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

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