006 – restated: €30.0 million). This increase reflects both volume growth and improved rental revenue per day, the full year benefit of the restructuring programme and gains on disposal of properties, together with the continuing turnaround of Budget. However, these were partly offset by inflationary cost increases, the higher investment in revenue management and web development capabilities and higher interest charges. Earnings per share on the same basis were 2.9 euro cents (2006 – restated: 2.3 euro cents).

Profit before tax on continuing operations was €33.2 million (2006 – restated: €1.8 million). Earnings per share on the same basis were 1.6 euro cents (2006 – restated: loss per share 0.2 euro cents).

Profit before tax including the discontinued operation was €19.7 million (2006 – restated: €7.2 million). This is stated after a net exceptional charge before tax of €22.8 million and certain re-measurement items and economic hedging gains of €2.5 million. Exceptional items represent primarily the goodwill impairment and subsequent loss on the disposal of the operation in Greece and restructuring costs. Earnings per share on the same basis were 0.3 euro cents (2006 – restated: 0.2 euro cents).

As announced earlier in the year, the Group identified a malpractice in Portugal that resulted in a restatement of the prior year comparative results. As previously reported, the adjustment resulted in a reduction to the comparative underlying profit before tax of €3.5 million.

Revenue overview

€ million   2007   2006   % change
Rental revenue   1,114   1,057   5.4
Other non-rental revenue   126   125   0.8
Corporate - continuing operations   1,240   1,182   4.9
Licensees   34   29   17.2
Avis - continuing operations   1,274   1,211   5.2
Corporate   43   36   19.4
Licensees   10   9   11.1
Budget   53   45   17.8
Revenue - continuing operations   1,327   1,256   5.7
Revenue - discontinued operation   49   81   n/a
Revenue including discontinued operation   1,376   1,337   n/a
n/a means not applicable

Avis Corporate revenue

Revenue from the continuing operations in the Avis corporately-owned business segment was 4.9% ahead of prior year at €1,240 million. Rental revenue of €1,114 million was 5.4% ahead, with other non-rental revenue (sale of fuel and other incidental operating income) broadly flat.

Billed days increased by 4.7% driven by an increase in the number of rentals in all customer groups, together with an increase in rental length in the corporate and insurance/leasing customer groups.

Rental revenue per day was ahead by 0.7%, with a good performance since Easter driven by a particularly strong result in the individual customer group across a number of markets as the benefits of previous investment in revenue management initiatives began to take hold. This improvement in rental revenue per day, which was helped by better ancillary sales, was achieved despite the negative mix effect of strong volume growth in insurance/leasing and overall longer rental length.

The analysis of rental revenue by customer type follows:

Individual
Overall rental revenue from this customer group was ahead of the prior year.

Billed days were flat, although this was in part due to the licensing of the operation in the Canaries in May. There was an increase in the number of rentals, with particularly good growth in Italy, offset by a decrease in overall rental length.

Rental revenue per day increased, benefiting from revenue management actions, with an especially strong performance in France. The Group has been successful in targeting an increase in direct business, principally through the continued development of the internet distribution channel and e-marketing initiatives.

Corporate
Overall rental revenue from this customer group was ahead of the prior year.

Billed days were up, largely driven by an increase in average rental length. The number of rentals was also higher, partly due to the acquisition of a licensee in Germany in May.

Rental revenue per day was marginally ahead for the full year, with a mixed performance by country but with some improvement in certain markets in the second half of the year.

Insurance/Leasing
Overall rental revenue from this customer group was strongly ahead against prior year, largely benefiting from certain new contracts in the UK which were won on better terms than the contracts relinquished in the previous year. There was also good growth in most other markets, including Germany which benefited from the licensee acquisition referred to above. Whilst volume was significantly ahead, rental revenue per day was below the prior year in most markets, largely driven by an increase in rental length.

Avis Licensee revenue

Overall revenue from licensee countries grew by 17.2% with good growth from all regions and a benefit from the licensing of the Group’s operation in Greece from July. Excluding this, growth in licensee revenues was 13.8%.

Budget Corporate revenue

Budget Corporate revenue of €43 million was 19.4% ahead of prior year, driven by continued strong performance in France and the UK.

Budget Licensee revenue

Budget Licensee revenue of €10 million was 11.1% ahead of prior year. There was continued growth in network revenues across the EMEA region, especially in Western Europe.

BusinessFlexibility

Discontinued operation

Revenue from the discontinued operation in Greece for the seven months of ownership in 2007 was €49 million, compared to the full year revenue in 2006 of €81 million.

Profit overview


€ million   2007   20061   % change
Corporate – continuing operations   124.7   115.8   7.7
Licensee   31.9   26.3   21.3
Avis – continuing operations   156.6   142.1   10.2
Corporate   (4.1)   (4.6)   (10.9)
Licensee   1.2   (0.2)   n/a
Budget2   (2.9)   (4.8)   (39.6)
Headquarter costs   (47.2)   (47.8)   (1.2)
Underlying operating profit – continuing operations   106.5   89.5   19.0
Underlying operating profit – discontinued operation   7.9   12.6   n/a
Amounts excluded from underlying   (21.1)   (27.7)   n/a
Operating profit including discontinued operation and amounts excluded from underlying   93.3   74.4   n/a

Underlying operating profit from continuing operations was €106.5 million (2006 – restated: €89.5 million), including a reduced €2.9 million loss from Budget (2006: loss €4.8 million). After including €7.9 million for the discontinued operation and adjusting for €21.1 million of net exceptional charges and gains on foreign exchange derivatives, operating profit was €93.3 million (2006 - restated: €74.4 million).

Avis operating result

Underlying Avis operating profit on continuing operations of €156.6 million compared to €142.1 million in the prior year (restated). This, when combined with slightly reduced headquarter costs of €47.2 million, resulted in an underlying operating profit of €109.4 million, compared to €94.3 million (restated) in the prior year.

Underlying operating costs of continuing operations increased by €48.6 million or 4.4% over the prior year (restated) to €1,164.7 million with the impact of the licensing of the Group’s operation in the Canaries broadly offsetting the acquisition of a licensee in Germany.

Cost of sales of €721.7 million was €45.9 million or 6.8% higher than the prior year (restated). Fleet costs were up €33.8 million (or 8.5%), around half of which was attributable to higher rental volumes. Fleet cost inflation, together with additional costs resulting from environmental tax changes in certain countries, were partially mitigated by improved vehicle utilisation and lower insurance expenses. Selling costs were 8.4% higher due to increased advertising and commission costs, whilst both revenue and rental related costs increased in line with volume.

Administrative expenses of €443 million were €2.7 million or 0.6% higher than the prior year (restated). Staff costs increased by 1.4%, due to salary inflation, an increase to a full complement in the revenue management team and the in-sourcing of web-development capabilities, partially offset by the full year effect of the restructuring programme implemented in the prior year. Overheads decreased by 0.8%, with a gain of €4.6 million on the disposal of certain properties and the full year effect of the restructuring being largely offset by inflationary increases and higher investment in systems.

The Avis Corporate underlying operating profit of €77.5 million was therefore up €9.5 million on the prior year (restated), whilst Avis Licensees at €31.9 million were up €5.6 million on the prior year.

All of the exceptional items reported within continuing operations relate to this business segment and the re-measurement and economic hedge items excluded from the underlying results relate to headquarter costs.

Budget operating result

Revenue of €53 million was up €8 million on the prior year. Cost of sales of €28.4 million was €5.3 million higher than the prior year, primarily driven by volume growth, whilst administrative expenses at €27.2 million were just €0.1 million higher. Consequently, the underlying operating loss of €2.9 million was €1.9 million lower than the prior year.

Corporate profitability improved as a result of the continued focus on yielding and utilisation, combined with strong cost controls. Licensee operating profit improved given the increase in revenues and tight overhead cost control.

Underlying operating margin

Underlying operating margin on continuing operations, after deducting headquarters costs, was 8.0%, being 0.9% higher than the prior year (restated). This increase reflects both volume growth and improved rental revenue per day, the full year benefit of the restructuring programme and gains on disposal of properties, together with the continuing turnaround in Budget. These benefits were partly offset by inflationary cost increases and the higher investment in revenue management and web development capabilities. Operating margin on continuing operations after exceptional items, certain re-measurement items and economic hedges was up 2.7% to 7.6%.

Discontinued operation

On 25 July 2007 the Group disposed and re-licensed its operation in Greece. Operating profit for the seven months of ownership in 2007 was €7.9 million, compared to the full year operating profit in 2006 of €12.6 million.

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