On the eve of Dollar Thrifty Automotive Group's announcement of second quarter financial results, inquiring minds want to know:
Why is Dollar Thrifty converting some corporate locations to franchises?
How is the company dealing with the move to higher mileage units?
Has the company changed its remarketing strategy?
What is the company doing to position itself for recovery and the new economy?
In an exclusive first-time interview, Scott Thompson, Dollar Thrifty president and CEO, along with Jeff Cerefice, vice president, DTG Global Franchise Operations and Development, answer these burning questions and more.
In this tough economic climate and amidst store closings, why refranchise?
Thompson: Our closings were primarily local offices that we do not think make sense for the company. Our stores targeted for refranchising would be operations that are profitable, but may not be a good use of our capital. I was a franchisee-some of these businesses would be run better by an owner/operator who is entrepreneurially focused.
Cerefice: As we made the decision to downsize our corporate operations, it was a logical conclusion instead of simply closing some stores down to see if we could channel them to our other outlet, which is franchising.
It's important to note that we never stopped franchising, even as we made an effort to buy back the larger franchises. We continued to franchise all along. We've always felt it's been a good complement to our corporate store operations. It gives us network flexibility depending on the environment. It's a nice balance.
What franchise opportunities exist right now?
Thompson: We have several opportunities. As the credit markets unfreeze you'll see more activity in that area, but I wouldn't be surprised if we do a couple more deals before year end.
Cerefice: We don't market geographically but we look to fill in and complement where we don't have corporate store operations.
What are your criteria for a franchise operator?
Thompson: The right people will have some financial staying power and have their floorplan lines in place. I think for someone that has car experience, maybe used car experience, it could be a fabulous opportunity in this market.
Cerefice: We look for two main ingredients: experience, preferably car rental experience but certainly automotive experience, and the financial ability to run certain size operations.
Thompson: Jeff [Cerefice] and his team are charged with finding as many qualified candidates as he can find. I don't mind letting some other people make some big money. If they make money, we'll make money. The threshold is finding the quality candidate.
Let's talk financing. How are you managing debt moving forward?
Thompson: We're fortunate in that the first maturity in fleet financing of any size is in the first quarter of 2010. We have that cash on our balance sheet; we can pay off that debt. We don't have any significant fleet maturities of any real issue until fourth quarter 2010.
We expect 2009 will be a difficult year for the industry. We said we were going to spend all of 2009 effectively fixing the ship. We need to get our finance, cost structure and strategies right this year so we can take full advantage of the recovery in the industry in 2010.
Are you looking at any creative ways to finance your fleet?
Thompson: We're certainly talking to all the people you'd expect us to: commercial banks, OEMs, leasing companies. We've got quite a bit of time on our hands. We're waiting for the market to price fleet financing a little more like it ought to be priced. There are available funds out there but we're not particularly keen to the terms. Unless you have a gun to your head, it doesn't seem like those are the terms you ought to jump on.
What about leasing? Is TALF money still in the picture?
Thompson: We've looked at [forms of lease deals] and we've decided to pass. We have a group of people that look at any deal in the marketplace. TALF was a good idea, but it probably won't work for the rental car industry without some major changes.
We've been in a holding pattern in terms of fleet purchases. With an eye on the economic recovery, will the rental industry increase its fleet buy for the second half of 2009?
Thompson: If you're talking about the overall size of the rental car fleet for the industry, I suspect that it would not increase much. It may even decrease in the next 12 months. If you're talking about fleet purchases from the OEMs, that gets to be an issue of how many miles are on the car and the economics of what the manufacturers are offering.
I expect next year's purchases will be more than this year in total, because everyone went to stretching out their fleet, but I don't think we're fixing to go back to robust purchases from the OEM standpoint. I don't think the overall fleet size will change significantly.
Will you be dipping into the wholesale market to fleet up?
Thompson: We at times buy a few used cars, but that depends on the OEMs and the offerings on new vehicles. To the extent that there are favorable terms on new vehicles, I don't imagine that we'll participate very aggressively in the used car market. If we don't find those transactions to be advantageous then I imagine we'll buy a few more used cars, though I don't think it will be a part of our acquisitions strategy.
What's your percentage mix of risk vehicles versus GDP?
Thompson: I would call us 90 percent risk. I imagine we'll stay pretty close to those ratios, unless manufacturers change their thinking and pricing in terms of GDP.
How is OEM pricing now?
Thompson: I would say pricing continues to be very favorable from the OEMs. The other side of the equation is the retail sales collapse. [Retail sales] might be better in the next 12 months, though SAAR will be down considerably and I doubt it will come back quickly. I have not seen or felt any OEM not wanting to sell into rental. I know [pulling back from rental sales] has been the public statement, but I don't feel that from any of the OEMs.
Do you feel then that it's the rental companies that didn't feel need to fleet up in this economy?
Thompson: I think that's exactly right.
What are the drivers of that philosophy?
Thompson: [Rental companies] chose not to fleet up aggressively in an uncertain economy and credit market. And that's been positive overall. They began to look at their balance sheet and began to feel financial stress from the credit crunch. They began to look at their business model and question what size balance sheet they want to run.
We've been very clear that we're focused on return on assets. There are two parts to that equation: You have to get your assets down, and you've got to get your return up. And that improves your ratios. Other companies seem to be following a similar strategy to make sure they're getting good returns on their assets.
What forces will motivate rental fleet sales?
Thompson: The first factor in near term-the next two years-will be the credit market. That will be more important than overall demand and OEM pricing. The credit market over the last six months has gotten better. It continues to get better. The spreads continue to contract, and availability continues to show up in different parts of the market.
Once we get comfortable with the fact that there will be a recovery and we get a positive GDP [gross domestic product], the credit market will come back. Will it come back to the extent that it had two years ago? Probably not, nor should it. Credit will be tighter, but won't be as tight or unrealistic as it is today. We feel fairly confident that over time the credit markets will heal.
Fleet financing is a very high quality loan that people don't lose money on. It's a good return for the banks and lenders. Those loans and that market should come back as the credit markets normalize, although at a higher rate than it was a couple years ago.
Can you talk about DTAG's initiatives to lower vehicle operating expense?
Thompson: We've put a little more science around the buying of fleet, with a lot of work on predicting future residuals.
We're now more disciplined as a buyer as opposed to accepting what the manufacturer wanted to sell that week. We're matching up [our buy] with customer demands so we have the right inventory to meet our customer needs.
Under Jeff [Cerefice's] leadership, that process has gotten a lot better. I feel much better about how we're buying vehicles.
What new initiatives have you undertaken in terms of remarketing?
Cerefice: We developed a direct sales team in 2007 in anticipation of the movement toward risk vehicles. Generally it's a two-pronged approach that uses our direct sales team and the auction network, with the goal of saving time to sale and certainly cost.
Thompson: Our whole science of remarketing has gotten better. [Remarketing] is getting a lot more detailed supervision than it used to. We used to think of ourselves as a rental car company only, and by the way, we had to remarket cars. We're flipping it more to the other way.
My background is in retail, so I just look at this like a big used car lot. We've incentivized our people. It moves Dollar Thrifty closer to the Enterprise model, which has a lot of local representatives and does a lot of local marketing. But I don't see us going that far.
We think the acquisition, management and disposition of the inventory are at least equal to the job of renting the cars.
How has this philosophy shift changed the business model?
Thompson: Before we were very utilization focused. You can have great utilization but it will hurt you in other areas, like revenue per unit and in remarketing. In order to get utilization up, you may be telling the remarketing guys to "shove the car out the back end of the store" when the market doesn't really want the cars.
Although we think utilization is an important statistic, it does not dominate our thinking in the organization like it used to. It's enhanced our ability to remarket the cars at the appropriate time without a gun to our head.
The result is that our fleet costs have gone down in the first quarter, and we've told the market that we would expect that some time in 2010, that our fleet costs will get back to the industry average. The concentration with Chrysler product hurt us some, but because of this utilization focus and undisciplined buying practices we had been running significantly higher than industry average.
Are you growing online auction sales?
Cerefice: We see online auction sales proportionately increasing. It's been favorable from a time and cost standpoint. It will hold a bigger place in the remarketing equation, but the need to physically see the car and buy the car will be there as well.
In terms of business/leisure mix, any initiatives in the corporate market?
Thompson: We're getting lots of inquiries from companies under cost pressure. [Corporate] business has been performing well and we'll continue to focus on it, but it's not going to be a big driver to the bottom line. We'll get small businesses, but we're not in the Fortune 500 marketplace. That part of the business is dominated by Hertz, Avis and National. We're in the small entrepreneur mom-and-pop type businesses, and we do those well.
Any foreign growth potential?
Thompson: There is a lot of opportunity in the overseas market and we're doing well. We believe we're underrepresented internationally and we're making some investments, but there won't be big drivers to the bottom line overseas anytime soon.
What part does Chrysler play in your fleet mix moving forward?
Thompson: Chrysler is still one of our main suppliers. We'll buy Chryslers and we'll buy Fords and some other manufacturers. Where exactly that mix falls by the end of the year I'm not sure yet. I think we will be less concentrated in Chrysler than we have been historically.
Have you changed your model mix?
Thompson: We have a less "rich" mix to match what our customers are telling us they want overall. We have fewer minivans and more compact cars. We never were huge into SUVs.
Do you anticipate any changes in market share?
Thompson: We don't manage market share, we manage cash flow and let the market share do what it happens to do. We expect that we'll be somewhere between 12-13 percent on airport. We do not expect to be a significant player in the local market at all; in fact I think we've closed almost all of our local market stores.
Although we have not been managing market share, since January through May, our market share has gone up. That's not by design. I think that leisure has held up better than business travel. So naturally we'll pick up some share because business travel has hit some of the others harder than us. We've picked up some value focused customers as well.
How are you dealing with the move to higher mileage units?
Thompson: As the value brand it's easier for us, because the expectations are different. We're running our cars to about 45,000 miles. As long as the top of the value chain is running their cars from 45,000-50,000 miles, we've got plenty of air cover for what we want to do.
The early returns are that the used car market can absorb and love these 40,000-50,000-mile cars. But I don't think we have enough information yet to know exactly where the sweet spot is. After 45,000 miles, you need to think about bigger repairs and things like transmissions. I don't think we're set up for that. We're very comfortable changing tires and brakes. Engine jobs and transmissions are a whole different game.
In terms of maintaining the cars, the issue really isn't cosmetic; in fact I haven't pushed our guys on that subject. But we have been aggressive on safety, making sure we've got proper tires, and good brakes and handling.
Cars are built a lot better now. We're not seeing a big pushback from the customers. They're getting educated pretty fast.
Any last thoughts on the car rental industry?
Thompson: One of the interesting things I've observed is that the car rental industry is becoming a commodity. The differentiation between the companies is getting narrow. You pick up the cars in the same location because of the airport consolidated facilities. Whereas we used to buy from our one manufacturer, we now all buy from the same manufacturers; we're all renting the same cars.
With staff cuts in the downturn, some of the high level services have been impacted at the top end of the value chain. I would suspect that some of the premium brands' wait lines are not that much different than ours now.
If you're trying to charge a premium for your product, then you have to differentiate yourself. If you're the value brand, I don't think you have to differentiate yourself, you just have to provide good value.