Short-Term Car Rental Avis Europe plc - D'Ieteren

Short-Term Car RentalAvis Europe plcWho we areAvis Europe is the leading car rental company in Europe,Africa, the Middle East and Asia, serving customers viathe Avis and Budget brands in over 3,750 locations. AvisEurope works in partnership with Avis Inc., subsidiary of theCendant group, which operates these two brands in the restof the world.What we doAvis and Budget provide short-term car rental services to abroad range of customers, including business and leisure travellers.Budget, acquired by the group in March 2003, is primarilyfocused on efficiently serving value-conscious customers.Around 80% of Avis Europe’s sales in 2005 was generated infive major markets, France, Spain, Germany, Italy and the UKand around 50% in airport locations.105 countries, over 3,750 locationsAround 8 million customers a yearOver 70 international partnershipsPartnerships support Internetgrowth and enhancebrand awarenessAvis has over 70 internationalpartnerships – more than anyof its competitors.Partnerships are one reasonwhy on-line sales,Avis Europe’s most efficientchannel, are increasing.New tailored on-line bookingtools can automatically generatecar rental quotes following flightor rail reservations.“We try harder”More than forty years ago, Avis launchedan advertising campaign, “We are only n°2.We try harder.”, which has become oneof the ten most famous advertising campaignsof all times. Today “We try harder” continuesto embody Avis’ commitment to customersatisfaction and also ensures continuousimprovement in everything they do.In 2005 Avis won a further 15 awardsfor service excellence and innovation.34 D’Ieteren - Annual Report 2005

Leadership in IT systemsTechnology enablesAvis Europe to achieveleadership in customerservice. One example is thekerb-side car return servicethat reduces return times tojust 60 seconds. The deviceis now operational inthe 125 major locationsand is delivering significantcustomer satisfactionimprovements as well asoperational efficiencies.How we do itAvis Europe’s development is supported by:• a global recognition of the Avis and Budget brands;• an extensive network footprint with representation at keyairport and train station locations;• strong travel-related partnerships with airlines, rail, creditcard and hotel companies;• leadership in IT systems including the global Wizardcomputer system providing integrated reservation, rentaland management information and the group’s Internetplatform.Avis Europe operates a balance of directly owned corporateoperations and licensees. These two operating structuresgive the group a flexible approach to meet the diversedemands of a worldwide market.The group’s management philosophy is one of decentralisationand local autonomy, underpinned by strong centralsupport services, an approach which stimulates entrepreneurialismwhilst promoting consistency of image, servicelevels and operational efficiency.A flexible business model toensure customer satisfactionand operational efficiencyFleet management is a keycompetence required in orderto maximise asset turnoverwhile guaranteeing customerdemand satisfaction even inpeak periods. Every year, morethan 180,000 cars arepurchased from more than30 manufacturers and kept7 months on average. Morethan 65% of this fleet benefitsfrom buy-back contracts withthe car manufacturersallowing Avis Europe to returnthe cars without residual valuerisks and to quickly adapt thefleet size to changing demand.The leadingcar rentalcompanyin EuropeGoing EastAsia, where Avis Europeoperates under the Avis brandonly, is one of the long-termgrowth areas for the group.Avis is present in 18 countries,including India and Chinaopened in 2003. Avis Europe’splans for China are ambitiouswith expansion into the keycities in time to welcomevisitors to the 2008 Olympicsand the Universal Exhibitionof 2010.Short-Term Car Rental35

KEY FACTS> Results ahead of expectations -difficult pricing environment offsetby improved volume and goodutilisation.> Sales revenue up 1.9% toEUR 1,276.4 million - goodsummer performance,particularly in leisure.> Current operating result 12.1%lower at EUR 100.4 million.> Current result before tax,group’s share, 27.0% lowerat EUR 22.7 million.> Restructuring costs and rightsissue expenses impacted resultfor the period.> Recovery strategy on track;- Phase I benefits beginningto flow through;- Phase II implementationprogressing with initial focuson overhead reduction.> Strengthened capital basewith successful completionof the rights issue.FINANCIAL HIGHLIGHTS (in EUR million)2005 2004 % CHANGEExternal sales 1,276.4 1,252.8 +1.9%Current operating result 100.4 114.2 -12.1%Current operating margin 7.9% 9.1% -Current net finance costs -62.1 -62.0 +0.2%Current result before tax 38.3 52.2 -26.6%Unusual items & re-measurements,before tax -35.5 -98.2 -Current result before tax,group’s share 22.7 31.1 -27.0%AVIS SALES BY CUSTOMER SEGMENTAVIS SALES BY GEOGRAPHIC MARKET2005 % CHANGELeisure 37% +5%Corporate 22% -Replacement 22% -4%Premium 19% -2005 % CHANGEFrance 21% +2%Spain 17% +2%Germany 15% +1%Italy 15% -1%UK 14% -2%Other 18% -D’IETEREN TOOK UPITS FULL RIGHTS INAVIS EUROPE EQUITYINCREASEIn July 2005, Avis Europe plc raised approximately£ 110.5 million, net of expenses,through the issue of 334.7 million new sharesat a price of 35 pence per new share byway of a rights issue to qualifying shareholdersproviding Avis Europe with a strengthenedcapital base and funds for its recoverystrategy. D’Ieteren subscribed its share ofthe equity increase, i.e. EUR 105 million.Subsequently, D’Ieteren’s shareholding inAvis Europe remains unchanged at 59.6%.ACTIVITIES AND RESULTSExtracts from the annual report 2005 of Avis Europe plc“Total sales revenue was up 1.9% at EUR1,276 million. Avis corporate revenue was1% ahead of prior year at EUR 1,209 million.Volume, in terms of billed days, was up 2.8%,with all customer groups other than replacementahead of prior year and a particularlystrong performance in leisure. Although thepricing environment remained difficult withrevenue per day 1.5% lower, there was someeasing in the second half, largely resultingfrom a reduction in longer rental lengthreplacement business. Budget corporaterevenue of EUR 34 million was up 26%.Underlying operating profit was EUR 99.9million (2004: EUR 114.2 million), includinga EUR 6.9 million loss from Budget (2004:loss EUR 8.1 million). Underlying Avis operatingprofit amounted to EUR 153.9 millioncompared to EUR 174.8 million in the prioryear. This when combined with a reductionin unallocated costs of EUR 5.4 million, toEUR 47.1 million, resulted in an underlyingoperating profit of EUR 106.8 million,compared to EUR 122.3 million in the prioryear. Avis underlying operating margin afterdeducting unallocated costs at 8.7% was1.3% lower as anticipated. The weakerpricing environment, together with theinvestment in recovery strategy initiativeswas partially mitigated by volume growthand a good utilisation performance.Net exceptional charges before taxation ofEUR 13.2 million have been incurred in theyear, of which restructuring costs of EUR 2.0million in connection with the transfer ofback-office functions to the shared servicecentre in Budapest, a further EUR 6.4 millionincurred in relation to a re-structuring projectcommenced in late 2005 covering the rolesof the group’s European headquarters,corporate operations, shared service centreand call centres. Following the group’s decisionin 2004 to terminate the agreementwith the principal contractor on the IT backofficeproject, additional termination costs ofEUR 3.6 million have been recognised in2005, primarily arising from the mitigatingaction being taken against the terminationcosts, which may lead to a net credit infuture accounting periods. During the year,the collection of credit hire receivablebalances in the Centrus business was moresuccessful than previously anticipated.Exceptional income of EUR 3.2 million hasbeen recognised reflecting a partial reversalof the receivable write-off and reorganisationprovisions made in previous periods.Additionally, various professional, legal andconsultancy costs have been incurred in theperiod in conjunction with the company’scapital restructuring and the rights issue.Where such costs are not directly attributableto the issue of new shares, or thedrawing down of new debt facilities, theyhave been recognised as exceptional items.Underlying net finance costs increasedmarginally year-on-year due to the full yearimpact from the higher cost of the loan notes36 D’Ieteren - Annual Report 2005

OUTLOOK> Overall expectations for 2006 remainbroadly unchanged.> The group continues to face a numberof challenges: a negative pricingenvironment reinforced by experiencein the first couple of months; inflationarycost pressures and specific costincreases, reflecting tougher fleet marketconditions; and a higher finance cost.> These factors are expected to bematerially offset by: improving volumetrends from the latter part of last year,which are expected to continue;the anticipated initial savings from there-structuring programme; and lowerspend on initiatives.Cost reductionAs previously announced, the group hasnow commenced a restructuring of theroles of its European headquarters, corpoissuedin the summer of 2004 offset byslightly lower average debt, benefiting fromthe receipt of the rights issue proceeds.”Note: D’Ieteren reports a current operatingresult of EUR 100.4 million for the car rentalsegment. In addition to the unusual itemsand re-measurements recognised by AvisEurope, D’Ieteren includes the amortisationof the Avis licence rights for EUR 21.7 million(already fully amortised in the accounts ofAvis Europe) as well as EUR 5.3 millionrepresenting its share of the rights issuecosts (recognised in equity in Avis Europe’saccounts).RECOVERY STRATEGY PROGRESS“The group is implementing its marginrecovery strategy. The strategy has twophases, each of which encompasses aseries of initiatives designed to drivetargeted profitable growth or to reducecosts.Phase I – Fix the basicsThis element of the strategy is wellunderway and comprises a series of initiativesto improve the basics of the businessand begin to address structural change inthe industry.Sales revenue developmentTo drive profitable growth, the group hasinvested in strengthening its sales andmarketing capability to develop channels tomarket, stimulate Avis network reservations,enhance customer service and focuson improving yield and utilisation.On-line marketing activities and continuedinvestment in enhancing website functionalityhave increased internet bookings in theyear from 18% to 24% of reservations.Arrangements have been put in place withScandinavia to improve international out-bound business. Operational investmentsto improve customer satisfaction with thecar rental collection and return processesare progressing well.Cost reductionCost initiatives have been undertaken toincrease efficiency across the cost base,including successfully reducing commissionson directly contracted business andthe reduction in post-rental adjustments.Additionally the group has invested in staffto help optimise the value on vehicle remarketingfor the fleet that is not subject tore-purchase contracts. The transfer of backofficeactivities to the group’s shared servicecentre in Budapest continued, with a totalof 80 positions having been transferred inthe year.BudgetThe Budget business has continued tomake losses but remains on track to returnto profitability on a run rate basis by the endof 2007.Phase II – Optimise the businessThe objectives of the second phase are toboth grow revenues in chosen customergroups and to substantially re-structure thecost base.Targeted growthActions are underway to migrate businesstowards more profitable customer groupsso that capital is progressively deployed togenerate a higher return. This shift will beachieved by increasing marketing spendand sales focus on these more profitablesegments and by upgrading the group’sservice to its chosen customer groups.rate operations and shared service centresto create an organisation that is both moreeffective and more efficient. The projectcomprises the following main elements:• a substantial reduction in staff and runningcosts at the European headquarters;• acceleration of the transfer of back-officeactivities into the shared service centre inBudapest;• consolidation of all call centre activities intothe existing Barcelona facility and closureof the Manchester call centre; and• a number of personnel and overhead costinitiatives within corporate operations.Subject to the employee consultationprocess which is underway, the net headcountreduction is expected to be approximately200, primarily in the Europeanheadquarters and the UK and Germancorporate operations. It is expected thatsome 180 positions will be created in theBarcelona call centre as Avis Europe closesits Manchester operation and there will befurther transfers of roles to the Budapestshared service centre. Redundancies willbe phased over the next 18 months.Non-staff related overhead costs will bereduced through a number of initiatives,including the re-negotiation and exit ofcertain non-fleet supplier contracts in theareas of telecoms, systems, transportationand professional services.In addition to EUR 6 million of exceptionalcosts taken in 2005 in respect of thisrestructuring, the exceptional costs of theproject are expected to amount to someEUR 40 million in 2006 and EUR 7 million in2007. The project will generate anticipatedsavings of around EUR 7 million in 2006,EUR 25 million in 2007 and EUR 30 millionper annum thereafter.”Short-Term Car Rental37