Avis Europe plc Avis Annual Report 2010
Avis Europe plc Annual Report 2010
World Travel Awards, World Travel car leading rental Asia’s company 2010 Awards, British Travel best business car hire company 2010 Business Travel Awards, Business Travel best car rental company worldwide 2010
World Travel Awards, World Travel business leading World’s car rental company 2010 Awards, World Travel Middle East’s business leading car rental company 2010 Business Travel Awards, Business Travel best car rental company in Europe 2010
British Travel Awards, British Travel best car company hire of the (silver) year 2010 Grand Travel Award Grand Travel best for carSweden’s rental provider 2010 World Travel Awards, World Travel Europe’s leading business leading Europe’s car rental company 2010 World Travel Awards, World Travel leading Indian Ocean’s car rental company 2010
Avis Avis Europe plc, Avis House, Park Road, 2EWBracknell, Berkshire RG12 +44 Telephone 426644(0)1344 +44Facsimile 485616(0)1344 www.avis-europe.com World Travel Awards, World Travel Awards, British Travel best car holiday hire company 2010 Africa’s leading business leading Africa’s car rental company 2010 Grand Travel Award Grand Travel for Norway’s best car rental provider 2010 Grand Travel Award Grand Travel for Norway’s best car rental provider 2011 Award winning Award avis-europe.com Annual Report 2010 85 Overview Avis Europe at a glance Shareholder information
Registered office and head office What we do Avis House, Park Road, Bracknell, Berkshire, RG12 2EW Tel: +44 (0) 1344 426644 We are a leading vehicle rental company operating two of the Fax: +44 (0) 1344 485616 main global brands, Avis and Budget, in Europe, Africa, the Registered number: 3311438 Middle East and Asia. Website The Avis Europe website, www.avis-europe.com, includes an Investor Centre Avis Europe operates the Avis and Budget brands in its territories under long-term licences from and is continuously updated with announcements and Avis news. Avis Budget Group, Inc. (ABG), which operates the brands in the rest of the world. Although under separate ownership, Avis Europe and ABG have close commercial ties, joint marketing initiatives and Registrar technology to provide a global service to customers. Shareholders with queries relating to shareholdings, change of address, lost share certificates or dividend payments should contact the Company’s registrar, Equiniti, on 0871 384 2278 or write to Equiniti, Aspect House, Spencer Road, Lancing, West Sussex, BN99 6DA.
The registrar provides a wide range of shareholder information online. Shareholders can check their holding and find practical help on transferring shares or updating their details at www.shareview.co.uk
Founders Club Founders Club members and holders of other shareholder privileges should use the following dedicated phone line for all reservations and enquiries including queries about discounts – 0844 581 0173.
Since 1 January 2005 Avis Europe plc no longer offers discounts for new shareholders.
ShareGift Market overview Shareholders with a small number of shares, the value of which makes it uneconomic to sell them, may wish to consider donating them to charity We operate in 13 countries on a corporately-owned basis through ShareGift, a registered charity administered by The Orr Mackintosh Foundation. The share transfer form needed to make a donation may be and have licensee operations across a further 102 countries. obtained from the Company’s registrar, Equiniti. Further information about Together with the ABG network, we have over 7,600 locations ShareGift is available at www.sharegift.org or by telephone: 020 7930 3737 across our worldwide network.
Customer overview Our customers can be characterised into three main groups: Individual, Corporate and Insurance/Replacement. The analysis of customers by customer type, location and country for our corporately-owned segment is as follows:
Rental revenue Rental revenue Rental revenue by customer by location by country
Insur/Rep. Other 12% 14% France 24% Spain Non-airport Airport Corporate Individual 13% 34% 54% 47% 53% Germany UK 17% 15% Italy 17%
Designed by Tor Pettersen & Partners. Typesetting by Orb Solutions Printed by Park Communications on FSC certified paper. Park is an EMAS certified CarbonNeutral® Company and its Environmental Management System is certified to ISO14001:2004. 100% of the inks used are vegetable oil based, 95% of press chemicals are recycled for further use and on average 99% of any waste associated with this production will be recycled. This document is printed on Revive 50:50 Silk, a paper containing 50% recovered waste and 50% virgin fibre sourced from well managed, sustainable, FSC certified forests. The pulp used in this product is bleached using a Totally Chlorine Free (TCF) process. avis-europe.com Annual Report 2010 1
Strategic priorities Contents
OVERVIEW verview We now intend to maximise opportunities from the improving O ifc Avis at a glance trends we are seeing across the industry as a whole, which 2 Market analysis will support our continued push for improved margins and 4 An integrated business model cash generation. The strength of our brands, service and BUSINESS REVIEW 6 Chief Executive’s review innovative offer to customers position the Group well to take 12 Corporate social responsibility full advantage of opportunities in both our traditional core and 18 Financial review emerging markets and in growing our new mobility offers. CORPORATE GOVERNANCE 24 Chairman’s statement Our focus 25 Board of Directors 26 Corporate governance report Continue to develop our strong customer oriented and 30 Risks and uncertainties 34 Statement of Directors’ responsibilities mobility brands 34 Remuneration report 42 Directors’ report Drive profitable growth FINANCIAL STATEMENTS 44 Auditors’ report Ensure capital efficiency 45 Consolidated Income Statement 46 Consolidated Statement of Comprehensive Income Strategy p6 >> 47 Consolidated Balance Sheet 48 Consolidated Statement of Changes in Equity Summary of Key Performance Indicators 49 Consolidated Cash Flow Statement 50 Significant Accounting Policies We measure our performance through a number of 56 Notes to the Consolidated Financial Statements Key Performance Indicators: 78 Auditors’ Report – Parent Company 1 Rental revenue per day5 Underlying Return 79 Parent Company Balance Sheet 3 80 Parent Company Cash Flow Statement (% change) on Capital Employed 81 Significant Accounting Policies – Parent Company +2.4% +1.6% 12.4% 82 Notes to Parent Company Financial reported currency constant currency6 (2009: 9.9%) Statements (2009: +1.0%) (2009: +0.7%) 84 Five Year Summary 85 Shareholder Information Billed days9 Utilisation10 (% change) (% pts change) (0.1)% +0.8% +1.0% pt. reported like-for-like4 (2009: +3.9% pts) (2009: (10.3)%) (2009: (8.4)%)
Underlying1 pre-tax margin2 4.2% Footnotes and detailed definitions are described on page 23 (2009: 3.0%)
Financial review p18 >> 2 avis-europe.com Annual Report 2010 Overview Market analysis Very strong 2010 performance in the improving trading environment
Operating environment Growth expectations for the airline sector tend shops with which Avis has a direct contractual Market analysis and growth to be higher than GDP growth, driven in part by relationship. This category also displays a There is little external data available regarding structural trends, in particular by the continued relatively even pattern of demand throughout the the European car rental market. The main growth of low cost airlines. The Airports Council year and customers’ requirements are similar to source is Euromonitor, who estimate that €8.0 International currently estimates growth in those in the Corporate customer group. billion of car rental revenues were generated passenger traffic for flights in Europe of 3.1% in Europe during 2010. The largest countries for 2011 and 4.1% for 2012. Partnerships by revenue were Germany (24%), Spain (17%), To support business from both Individual and France (17%), the UK (15%), and Italy (14%). Market composition Corporate customers we have an extensive During the year, Euromonitor estimated that The car rental market is generally categorised portfolio of over 70 international partnerships with a combined fleet of approximately 1.1 million either by the type of customer group, (Individual, the world’s airlines, railway networks and other vehicles was employed by the car rental Corporate, Insurance/Replacement) or by the leading travel companies. industry, representing a reduction of 2.3% location of the rental service (airport, non-airport). compared with 2009. In 2010, approximately 52% of the market was Stations/locations estimated to be Individual, with 40% being Rental locations throughout the network are Car rental industry transaction growth has Corporate and 8% being Insurance/Replacement selected for their convenience to customers, with historically been approximately correlated business. During 2010, 65% of the industry’s particular importance attached to representation to general economic activity levels plus, in revenue came from airport rentals, with 35% at airports, rail locations and other major travel the case of rentals from airports, to airline attributable to non-airport locations. points. Whilst Euromonitor estimates that across passenger volume growth. From these the market as a whole 65% of revenue comes perspectives, the operating environment in We recognise three key customer groups within from airport rentals, Avis benefits from a broadly 2010 began to recover from the difficulties our corporately-owned network, each with even distribution of revenue from airport and non- experienced in 2009. differing needs and expectations: Individuals, airport locations due to its significant international Corporate and Insurance/Replacement. network. Consensus Economics Inc report an estimated 1.7% increase in euro-area GDP for 2010, Individual: Competition contrasting with a decline of 4.0% for 2009 and These customers are individual travellers booking In Europe three large multinational companies growth of 0.3% in 2008. In respect of the UK, directly or indirectly through travel companies, comprise around 61% of the overall market. they report estimated GDP growth of 1.7% for tour operators, partnership arrangements and Euromonitor research shows that the Avis and 2010, following declines of 5.0% and 0.1% for brokers. This category is more seasonal than Budget brands had the second highest aggregate 2009 and 2008 respectively. the Corporate customer category, with demand market revenue share in Europe in 2010 at peaking over the key holiday periods. Individual 18.3%. The Europcar Group (which includes the The Airports Council International reported growth customers are principally attracted to Avis by its National and Alamo brands) holds the highest of 4.2% in European passenger numbers in 2010 widespread network, quality of service, reliability, reported share at 26.7%, while Hertz is the third compared with a reduction of 5.4% in 2009. car choice, brand, website and competitive prices. largest operator with a reported market share of 16.1%. Correspondingly, during 2010 the operating Corporate: environment began to ease across most European Corporate customers book via negotiated In specific markets we face competition from countries compared to that experienced in 2009. arrangements with their employers and other car rental operators. For example, Sixt is Euromonitor report a reduction of 2.3% in the through vehicle replacement companies. This a major competitor in Germany with a share of number of rental transactions for the industry, customer category displays a relatively even 31.8% in that market and Enterprise in the UK with revenues ahead by 0.1%. This compares to a pattern of demand throughout the year. The holding 8.1% of that market (source: Euromonitor). reduction of 10.4% in rental transactions in 2009, key requirements of Corporate customers are There are a large number of other operators with with an 8.8% reduction in revenues. competitive prices, speed and quality of service, strength in particular markets, examples being reliability, car choice, availability of management Maggiore in Italy and ADA in France. In respect of 2011, Consensus Economics Inc information and geographical coverage. forecast growth of 1.5% in euro-area GDP. In It is noteworthy that in our territories we operate respect of the UK, they report forecast GDP Insurance/Replacement: two of the three established global brands, Avis, growth of 2.1%. Both these figures are broadly These customers come through insurance and Budget and Hertz. similar to 2010 estimates. leasing companies, vehicle dealerships and repair avis-europe.com Annual Report 2010 3
Where we operate verview
Our network comprises Avis: geographic presence as operated by Avis Europe plc O countries in Western Europe (the corporately-owned countries) plus a wider network of licensee operations across the rest of Europe, Africa, the Middle East and Asia.
Avis Europe plc Avis Budget group, Inc.* Europe Americas Africa Australasia Middle East Asia Territories: Asia Corporately-owned: Countries 13 7 Corporately-owned Licensee Locations 1,897 1,997 Austria Asia Belgium Africa & Indian Ocean Czech Republic Central/Eastern Europe Licensees: France Middle East & Mediterranean Avis Countries 99 49 Germany Scandinavia Italy Budget Countries 54 52 Luxembourg No Avis presence. Netherlands Avis Locations 1,301 897 Portugal Singapore Budget Locations 613 937 Spain Switzerland *Avis Budget Group, Inc., independently owned and quoted in UK the US, operates Avis and Budget brands in the Americas, Australasia and Asia.
The Budget-branded business Budget: geographic presence as operated by Avis Europe plc is corporately-owned in seven western European countries with the remainder of the network represented by licensees.
Corporately-owned Licensee Austria Africa & Indian Ocean France Central/Eastern Europe Germany Middle East & Mediterranean Netherlands Scandinavia Spain Switzerland No Budget presence. In Asia, UK the Budget brand is operated by Avis Budget Group, Inc. 4 avis-europe.com Annual Report 2010 Overview An integrated business model
The table below links our vision and values to each of our stakeholder groups and the strategies and business drivers we have to achieve our objectives. The risks we face and the Key Performance Indicators we use to measure our progress are also set out by stakeholder.
Vision Values Strategic focus The leading global mobility solutions provider “We try harder.” is the ethos that runs through A clear strategy to grow both profitability – “Convenient mobility with the Avis human Avis and manifests itself in everything that we do and return on capital employed touch.”
Delivering long-term profitable growth The highest standards of governance Maximising opportunities from progressive demand recovery in our traditional core
lders Communicating with shareholders on a businesses o timely, clear and fair basis Strengthening leading market position and accelerating growth in fast-growing hareh
S geographical markets
Developing new mobility solutions to anticipate changing consumer behaviours
Continuing to improve cost and capital efficiency
Loyal customers choosing Avis everywhere Convenient mobility with the Avis Delivering consistently high service standards human touch
mers Working with pace and focus to meet customer
to needs, going the extra mile s Cu
Making Avis a great place to work Fostering a culture of open and informal Ensuring our people are well trained and working in which all employees can grow positively incentivised yees
o to their full potential mpl E
Alignment with travel partners to create Doing business with integrity, professionalism Seeking partnerships with companies who es
t mutual competitive advantage and sensitivity have the same ethos ffilia A siness Bu
t Minimising our environmental impacts Committed to measuring the impact that our Remaining a carbon-neutral operation business has on the environment nmen o nvir E
Make positive contributions to the quality of Community investment guidelines set out our Actively driving employee engagement y
t life in the communities where we operate investment criteria in volunteering and fundraising ni u mm Co Strategy p6 >> avis-europe.com Annual Report 2010 5
Our proven flexible business model verview helps deliver a strong performance O
Business drivers Risks Performance Strongly differentiated and global leading Managing risk through geographic and We have chosen the Key Performance brands customer diversification and maximising Indicators (KPIs) below to measure our flexibility in our business model progress over time
Growth, linked to general economic activity Funding Corporately-owned segment and, in the case of airport rentals, to airline • Rental revenue per day passenger volume growth Interest and foreign currency • Billed days • Utilisation Changing consumer attitudes towards car ownership Total Group • Underlying pre-tax margin Flexible cost base, strong asset backing with • Underlying return on capital employed a wide range of funding sources
Develop strong customer-oriented and International operations Overall satisfaction levels mobility brands Demand Net Promoter Score™ Brand leadership and service differentiation Pricing and competitive pressures Customer complaints Worldwide network Station performance
Living the “We try harder.” ethos Pensions Employee satisfaction levels consistently
Making Avis the preferred car rental employer
Fostering long-term relationships with key Fleet Retention of contracted business airline, rail and other corporate partners Relationship with Avis Budget Group, Inc. Licensee revenue Well established licensee partners Information systems Supplier diversification
Strong relationships with vehicle Insurance manufacturers Airports and railway stations
Reducing energy consumption Reduction and offset of emissions
Low-emission fleet
Risks p30 >> KPIs p6 to p23 >> 6 avis-europe.com Chief Executive’s review Business review
Annual Report2010
Strategic focus are key strategic drivers service differentiation Brand leadership and 4.2% and return on capital employed capital on return and 4.2% We significantly improvedsignificantlyWeunderlying offerings. customer mobility introducingnew andChinain expansion continued our particularly opportunities, growth future time,investedinwesame the At capital. and costs of control tight a with togetherpricing improvementsin further driving on focus our year.theduring travelindustry the todisruptions unforeseenof numbera with havealbeitstabilised, conditions economic global as industry rental car the in growth to returnprogressive a 2010seen has levels in five years. levelsfivein 12.4%,to points basis highest the 250 atallby pre-tax margin pre-tax million), €51.0 towith €35.2 milliontax (2009: We are committed to serving all of our stakeholders. Customers Shareholders Community Environment Business affiliates Employees Stakeholder 2 ahead by 120 basis points to 120byahead points basis T his has enabled us to continue to us enabled has his Drive employee engagement in volunteering and fundraising Contribute to the quality of life in the communities in which we operate Reduce ourimpactstoaminimum alliances Develop strategic incentivised Ensure ourpeoplearewell-trainedandpositively Brand differentiation standards highservice Deliver consistently efficiency Ensure capital growth Drive profitable Develop strongcustomer-oriented andmobilitybrands Main strategic focus Main strategic 1 profit before profit 3 ahead remaindifficult. We achieved thehighest growth Spainwhere thetrading environment continues to themajorityofcountries, themain exception being ashcloud inApril. We sawanimproving trend in beginningandend ofthe year andtheIcelandic conditionsacrossEurope atNorthern boththe disruptionstotravel caused byadverse weather performancewhich wasachieved despite the anddifferentiationservice all contributed tothis geographicdiversification, brand leadership improving An macroeconomic environment, our like-for-like turningpositive inthesecond half, leading toa ownedsegment during theyear withbilled days improvementinvolumes inour corporately- actionstogain market share wesawprogressive a T Progressive hroughbothmarket recoveryand our own 4 increase of0.8% forthefull year.
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income Shareholders Performance Indicators (KPIs) are set out below: reported on a regular basis, to measure the T Capital Employed U margin U O Rental revenue per day segment KPIs Corporately-owned U Billed days he Board monitors a range of financial and non-financial performance indicators, nderlying Return on nderlying pre-tax tilisation verall G roup KPIs roup points to 12.4%, driven by an improvement in operating margin U 120 basis point increase in pre-tax margin to 4.2%. Significant improvement in underlying profit before tax drove 2010 Progress arising from the ash cloud. change improvement in 2009, despite operational challenges 1.0% pt. improvement in utilisation in addition to the step- and 0.8% ahead on a like-for-like basis. saw a progressive improvement in volumes, 0.1% lower overallT optimise customer mix, which led to a 1.6% increase. investments made in revenue management and seeking to Continued to monitor capacity levels closely, capitalising on 2010 Progress amended since the comparative year in respect of this change. of this in respect year comparative the since amended have been presented KPIs the Accordingly, business. a rent-a-car of operating cost financing the it includes as margin operating underlying than indicator key performance is appropriate a margin more pre-tax underlying Directors, of the opinion the In and strong capital employed performance. hrough both market recovery and gaining market share, we nderlying return on capital employed was ahead 250 basis G roup’s performance. avis-europe.com O f these, the Key
Annual Report2010
7
Business review Customers 8 avis-europe.com revenue management and seeking to optimiseto revenue seeking managementand in madeinvestments closely, the on capitalising levels capacity monitor tohaveWe continued customers. Corporate our from greater flexibilityincreasingfor demand satisfy to product rental monthlyversatile a Flex, offer,customer introducedAvis recently the in growth substantial further sawwe addition, In industry. rental unmatchedthe in entering the rental station. station. rental theentering minutesagreementof threewithin rental and keystheir customers Preferred Avisour guarantee we“3-minutepromise” whichourunder of success continuedinnovations thecomplement solution. booking Blackberry a developmentof the and application reservation rental iPhone introducingan portals, onlineenhancingwebsites,invoiceourcustomer booking customerour re-launch of includedthe initiativeshave Recent brands. ourstrengthening and differentiating on focussed areWe Replacementcustomer group. inthelessseasonal andoff-airport Insurance/ majornewcorporate contractsand gaining share inthe Business review customer KPIs to track our performance and drive improvement. Quality of service is a key differentiator. Customer loyalty is important and we use the following Station performance Station Customer complaints Net PromoterScore O Customer KPIs verall satisfaction levels verall satisfaction U K largelyK resultaas ofwinning several
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avis-europe.com Annual Report 2010 9 Business review
Differentiation through innovation iPhone app Avis Home Delivery The Avis iPhone app launched in eight countries during 2010 and will be Designed to make the car rental experience more convenient, we launched extended to a further six countries in 2011. Customers can search for doorstep delivery and collection throughout the UK during 2010. Building vehicles, obtain quotes and book their hire cars in three easy steps and in on our existing delivery and collection capability for Corporate customers, less than three minutes. A Blackberry app is being developed for 2011. our Individual customers can now have their rental car delivered direct to their home and collected at the end of the rental for a small additional fee.
The service has proved extremely popular with customers, with over 90% of respondents to a recent survey saying they would recommend Avis Home Delivery to a friend. Customer take-up continues to show strong growth, supported by specific marketing activity including a successful nationwide radio campaign.
Avis Flex Launched in 2009, Avis Flex provides a flexible and cost effective long-term rental solution for Corporate customers. During 2010 Avis Flex was rolled out to 10 European markets with revenue growth doubling versus 2009.
New website The enhanced Avis website was launched across all corporately-owned countries and a number of licensees in June 2010. The customer journey through the website has been substantially refined, with a 50% reduction in the number of steps required to make a booking. Since launch, the number of visitors to our site who go on to make a booking has increased by circa 20%. 10 avis-europe.com Annual Report 2010 Business review Chief Executive’s review continued
capital discipline) and reduced interest rates. As launch of home delivery and collection in the a consequence, underlying pre-tax margin was UK and the development in France of an strongly increased by 120 basis points to 4.2%. alternative short-term solution for leasing customers of Citroen. Underlying return on capital employed was ahead by 250 basis points to 12.4% driven by both the Outlook improvement in operating margin and the focus on Our dual-brand strategy and global reach is capital employed. well placed to drive growth and benefit from the improving economic climate in most of our Strategic development main markets. While visibility remains limited, In addition to the continued focus on our particularly in Spain, we expect overall volumes traditional markets in Western Europe, we to further improve and we will continue to seek to continue to invest in our international operations. enhance pricing. This includes continued licensee network development (for example, the recent opening Costs and capital discipline also remain key and in Vietnam) and rapidly expanding our joint we continue to focus on improving utilisation. venture in China. In addition to the long-term Furthermore, net finance costs will reduce year- growth potential in these markets, we are already on-year, benefiting from cash flow performance beginning to benefit from the very strong growth and the full year effect of the Rights Issue. rates in outbound international travel of these We therefore expect a further increase in our customers into our traditional markets. underlying pre-tax margin during 2011.
Furthermore, we have identified growth In addition to the focus on our traditional core opportunities as consumers and businesses markets, benefiting from the Avis and Budget begin to seek to move away from existing brand strengths and close attention to quality of vehicle ownership patterns, recognising that service, we will also continue to invest in future we are well placed to help shape the evolution profitable growth opportunities, particularly of environmentally compatible mobility. Current our ongoing expansion in China and other fast investment and development activity in such growing markets, and innovate through the mobility offers includes the acquisition of Vinci introduction of further new mobility customer Park’s interest in our Paris car sharing operation, offers. The Board remains confident of further now being re-launched as Avis on Demand; the progress in the year ahead.
Footnotes and detailed definitions are described on page 23
Underlying pre-tax Underlying Return on margin (%) Capital Employed (%) 4.2 12.4 9.9 2.8 2.9 3.0 8.5 9.0
2007 2008 2009 2010 2007 2008 2009 2010
Underlying pre-tax Underlying Return on margin (%) Capital Employed (%) 4.2 12.4 9.9 2.8 2.9 3.0 8.5 9.0
2007 2008 2009 2010 2007 2008 2009 2010 avis-europe.com Annual Report 2010 11 Business review
Avis’ presence in China. Our early market entry and the strength of the Avis brand are reinforcing our leading market position. We currently have 39 locations in 28 cities and are on track to increase the number of rental stations to 100 by the end of 2012.
Wurumqi Ha’ErBin
Hohhot ShenYang
BeiJing Yinchuan TianJin DaLian
JiNan Xining Lanzhou QingDao
Xi’An NanJing JiangYin HeFei WuXi ChangZhou ShangHai ChengDu WuHan SuZhou Lhasa ChongQing HangZhou NingBo ChangSha NanChang
DongGuan Kunming XiaMen GuangZhou ShenZhen JiangMen HongKong ZhongShan 12 avis-europe.com Annual Report 2010 Business review Corporate social responsibility Being a good corporate citizen is an integral part of our business model Board level responsibility for Corporate Social Responsibility (CSR) rests with the Chief Executive. In our corporately-owned operations, CSR management and monitoring is assigned to local management. In licensee countries, our Regional Licensee Directors are responsible for promoting alignment with Group CSR principles and policies.
CSR strategy is an integral part of our “We try harder.” philosophy. We are committed to the strategy of measuring the effects of our business operations on the environment and progressively reducing the impact.
We have a comprehensive environmental In the workplace we actively seek to ensure and country headquarters and rental stations, plus programme in place to ensure that we improve employee satisfaction, which together our shared service and call centres.
progressively reduce CO2 emissions in our with customer satisfaction, is fully recognised as premises, offset non-reducible emissions, being essential for the long-term success of the Our data is reviewed and analysed by an continue to introduce less polluting vehicles Group. Our values are set out in our statement independent third party assessor working with onto our fleet and encourage our customers of business principles (see www.avis-europe.com). The CarbonNeutral® Company. and partners to offset their emissions. We are a member of the FTSE4Good Index and In 2010 emissions from our corporately-owned
We face challenges in setting formal overall the Kempen/SNS Smallcap SRI Europe Index. operations amounted to 15,901 tCO2e, a reported targets for energy consumption because in increase of 17.6% compared with 2009. However, many rental stations, particularly at airports, we Environment with the restatement of emissions relating to share our location with other users, and thus Several converging factors make our green gas and electricity usage in the UK business and have limited ability to directly affect energy use. agenda increasingly important, not least the to vehicle usage in Spain in 2009, the overall However, where possible, our corporately-owned need to align our CSR policies with those of our increase in emissions was 0.8%. country headquarters and rental stations, plus customers. We are installing on our fleet newly our shared service centres, have set individual developed electric vehicles, which are key in the Buildings and premises targets. In addition, we have forged closer links drive for a low-carbon economy. Added to this is During the year we have taken further steps with certain airport operators to introduce joint the stimulus from legislative pressures such as to make our buildings and premises more environmental initiatives, particularly in relation congestion charges in major cities and the greater environmentally friendly, and make it easier to recycling. For example, we recycle office onus on companies to disclose carbon emissions. for staff to play their part. Initiatives include: equipment and computers in conjunction with local authorities and airports. The largest of our impacts on the environment is • Reducing utility usage by conducting an
greenhouse gas emissions. Since 1997 we have internal CO2 emissions reduction programme. On community matters, our corporately-owned offset such emissions through innovative renewable This included energy audits, installing operations have made good progress in providing energy and energy efficiency projects, and through motion sensors into lighting, and changing
vehicles for community purposes and local reforestation. For every metric tonne of CO2 to lower electricity consumption technology. environmental improvements. Local management produced, we fund an equivalent metric tonne to Measurements in Germany indicate that has discretion to support staff that volunteer and be saved by climate-friendly offsetting initiatives in converting fascia signs to LED technology raise funds for causes of their choice, and the conjunction with The CarbonNeutral® Company. delivers energy savings of some 85%. year has seen a lively range of charitable activities • Signing our first green electricity contract, throughout our operations. Examples include We measure our environmental impacts through under which the entire electricity needs of the staff volunteers running for Action against Hunger a management information system that integrates European headquarters from April 2011 to in France, employees supporting the Fair Trade environmental reporting into financial reporting, March 2012 will be met from 100% renewable Association in Italy, and donating writing materials both tracking utility use and business travel. The resources such as wind turbine, bio-mass and to a primary school in Kenya from the UK. system encompasses our corporately-owned hydro systems. avis-europe.com Annual Report 2010 13
Spain: Employee volunteering in Italy: The Mary Poppins foundation Barcelona Since 2001, this voluntary foundation has been supporting children with Every quarter, when employees of the Barcelona Call Centre commit cancer in the Paediatric Oncology Clinic of the Rome General Hospital. 12 hours or more of their own time to a charitable organisation, we It provides lodging and financial help for children and their families who donate €150 to that charity. Typical volunteering in this highly successful visit Rome for cancer treatment from other countries, mainly in Asia and Business review programme involves spending time talking with elderly people and helping Africa. In the last 10 years, Avis has raised €45,000 for the foundation, with shopping or housework, or providing Spanish lessons to immigrant and collected €4,000 in 2010 to equip a sterile specialist treatment room. children in the city. Avis donates this money to the foundation through an amateur theatrical company, Dolphin’s Company, with which some Avis employees are Hungary: Toxic waste disaster involved. Every year, Avis funds a charity performance for employees, October brought Hungary’s worst-ever ecological disaster as up to a customers, partners and consultants, with proceeds donated to the million cubic metres of toxic red sludge escaped from a reservoir and Mary Poppins foundation. poured through villages and towns – eventually polluting the River Danube and affecting other European countries.
Seeking to help, the Avis shared service centre in Budapest (“BSC”) opted for donations boxes in the office which quickly filled up with €500. We subsequently tripled this amount and sent €1,500 to the Red Cross – resulting in a positive effect not only on the community affected by the disaster but also on the BSC team who united for a common cause. 14 avis-europe.com • • included: 2010in Projects world. the around projects renewableenergy andclean verified validated and independently from purchasingbyoffsets footprint Business review We have worked with with haveWeworked Certifications • • • • Company since 1997 to offset our operational C operational our 1997offset sinceto Company
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In the year ahead we will pilot other Spain, Germany, the UK, Belgium, Italy and and to make free transport available for environmentally friendly mobility solutions, with the Czech Republic. community activities. In 2010, among many the aim of formally launching the best candidates. • Ethanol-powered Saab 9-5 BioPower cars, other initiatives, we provided some 40 vehicles Ford Flexi-fuel and Toyota Prius vehicles in from Avis France to help transport artists and Car portfolio Scandinavia. equipment to a concert in aid of Les Restaurants
Continuing the “greening” of our fleet, we have du Coeur, a charity that supplies free meals for Business review signed a pre-order for 500 electric vehicles from By frequently updating our fleet, we ensure that people in need. All profits from the concert go to Renault. These will join our fleet in late 2011, and we are using the latest low-emission vehicles the charity. In Italy, we provided a car for a month by the end of the year Avis customers in seven available, and we check them after every rental for use in helping the elderly in Milan during the countries will be able to hire the Renault Fluence to maintain their optimum operating efficiency. summer holidays. ZE and Renault Kangoo Express ZE. As a result of these and other changes, 55% of In addition to this activity across our corporate
We have also extended the low-emission AVIS 2010 fleet purchases emitted less than 140g CO2 and licensee network, we support UNICEF on a ECO collection launched in the UK late in 2009. per km, on a par with European norms. variety of projects, as well as initiatives that are This guarantees customers a fuel-efficient, sub- particularly important to local staff. In the UK,
120 CO2 emission diesel model every time they Ongoing environmental focus for example, employees took part in the annual rent a car from the new collection. The year ahead will see us continuing to seek “Santa Dash”, a 5km run that raises money for
opportunities to reduce CO2 emissions from all Thames Hospicecare. In Spain, Avis in Malaga Our fleet now includes several hundred new and our buildings and operations. Specific initiatives supports people with disabilities by recycling environmentally friendly “green” cars that run on include further trials of various mobility options, waste paper, card and plastics through the fuels other than petrol or diesel, or use advanced along with our first large-scale trial of electric Disabled Parents Association. emission-reducing technologies. These include: vehicles in our increasingly “green” fleet. DRIVING ENGAGEMENT • toyota Prius vehicles extended during the year GIVING BACK Developing our people to the UK. Community Our Human Resources vision is to enable people • Honda Civic hybrids introduced in Germany We aim to make a positive contribution to the to grow within our company – developing both and Portugal. quality of life in the communities where we operate. themselves and our organisation. In 2010 we • Natural gas Volkswagen Tourans in Germany; invested in improving capability and engagement • LPG-fuelled Volkswagens in Italy. Our community investment guidelines encourage at all levels. • BMW 1 series with stop-start technology in us to help with local environmental improvements
Santa dash In the UK, employees at the Group headquarters in Bracknell took part in the annual “Santa Dash”, a 5km run that raises money for Thames Hospicecare, a local charity. 16 avis-europe.com Annual Report 2010 Business review Corporate social responsibility continued
The quality of line management is critical to 2010 also saw a major drive on leadership recognise those who achieve good results in what the development of our organisation, and we development. In partnership with Ashridge is still a tough business environment. introduced workshops to help clarify requirements Business School in the UK we ran a 3½ day and raise capabilities. Employees in all areas of leadership programme for 50 senior managers, We have been particularly aware in 2010 of the our business took part in workshops to discuss focusing on the leader’s role in shaping culture, need to thank our people at every opportunity for “what makes a great Avis manager?”. Using the driving results, and engaging teams. their continued commitment. results of this we have: In addition, we carried out a comprehensive The “We try harder.” promise • Set out a management charter outlining exactly review of some 350 managers and directors – We rely on our people to deliver the “We try what is expected of managers. looking at potential to grow within the company, harder.” promise and appreciate that it is essential • Shared best practices across the organisation. personal aspirations and possible career paths. that we make Avis an enjoyable place to work • Created a comprehensive line-manager Every individual reviewed was given open where employees can develop and grow. development programme that we will roll out feedback. across our corporately-owned countries. We keep the spirit of “We try harder.” alive Workplace through Company induction programmes and Always acutely aware that it is our people who We continued to review our organisation to ensure through our communications and training deliver our brand promise and bring “We try we remain as effective and flexible as possible. programmes. Employee recognition programmes harder.” to life, we also invested in the skills of that encourage teamwork are widely used. For our front-line customer-facing employees. In the current economic environment it has proved example, every country recognises its ‘Station even more important than ever to communicate of the Year’ and individual employees recognise In 10 stations across Europe we piloted advanced well with our staff. Despite the tight control of colleagues who have demonstrated great customer service training, and as part of this costs and employee numbers, staff morale overall commitment or service through a scheme known implemented a series of local initiatives which remains very positive and we celebrate this as ‘Making a Difference’. employees had identified as key to raising service and applaud success at every opportunity. We standards. This proved highly successful in communicate regularly and openly at team level, In addition, most of our countries hold annual boosting skill, motivation and engagement levels and enable employees to have direct contact conventions that celebrate the brand, teamwork and will be extended more widely across Europe with senior management. We continue to provide and public recognition of those who have in 2011. training and development opportunities and to exemplified the spirit of Avis.
Avis Portugal gave some truly hands-on support to a local organisation that cares for homeless people – a group that Avis volunteers feel are often overlooked.
The Centro de Acolhimento Casa do Beato hosts some 300 people every day for food, shelter and medical care. Avis volunteers collected blankets and other necessities for delivery before Christmas, but followed this with an internal poster campaign ‘This time, instead of an Avis shirt, we’ll be using an apron’ and then providing, cooking and serving a special dinner for the homeless. The whole Avis team felt they had made a real difference, and are now planning to help more social causes. avis-europe.com Annual Report 2010 17
ETHICS contact centre in Barcelona we employ some Disability policy 30 nationalities, and in our Group headquarters We are committed to encouraging the recruitment, we now have some 21 different nationalities development and retention of disabled people. working side by side. Specifically, the Company commits to:
Equal opportunities Business review • Interview all (internal or external) applicants We operate in many countries with diverse with a disability who meet the minimum criteria employment practices. Whilst respecting local for an advertised job vacancy. circumstances, wherever we operate we follow • Make every effort when employees become the principles of equal opportunity in recruitment, disabled to enable them to stay in employment. development, remuneration and advancement. • take action to ensure that key employees, such as senior managers and managers with We make every effort to offer part-time and vacancies, develop an awareness of disability, flexible working arrangements to those employees so that our commitments are met. who have personal and family commitments.
If an employee becomes disabled while working Health and safety for Avis, they are encouraged to notify the We continue to embed a robust health and safety Company and we make every effort to ensure culture across the Group, with each country continued employment. If appropriate, the required to report quarterly on key statistics. Company will arrange suitable training and rehabilitation and will make any reasonable The majority of countries have increased training adjustments. in this area, with many taking action locally to further improve performance. For example, in our Diversity contact centre in Barcelona we held a health and During 2010 we continued to focus on developing safety week to raise knowledge and awareness a workforce that reflects the communities we amongst our employees. During the week a series serve. In particular, we continued to ensure our of activities took place including workshops and management structure reflects the international relaxation sessions. nature of our business. The Avis Executive Board comprises six different nationalities. In our
Our working “climate”
As part of our drive to improve the engagement of employees, we introduced an exercise that enables us to monitor the working “climate” regularly. At least quarterly, every line manager leads a discussion with their team regarding their commitment and motivation levels, team issues, and ideas for improvement. The results of these discussions are aggregated at country level and reported to the Avis Executive Board. This process enables us to remain sensitive to the working atmosphere and morale, and quickly respond to issues.
By ensuring ownership for the working climate with managers and their teams, we have been able to empower people locally. 18 avis-europe.com Annual Report 2010 Business review Financial review
Financial results profit flow from the improvements in rental rate Trading conditions in the Individual customer Results overview per day, and our continuing tight control of costs. group stabilised as leisure customers resumed Underlying profit before tax8 increased to €51.0 Amounts excluded from underlying were €31.0 travel from the first half onwards. We achieved million (2009: €35.2 million). After a considerable million lower, primarily reflecting the exceptional particularly good increases in revenue in inbound reduction in exceptional charges and re- reorganisation actions in the prior year, with Europe as we benefited from the global economic measurement items, profit before tax was €49.7 operating profit therefore €35.8 million higher. recovery, particularly from customers travelling million (2009: €4.5 million). from the Americas, reflecting the global reach Corporately-owned operations of our brands. Overall pricing in the Individual The underlying1 basic earnings per share was customer group was ahead of general inflation. € million 2010 2009 17.8 euro cents (2009 restated: 20.0 euro cents), Consequently, rental income was ahead of the Rental revenue 1,034.8 1,011.4 reflecting the impact of a higher tax rate and comparative year. an adjustment for the combined effect of the Other revenue 118.6 107.8 increased number of shares following the Rights Rental income 1,153.4 1,119.2 Rental income in the Corporate customer group Issue and share consolidation in July. Total basic Cost of sales (665.8) (642.2) recovered strongly in the second half following earnings per share was 18.4 euro cents (2009 Gross profit 487.6 477.0 the resumption of business travel generally. restated: 0.2 euro cents). Administrative expenses (419.1) (408.9) Volumes were higher overall, despite a lower Underlying operating profit 68.5 68.1 first quarter which was impacted by the adverse Group revenue winter weather disruptions in Northern Europe. % Rental income from the corporately-owned The growth of our Avis Flex product particularly € million 2010 2009 change business segment was 3.1% higher at €1,153.4 benefited this customer group. Corporately-owned operations: rental income 1,153.4 1,119.2 3.1 million in reported currency and 2.3% higher on a constant currency6 basis. Insurance/Replacement rental income was Licensees: significantly ahead, despite being broadly flat % change versus prior period Avis 37.3 32.9 13.4 in the first half, reflecting new account wins, First half Second half Full year particularly in the UK, with an increase in rental Budget 9.6 10.3 (6.8) Rental length (0.2) 3.0 1.7 length naturally reducing rate per day. Rental 46.9 43.2 8.6 Billed days (5.1) 4.2 (0.1) income from this customer group has now Rental income 1,200.3 1,162.4 3.3 Rental revenue per day 4.5 (0.8) 1.6 recovered to above 2007 levels. These account Disposal proceeds on non- 321.6 233.1 38.0 Rental income: 0.9 4.9 3.1 wins, being of longer average length, dilute repurchase vehicles corporately-owned overall reported rate per day, but naturally smooth Group Revenue 1,521.9 1,395.5 9.1 the seasonality of the business, improving fleet In respect of our corporately-owned operations utilisation10 and use of other operating assets Rental income7 was 3.3% higher at €1,200 segment, rental income was ahead by 0.9% in the outside the peak summer period. This has the million, primarily reflecting the improved pricing first half and 4.9% in the second half, with the full benefit of enhancing overall return on capital performance in the corporately-owned segment and year improvement being 3.1%. employed3. the resumption of growth from the Avis licensee segment. Reported Budget revenues were impacted Billed days9 were 0.1% lower overall, and 0.8% Other revenue was higher as a result of both by the re-launch of former licensees in Germany and ahead on a like-for-like4 basis. We have seen stronger fuel sales and sub-licensee revenues Holland as corporately-owned operations. an improving trend in the majority of countries (both fees and leasing of vehicles) with the throughout the year, with billed days well ahead in full-year effect of certain rental locations being Disposal proceeds on non-repurchase vehicles the second half, offsetting the softer first half. sub-licensed. were 38.0% ahead of prior year primarily reflecting the re-balancing undertaken of holding We increased rental revenue per day5 by 2.4% on Rental income from corporately-owned operations periods, 2009 levels being significantly lower a reported basis and 1.6% on a constant currency is analysed geographically as follows: as we managed net vehicle purchases on a basis with a particularly strong performance in conservative basis given the then prevailing the first half, which included a circa 1% pt. benefit € million 2010 2009 economic uncertainty. from one-way rentals during the ash cloud period. France 269.4 265.4 We successfully yielded the business across the Germany 195.6 185.5 Group operating profit summer, but since August reported rental revenue Italy 193.2 190.0 per day was lower, due to the longer rental length € million 2010 2009 Spain 134.7 144.8 offered by the success of Avis Flex and customers Underlying operating profit 108.2 103.4 United Kingdom 205.0 183.4 extending rentals during adverse weather Amounts excluded from underlying: Other 155.5 150.1 conditions. Both customer and country mix also - Net exceptional credit/(charges) 0.3 (29.5) Rental income 1,153.4 1,119.2 had an effect. Rental revenue per car month, - Certain re-measurement items (2.8) (4.0) and economic hedges our combined measure of pricing and utilisation, We continue to benefit from our geographical was ahead in both the first and second halves of diversification with an improving trend in the Operating profit 105.7 69.9 the year, and in the second half we continued to majority of countries, the exception being Spain.
improve pricing, before changes in mix and rental Good growth was experienced in Germany and Underlying operating profit was €4.8 million higher length. Holland with the return of Corporate customer than the comparative period reflecting operating
avis-europe.com Annual Report 2010 19
spending and higher leisure volumes following the Reported Budget licensee segment revenue was rates on the higher average gross cash deposits integration of Budget operations. UK growth was 6.8% lower, with the reduction in fees due to the held. The effective borrowing rate was 6.5% largely the result of winning customer contracts as transfer of Holland and Germany to corporately- (2009: 6.7%) and deposit rate was 0.5% (2009: described above. owned operations being partially offset by the 1.2%). continued growth of the diverse network.
Cost of sales of €665.8 million was €23.6 million Exceptional items Business review or 3.7% higher than prior year. Fleet costs only Costs (which are structurally higher than those A net exceptional charge before taxation of €0.6 increased by €8.2 million or 2.0%, benefiting from of the above Avis licensee business as they million was recognised in the year, analysed as the 100 basis points improvement in utilisation. comprise all network support, including systems follows: During the year, we took advantage of continued and sales and marketing) were €1.5 million stabilisation in the used car markets to accelerate lower, mainly due to lower receivables provisions € million 2010 2009 the rotation of our fleet post the peak summer and reduced staff costs resulting from the Refinancing and capital 5.5 – restructuring costs period, thereby reducing the age of our vehicles. combining of the remaining corporately-owned Other cost of sales was €15.4 million or 6.4% operations with the respective local Avis business. Disposal of leasehold interest (4.8) – higher on an increased level of fuel sales at a Consequently, underlying operating profit Restructuring costs (0.1) 21.8 higher cost and the resumption of investment in increased to €5.1 million. Securitisation preparation costs – 7.8 marketing activities to support the brands. Other – (0.1) Operating margin Net exceptional charge before tax 0.6 29.5 Administrative expenses of €419.1 million were Underlying operating margin2 was 9.0%, 10 €10.2 million or 2.5% above prior year. Staff costs basis points higher than prior year, reflecting Certain costs expensed in the year in conjunction were €4.6 million or 1.8% higher. At constant the improvement in pricing, utilisation and cost with the Rights Issue and refinancing were currency and excluding the impact of share option actions, as outlined above. recognised as exceptional costs. These were and related charges and ordinary restructuring largely offset by the gain on disposal of a material costs, staff costs were 1.1% lower. We further The operating margin after net exceptional items, leasehold interest in a UK property. maintained tight control of recruitment with certain re-measurement items and economic average staff numbers in the year reduced by hedges was 6.9%, being 1.9% higher than the In the prior year, €21.8 million of restructuring 2.9% to 5,163, and continued the prior year salary prior year. This was primarily due to significantly costs were recognised in respect of rationalisation freeze for the first quarter of the year. Overheads lower exceptional administrative charges, which of our operations. were marginally higher reflecting higher receivable were a net credit of €0.3 million in the current provisions, given the economic climate, and the year (2009: charge of €29.5 million), offset by an Certain re-measurement translation effect on sterling-denominated head- increase in revenues from the disposal proceeds items and economic hedges office costs. on non-repurchase vehicles. The following items have been recognised in the year and are excluded from underlying profit Avis licensee Underlying net finance costs before tax: Profit Operating Finance before € million 2010 2009 € million 2010 2009 € million profit items tax Revenue 37.3 32.9 Finance costs Net re-measurement losses 3.1 4.6 7.7 Direct costs (2.7) (1.9) Net finance costs (excluding payable 57.5 66.4 on derivative financial on deferred consideration) instruments Underlying operating profit 34.6 31.0 Interest payable on deferred 2.0 1.9 Economic hedge adjustments (0.3) (8.7) (9.0) consideration Revenue from the Avis licensee segment was Foreign exchange loss – 2.0 2.0 Underlying net finance costs* 59.5 68.3 on borrowings 4.6% higher on a constant currency basis, with most regions ahead of prior year, and 13.4% 2.8 (2.1) 0.7 higher on a reported basis as a consequence of Average net debt 713 949 the translation benefit from favourable exchange * Excludes certain re-measurement items and economic Operating profit re-measurement losses on rates. hedges, totalling a gain of €1.2 million (2009: gain of €2.8 derivative financial instruments of €3.1 million million). arose from the recognition in the Income Despite higher costs, largely due to foreign Statement of movements in the fair value of exchange and volume related costs, underlying Average net debt was reduced from €949 forward exchange contracts used to hedge net operating profit increased to €34.6 million. million to €713 million, primarily due to the €181 sterling and Swiss franc exposures. Net re- million Rights Issue proceeds and continued measurement losses on finance items primarily Budget licensee tight management of capital assisting free cash arose from movements in the fair value of both generation. interest rate swaps used to limit the Group’s € million 2010 2009 floating interest rate exposures and an embedded Revenue 9.6 10.3 The underlying net finance costs of €59.5 million derivative in respect of the call option on the Direct costs (4.5) (6.0) were €8.8 million lower, reflecting the reduction in €250 million senior Floating Rate Notes. Economic Underlying operating profit 5.1 4.3 the underlying average net debt for the year and hedge adjustments on finance items totalling €9.0 the benefit of lower borrowing rates, as existing million largely arose from the maturity of interest hedging expired, partly offset by lower deposit rate swaps in the year (the re-measurement loss 20 avis-europe.com Annual Report 2010 Business review Financial review continued
being mainly recognised in the prior year). The Underlying basic earnings per share decreased by Other capital employed foreign exchange loss on borrowings primarily 2.2 euro cents to 17.8 euro cents (2009 restated: A reduction of €50.7 million was achieved in arose from translation of sterling debt exposures. 20.0 euro cents), with the effect of the higher the period, largely due to €33.2 million lower tax rate and the above adjustment offsetting net fleet working capital than prior year. We Joint ventures and associate an improved underlying operating profit. Total accelerated the disposal of fleet post our summer basic earnings per share increased by 18.2 euro peak, thereby reducing year-end fleet receivable € million 2010 2009 cents to 18.4 euro cents (2009 restated: 0.2 balances, and purchased certain new vehicles Share of profit of joint ventures 2.3 0.1 and associate euro cents), due mainly to higher net exceptional later in the period, then benefiting from supplier charges in the prior year. credit terms at the year-end. Also, other property, Our share of profit of joint ventures and associate plant and equipment was €6.1 million lower as increased during the year, reflecting both good Financial position and returns we maintained tight control of operational capital growth in China and a reduction in losses in Our balance sheet as at 31 December is expenditure. OKIGO, the Paris car-sharing joint venture. During summarised as follows: the year we doubled the number of locations in Shareholders’ funds China and are now operating at 39 locations in € million 2010 2009 At the end of the year, shareholders’ funds were 28 cities, with a fleet of around 4,600 cars. We Fleet 953.0 942.1 €291.9 million (2009: €62.4 million). This is reinforced our leading market position with our Other (50.5) 0.2 primarily due to the gross proceeds of the Rights appointment as the official designated car supplier Capital employed 902.5 942.3 Issue of €180.6 million, retained profit of €28.8 to the Shanghai 2010 Expo. million (2009: €0.2 million), actuarial gains of Shareholders’ funds (291.9) (62.4) €7.4 million (2009: losses of €17.6 million) and Taxation Net debt (528.4) ( 757.9) translation reserve gains of €9.4 million (2009: €5.5 million). € million 2010 2009 Taxation 15.8 (3.4) Underlying taxation 23.1 10.4 Retirement benefit obligations (68.0) (89.1) Net debt Credit on exceptional items (2.2) (5.8) Other funding (30.0) (29.5) Net debt at the year end was further reduced by (902.5) (942.3) Credit on certain re-measurement – (0.3) €229.5 million to €528.4 million driven by the items and economic hedges Rights Issue proceeds and positive free cash flow Taxation charge including exceptional 20.9 4.3 items, certain re-measurement items Fleet in the year. More details of our funding position and economic hedges The split between closing non-repurchase and are provided under the heading “Cash flow and repurchase vehicles (subject to manufacturer net debt”, below. The underlying effective rate of taxation for the repurchase arrangements, which guarantee a year was 46% (2009: 30%) as a consequence of disposal value at the end of the holding period) on Taxation results arising in different jurisdictions impacting the balance sheet is set out below: Net tax assets increased in the year following a both current and deferred taxation. In addition, one-off tax payment (that had been accrued in 2010 2009 a local law change has led to a reclassification € million % € million % previous years) as a consequence of a change in of what was previously treated as an operating overseas legislation. Ongoing tax charges for the Non-repurchase vehicles 353.5 37 364.5 39 expense now being included in the tax charge, in fleet year were offset by broadly equivalent payments amounting to €3.0 million in the year, with a Non-repurchase vehicles 0.7 – 3.1 – during the year. further €0.9 million continuing to be included within inventory as an operating expense (2009: €5.2 million Vehicles subject to 598.8 63 574.5 61 Retirement benefit obligations operating expense). The previous year also manufacturer repurchase Retirement benefit obligations were reduced by benefited from the satisfactory resolution of a agreements €21.1 million, primarily due to cash contributions number of historic matters. 953.0 100 942.1 100 to the schemes of €23.2 million, including deficit payments into the main UK scheme of €19.1 The tax on exceptional, certain re-measurement Average owned fleet decreased by 5.5% to million, partly offset by exchange translation items and economic hedges in 2010 was a credit 82,188 units. The average number of fleet units of €2.3 million. The actuarial gain arising from of €2.2 million compared to €6.1 million in 2009, operated under short-term hire operating leases applying lower inflation assumptions upon the reflecting the mix of exceptional items together during the year was 25.1% higher at 16,393, transition from Retail Price Index to Consumer with capital losses covering the gain on the with an Income Statement charge of €74.1 million Price Index measures in the UK was largely offset disposal of a leasehold property interest. (2009: €59.6 million). Therefore, the overall by the impact of applying a lower discount rate average number of fleet units, including operating assumption. The charge in the Income Statement Earnings per share lease vehicles, decreased by 1.5% to 98,581 for defined benefit schemes of €7.4 million was Earnings per share for the year has been based reflecting the further improvement in utilisation offset by an actuarial gain of €7.4 million arising upon a weighted average number of shares of during the year. from an improvement in actual investment 156.3 million to adjust for the Rights Issue and performance in the year. subsequent share consolidation; the comparative has then been adjusted to facilitate a direct comparison. avis-europe.com Annual Report 2010 21
Return on capital employed For management reporting and analysis, the Underlying return on capital employed increased movement in net debt is alternatively presented from 9.9% for the year ended 31 December as follows: 2009 to 12.4% for the year ended 31 December 2010, driven by a higher asset turn as we drove € million 2010 2009 capital employed discipline, including the further Underlying EBITDA 372.3 371.1 Business review improvement in utilisation. Net fleet fixed asset charge (246.0) (248.8) Closing fleet (11.0) 350.4 Cash flow and net debt Working capital 33.2 (4.1) Cash flow Exchange and other 12.0 12.8 Fleet cash flow (211.8) 110.3 € million 2010 2009 Net cash generated from 177.0 448.9 Net exceptional items and other (2.5) (32.1) operating activities Working capital 15.2 27.6 Net cash used in investing activities (6.3) (13.4) Pension deficit payments (19.1) (4.6) Net cash used in financing activities (3.1) (408.3) Net operating capex (9.0) (10.3) Net change in cash and cash 167.6 27.2 equivalents before foreign exchange Tax and interest (100.0) (83.2) Other movements in net debt 120.0 337.8 Non-fleet cash flow (115.4) (102.6) resulting from cash flows Net new finance leases (63.2) 11.4 Free cash flow 45.1 378.8 Other non-cash movements, 5.1 (1.1) including the effects of Proceeds of Rights Issue 180.6 – foreign exchange Other 3.8 (3.5) Decrease in net debt 229.5 375.3 184.4 (3.5)
Net cash generated from operating activities of Decrease in net debt 229.5 375.3 €177.0 million was significantly lower despite the improvement in operating profit, as in the prior Underlying EBITDA was broadly flat year-on-year. year we substantially reduced the overall size of our fleet to match demand in the then prevailing Fleet cash flow of €211.8 million represented a economic conditions. Net cash used in investing more normalised situation than the comparative, activities of €6.3 million was lower, as non-fleet as on-balance sheet fleet was increased slightly operational capital expenditure was reduced year- by the year end, contrasting to the €350.4 on-year and we sold certain financial assets held million reduction in 2009. Fleet working capital for trading. Net cash used in financing activities was improved year-on-year, largely due to the of €3.1 million contrasts to the comparative of earlier collection of de-fleeting receivables and €408.3 million; 2010 benefiting from the Rights the delivery of vehicles later in the year thereby Issue inflow compared to the cash outflow from increasing fleet payables. our debt reduction of the previous year. Overall net inflow of cash was therefore €167.6 million. Non-fleet cash flows of €115.3 million were higher than prior year. The cash outflow in respect of Other movements in net debt resulting from net exceptional items and other was primarily cash flows, primarily arise from the repayment comprised of the payment of restructuring of commercial paper, loan notes and related charges recognised in previous years. Working derivatives. The increase in net new finance leases capital inflow reflected further improvements in was due to the inception of new agreements the management of net trade receivables and exceeding the disposal of existing vehicles. payables. Pension deficit payments of €19.1 million included paying in advance €9.7 million that would have otherwise fallen due in 2011, contrasting to payments of €4.6 million in 2009. Tax and interest outflow was higher than the comparative primarily due to a one-off tax payment of €25.4 million, following a change of local law in a particular jurisdiction, offsetting a €11.6 million reduction in interest paid.
22 avis-europe.com Annual Report 2010 Business review Financial review continued
We generated free cash flow of €45.1 million. Funding In addition, as at 31 December 2010, the Group The comparative cash flow was impacted by Capital structure had outstanding loan notes and associated the reduction in fleet investment undertaken in The objective of the Group’s capital management derivative financial instruments of €535 million 2009. Together with the Rights Issue proceeds, policy is to ensure that the business has the (2009: €587 million). Of these, €101 million net debt was reduced by €229.5 million in the required financial resources to fulfil its strategic matures within one year, €109 million matures year, following the €375.3 million reduction in the goals, while ensuring that the capital structure is between one and two years, €325 million matures comparative period. both cost effective and sufficiently robust to deal between two and five years, and €nil million after with changes in economic conditions and the risk more than five years (2009: €51 million within one Net debt characteristics of the Group. year; €101 million between one and two years, 31 December 31 December €435 million between two and five years and €nil 2010 2009 € million % € million % The Group’s business is highly seasonal. As a million after more than five years). The Group also Debt due within one year (112.9) 15 (74.0) 9 result the Group increases its vehicle fleet during held cash and cash equivalents of €220 million Debt due after one year (435.6) 57 (509.5) 62 the peak summer months, the size of fleet then (2009: €52 million), being cash and short-term Finance leases (184.4) 24 (167.9) 21 reducing towards the winter period, when fleet deposits of €232 million (2009: €61 million) less Gross borrowings (732.9) 96 (751.4) 92 levels are typically lowest. Therefore, the Group’s bank overdrafts of €12 million (2009: €9 million). financing strategy is to use long-term sources of Derivative debt instruments (27.2) 4 (69.8) 8 capital, including equity, bonds and loan notes Other funding arrangements Gross debt (760.1) 100 (821.2) 100 and, to some extent, bank revolving credit facilities Where commercially beneficial, we seek to Interest bearing assets 231.7 63.3 to finance its expected base level of fleet. More optimise financing costs by entering into operating Net debt (528.4) ( 757.9) flexible sources of financing, including leases, are lease transactions, where substantially all of then used to fund the fleet during the peak season. the risks and rewards of ownership remain with We reduced the level of gross borrowings year- the lessor. At 31 December 2010, the total on-year through continued capital employed Leases include both committed finance lease commitment to pay operating lease rentals in discipline, particularly the further 100 basis facilities provided by a number of commercial future periods for land, buildings and vehicles points improvement in fleet utilisation. This banks and operating leases provided by a variety was €201 million (2009: €203 million). At the action mitigated the increase in fair value of US of vehicle manufacturers in a number of different end of the year, the Group has certain insurance, denominated debt arising from the movement in countries. operating lease and station rental commitments market interest rates and the strengthening of US which are backed by guarantees and letters of Dollar in the year. The majority of borrowings are raised through Avis credit that have been issued by banks to third Finance Company plc, an indirect wholly-owned parties amounting to €94 million (2009: €80 Despite the settlement of a $48 million US Private subsidiary of the Company, and proceeds are used million). Placement Note during the year, debt due within to finance the Group’s subsidiaries. Facilities vary one year increased as a $120 million US Private in their maturity to meet short, medium and long- Counterparty credit risk Placement Note was reclassified from long-term to term requirements of the Group. Aside from the Group’s credit risk exposure on short-term. This Note, due for repayment in June trade and other receivables (as set out in Note 19 2011, will be settled out of interest bearing assets. Rights Issue to the Financial Statements) the Group also has Finance leases increased year-on-year as a The Rights Issue was undertaken in July 2010 to credit risk exposure on cash deposits. The risk consequence of the utilisation of newly negotiated strengthen the Group’s balance sheet. The €181 is actively managed by following a policy of only facilities. million net proceeds are being used to ensure depositing with approved financial institutions that the Group has sufficient financial flexibility with strong credit ratings. Each counterparty has The fair value of derivative debt instruments to meet its investment needs going forward and a credit limit authorised by the Treasury Review decreased due to the realised portion relating to to provide for the repayment of $120 million of Committee, with exposures monitored daily and the US Private Placement Note and interest rate the Group’s USPPs when they mature in June the limits being regularly reviewed. The credit risk swaps settled during the year, and a reduction 2011. The stronger financial position now provides is assessed with regard to all exposures with each in the fair value of the remaining cross currency a platform to support the strategy of planned financial institution, including derivative contracts. interest rate swaps as the US Dollar strengthened profitable growth in both the Group’s core and over the period. emerging markets and development of new Pensions mobility solutions. The majority of the Group’s staff are within defined The increase in interest bearing assets was a contribution or applicable state sponsored pension consequence of the Rights Issue. Overall therefore, Facilities schemes. With regard to defined benefits, the there was a substantial reduction in net debt As at 31 December 2010, the Group had undrawn Group has two main schemes: an unfunded plan driven by the Rights Issue proceeds and positive committed borrowing facilities of €581 million in Germany with a liability of €39.9 million (2009: free cash flow in the period. (2009: €850 million) and additional uncommitted €35.0 million) and a UK plan, with funding held in borrowing facilities available of €338 million (2009: investments outside of the Group, having a deficit €312 million). Of the undrawn committed facilities of €23.5 million (2009: €49.8 million). €160 million expire within one year (2009: €192 million), €nil million between one and two years The scheme in Germany was closed to new (2009: €630 million) and €421 million between entrants in 2006. two and five years (2009: €28 million). avis-europe.com Annual Report 2010 23
The previous final salary defined benefit scheme • over-reliance on our partnership with Avis Footnotes and detailed definitions in the UK was closed to both then existing and Budget Group, Inc. 1 underlying excludes exceptional charges, certain net new employees in 2007 and replaced by the re-measurement and economic hedging items (see Basis of • Risk to our information systems arising from Preparation). Underlying is not a defined term under IFRS, Retirement Capital Plan, wherein the Group data protection issues or communication and is not intended to be a substitute for, or superior to, IFRS retains investment and inflation risk, and the network failures measures. 2 underlying operating margin/pre-tax margin is calculated employee any longevity risk. Assets for this • Availability of suitable insurance cover Business review as underlying operating profit/profit before tax divided by total scheme are pooled and controlled by the trustees • Dependency on the availability of rental income. of the previous scheme, together referred to as concessionary arrangements at airports and 3 Return on capital employed is the ratio of underlying the “Avis UK Pension Plan”. railway stations operating profit for the past 12 months, including the operating • Availability of appropriate level of funding profit of the joint ventures and associate, to capital employed. Capital employed is an average of current and previous two An actuarial valuation of the Avis UK Pension • Exposure to fluctuations in interest rates and period end closing balances, comprising shareholders’ funds Plan was last prepared as at 31 March 2008, foreign currencies plus net debt and other liabilities. being the first valuation carried out subject to the • Variation of assumptions impacting size of 4 Like-for-like measures comprise only those corporately- owned and agency rental stations that were in operation requirements of the Pensions Act 2004. Resulting pension deficit throughout all of the current and comparative periods. from this process, it was agreed with the trustees 5 Rental revenue per day is calculated as rental revenues that, under a nine-year recovery plan, the Group’s Going concern divided by billed days. annual cash contributions to fund the deficit During 2010 the Company successfully completed 6 Constant currency revenue data is calculated whereby both current and prior year non-euro denominated revenue would be increased effective July 2009 to £8.2 the €181 million Rights Issue and put in place a is translated into euro at the exchange rate prevailing in the million. This obligation may be re-assessed when new €375 million bank facility with a three-year equivalent month in the prior year. the results of the forthcoming triennial actuarial maturity. In addition, maturities of committed 7 Excludes the impact of IAS 16, Property, plant and valuation are available. However, in 2010 the equipment. For management reporting, revenues from the finance leases have been extended. The disposal of vehicles not subject to repurchase agreements are Group paid in advance the amount that would Directors, having made all the relevant enquiries netted against the related net book value in cost of sales – see have otherwise fallen due in 2011. consider that the Group and the Company have Basis of Preparation. adequate resources at their disposal to continue 8 These profit measures exclude exceptional charges of €0.6 million (2009: €29.5 million) and certain net re-measurement Principal risks and uncertainties their operations for the foreseeable future, and and economic hedging items totalling a loss of €0.7 million Risk mitigation is a key element of the that it is therefore appropriate to prepare the (2009: loss of €1.2 million). management role in the Group. We have a accounts on a going concern basis. 9 Billed days include any day or period less than a day for consistent process to identify, manage and help which a vehicle rental is invoiced to a customer. 10 utilisation is calculated as the average period of time during mitigate exposure to issues which may have Forward-looking statements which operational vehicles are on rent as a percentage of their a negative impact on the business. As part of This Annual Report contains a number of forward- holding period. the review process, the relative importance looking statements. By their nature, forward- of certain identified risks has changed since looking statements involve risk and uncertainty the previous year end. While risks relating to and actual outcomes and results may differ economic uncertainty on demand and residual materially from any outcomes or results expressed values are still key, the risk with regard to certain or implied by such forward-looking statements. counterparties previously identified is viewed Any forward-looking statements contained in to be substantially diminished, hence no longer this Annual Report reflect the Company’s and reported. Conversely, on re-assessment, the risk Group’s expectations with respect to future events regarding airport and railway stations has been as at the date hereof and the Group can give no added to the summary below. In respect of all assurance that these expectations will prove to such principal risks, we continue to monitor and be correct. respond to the changing environment. Martyn Smith Summarised below are the main risk factors Group Finance Director identified that may affect the Group’s business:
• Additional costs arising in international operations from unexpected changes to local regulatory environments, impacts to revenue from external factors such as political disturbance, etc • Natural disasters, economic downturn, etc may cause a reduction in demand • Pricing pressure from additional transparency with technological change and competitive pressures • Fleet risks including exposure to movements in residual values and change in supplier terms 24 avis-europe.com Annual Report 2010 Governance Chairman’s statement
Dividends Governance In line with previous statements and in view of the Sound principles of governance at Board level uncertain economic environment, the Board has not and across the Group remain a key focus for us, recommended payment of a dividend for the year particularly to ensure that management and staff in ended 31 December 2010. The Board’s intention is all our businesses identify, understand and manage to recommence the payment of dividends when the risk in a proactive way. The extensive disruption to financial and trading position of the Group allows. international travel caused by the volcanic ash cloud in April provided a good example of risk management Strategy in action. This incident presented our operations with The progressive improvement in our results was an a major and unexpected logistical challenge and I important factor supporting the Group’s successful am pleased to report that our staff responded with refinancing completed in July 2010, including the speed and flexibility to really help our customers €181 million Rights Issue and our €375 million and redeploy fleet effectively. It also demonstrated revolving credit facility. Strengthening the balance the importance of our processes to capture the sheet in this way provides a very strong platform experiences from events such as this, ensuring that to take advantage of profitable opportunities for best practice is shared across the Group. I am delighted that we have growth in our traditional markets as economic achieved such a strong trading conditions stabilise, to continue expansion in higher Through the year Board members have had a growing emerging markets and to develop new number of opportunities to meet with members performance for 2010, despite mobility solutions. of the Avis Executive Board and other senior challenging market conditions, management, and we are now expanding this Environment programme so that the Directors have further increasing both market share As car usage in general shifts towards a more opportunities to understand the business and and profitability. We saw a economical and low-emission approach, we are engage with management. During the year the progressive improvement in exploring new growth opportunities, recognising Board conducted a detailed succession planning that we are well placed to help shape the evolution review across the business. volumes during the year and of environmentally compatible mobility. As part delivered an increase in rate per of this, we are encouraging the development of Axel von Ruedorffer will retire from the Board in new mobility solutions that both reflect changing May 2011 after nearly ten years service to the day for the third consecutive consumer behaviour and complement the traditional Company and I would like to express our thanks for year. We improved underlying car rental business. his invaluable contribution over this time. We intend to appoint a new independent non-executive in due profit before tax by 45% to Outlook course to maintain the balance of the Board. €51.0 million, with pre-tax Our dual-brand strategy and global reach is well placed to drive growth and benefit from It has been a challenging and exciting year for the margin ahead by 120 basis the improving economic climate in most of our business and our employees have demonstrated points to 4.2% and return on main markets. While visibility remains limited, tremendous commitment and creativity, keeping the particularly in Spain, we expect overall volumes Avis human touch in a trading environment which capital employed ahead by 250 to further improve and we will continue to seek to continued to remain difficult. I have every confidence basis points to 12.4%, all at the enhance pricing. that the Avis “We try harder.” spirit will be just as much in evidence in 2011. highest levels in five years. Costs and capital discipline also remain key and we continue to focus on improving utilisation. Alun Cathcart Furthermore, net finance costs will reduce year-on- Chairman During the past two years we year, benefiting from cash flow performance and have engineered a significant the full year effect of the Rights Issue. We therefore expect a further increase in our underlying pre-tax turnaround of the Group, margin during 2011. effectively restructuring the In addition to the focus on our traditional core Company and reorganising the markets, benefiting from the Avis and Budget brand Avis and Budget brands for strengths and close attention to quality of service, we will also continue to invest in future profitable growth future growth. At the same time opportunities, particularly our ongoing expansion in we have continued to invest in China and other fast growing markets, and innovate through the introduction of further new mobility both customer service innovation customer offers. The Board remains confident of and product differentiation. further progress in the year ahead. avis-europe.com Annual Report 2010 25
Board of Directors
Executive Directors Non-executive Directors
Pascal Bazin (54) Alun Cathcart (67) #◊ Appointed to the Board 1 January 2008 Appointed to the Board 3 February 1997 Chief Executive (since January 2008) Chairman (since May 2004) He joined Avis France as President in 2005 from Redcats, the third largest Chairman of the Nominations Committee worldwide home shopping Group, where he was CEO of the Redcats Until 1 January 1999 he was Chairman and Chief Executive of Avis Europe specialised brands division and Senior Vice President of Group Strategy/ plc and served as Interim Chief Executive from November 2003 until March Corporate governance Development. His previous appointments include Chief Executive Officer 2004. He spent 14 years in executive positions in the transportation industry of a number of international divisions of the cosmetic group, Yves Rocher. before joining Avis Europe in 1980, and became Chief Executive in 1983. He began his career in 1980 with management consulting firm Peat He is also Chairman of Palletways Group Limited and Andrew Page Holdings Marwick Mitchell, after graduating from Polytechnique school in Paris. Limited, and a non-executive Director of Justice Holdings Limited.
Jean-Pierre Bizet (62) Les Cullen (59) *#◊ Appointed to the Board 29 October 2002 Appointed to the Board 25 May 2004 Executive Deputy Chairman (since May 2004) Chairman of the Audit Committee He was appointed a non-executive Director of the Board in October 2002, He has held successive appointments as Group Finance Director of STC plc, and became Executive Deputy Chairman in May 2004. A former Director De La Rue plc, Goodman Fielder Ltd, Inchcape plc and Prudential plc, having at McKinsey & Co. Inc., France, and Managing Director of the Belgian retail previously held senior financial roles with Black & Decker and GrandMet. conglomerate GIB Group, he joined s.a. D’Ieteren n.v. in 2002 and was He is a non-executive Director and Chairman of the Audit Committees of appointed its Chief Executive Officer in May 2005. He is also Chairman of Interserve plc and F&C Global Smaller Companies plc. He is also a trustee the board of Belron s.a. of the charity Sustrans Ltd.
Martyn Smith (55) Roland D’Ieteren (69) #◊ Appointed to the Board 11 September 2002 Appointed to the Board 3 February 1997 Group Finance Director (since September 2002) Since May 2005 he has been Chairman of s.a. D’Ieteren n.v., having He joined Avis Europe from John Menzies plc where he held the position of previously been President and Chief Executive Officer since 1975. He joined Group Finance Director from 1999 to 2002. Prior to joining Menzies, he was s.a. D’Ieteren n.v. in 1971. He is a non-executive Director of Belron s.a. Group Financial Controller for Inchcape plc, and previously held a number of financial roles with Inchcape plc and Rothmans International. Benoit Ghiot (41) Appointed to the Board 15 December 2004 He is Chief Financial Officer of s.a. D’Ieteren n.v., having joined the Company in 2002, and is also a member of the Board of Directors of Belron s.a. Prior to joining the D’Ieteren group he was Group Controller and Strategic Planning Director with the Belgian retail group GIB.
Axel von Ruedorffer (69) *#◊ Appointed to the Board 27 June 2001 From 1984 to 2002 he was a member of the Board of Managing Directors of Commerzbank AG, having joined the bank in 1967 and was responsible for Accounting and Taxes, Compliance, Financial Control and Internal Auditing. He is a non-executive Director of a number of companies, including Stiebel Eltron Group and a number of financial institutions.
Pierre Alain De Smedt (66) *#◊ Appointed to the Board 1 February 2007 Chairman of the Remuneration Committee (since May 2008) He is Chairman of FEB (Belgian Federation of Enterprises). He was with Volkswagen for 25 years, managing operations in Belgium and South America and was appointed Chairman of Volkswagen’s Spanish SEAT business in 1997. He moved to Renault for five years, becoming Deputy Director General for Renault Groupe SA. He currently holds a number of directorships with Belgacom, Deceuninck and Alcopa.
* Member of the Audit Committee # Member of the Nominations Committee ◊ Member of the Remuneration Committee 26 avis-europe.com Annual Report 2010 Governance Corporate governance report
Code principles Executive, the Chairman is responsible for encouraging close and effective This report explains how the corporate governance principles set out in the working relationships between Group level management and all levels of Combined Code on Corporate Governance 2008 (the Code) are applied by corporately-owned and licensee operations. The Chairman also chairs the the Company. Nominations Committee and has responsibility for ensuring that Board evaluation processes are carried out and their results acted upon. Board of Directors The names and biographical details of the Directors, including their The role of the non-executive members of the Board is to bring objective and Committee memberships, are set out on page 25. There were no changes informed judgement to Board discussions, with key areas of focus being: to the composition of the Board between 1 January 2010 and 25 February 2011. • reviewing business and management performance • development of strategy All Directors will stand for re-election at the forthcoming Annual General • reviewing and monitoring financial controls and risk management Meeting, with the exception of Axel von Ruedorffer who will retire from the • determining appropriate remuneration levels Board immediately following the Annual General Meeting on 25 May 2011. • developing succession planning at senior levels of the Group. The Board is currently seeking a new independent non-executive Director to replace him. The Chairman meets separately with the non-executive Directors at least annually in order to facilitate the non-executive Directors’ contribution to the As at 25 February 2011, the Board comprised the Chairman, three Board. The Company did not have a nominated Senior Independent Director executive Directors and a further five non-executive Directors. Three of during the period to 25 February 2011 and the Nominations Committee the non-executive Directors (Les Cullen, Pierre Alain De Smedt and Axel continues to keep this role under review. von Ruedorffer) are considered to be independent. Although Axel von Ruedorffer has now been a Director for over nine years, having been Board processes appointed for a further one year term at the 2010 Annual General Meeting, To enable the Board to function effectively, full and timely access is given Board continuity was viewed as particularly important for the Rights Issue to all relevant information. The Company Secretary is responsible for and refinancing undertaken in 2010. The Company considers that Axel ensuring that Board procedures are followed and for advising the Board, von Ruedorffer remains an independent Director, while recognising that through the Chairman, on all matters of governance. All Directors have this length of service is not in line with Code recommendations. The two access to the Company Secretary whenever they require. In the event remaining non-executive Directors (Roland D’Ieteren and Benoit Ghiot) and that any Director wishes to take independent professional advice on any the executive Deputy Chairman (Jean-Pierre Bizet) are appointed by s.a. point arising in connection with the exercise of their duties, the Company D’Ieteren n.v., which has a shareholding of 59.6% in the Company, pursuant Secretary will arrange this at the Company’s expense in accordance with to the terms of a Relationship Agreement entered into at flotation in 1997. written procedure. The Company Secretary may only be removed by a Under the Relationship Agreement, s.a. D’Ieteren n.v. is obliged to ensure resolution of the Board of Directors. that its appointed Directors exercise their voting rights so as to maintain the independence of the Board, as required by the Listing Rules, thus ensuring Board evaluation that all Directors take decisions objectively in the interests of the Company. During 2010 the Board carried out its annual evaluation process, which is Further details of the Relationship Agreement are set out in the Directors’ designed to provide a thorough evaluation of the Board’s own performance Report on page 42, together with information relating to the Company’s and that of its Committees. Evaluations are conducted via a set of structured capital structure. questionnaires which ask each Board/ Committee member to comment on a range of factors which contribute to the effectiveness of the Board or the The role of the Board relevant Committee. The Board is collectively responsible for providing clear and effective leadership of the Group by setting strategic objectives and providing the The results of the Board evaluation are reviewed by the Chairman and highest values and standards for the conduct of the Company’s business. relevant feedback is provided to the Board to agree any appropriate action, The Board’s key areas of focus are: with a similar process undertaken by the Chairman of each Committee.
• Formulation of strategy Board Committees • Ensuring that effective plans are developed for both the short-term and The Board has established a Nominations Committee, Remuneration longer-term development of the Group Committee and Audit Committee as described below. The terms of reference • Increasing shareholder value for each of the Committees are available on the Group’s website at • Significant financing arrangements www.avis-europe.com. In addition to the effectiveness evaluation, each • Ensuring that a framework of appropriately prudent and effective controls Committee conducts an annual review of its terms of reference, and is maintained recommends to the Board any changes that may be required. • Corporate governance
The roles of the Chairman and the Chief Executive are separate. The Chairman is responsible for leadership of the Board and for corporate governance, in particular for facilitating the contribution of the non-executive Directors, and ensuring that the Company maintains effective communication with its shareholders and other stakeholders. In coordination with the Chief avis-europe.com Annual Report 2010 27
Nominations Committee recognises that the representation of the D’Ieteren-appointed Directors on The Committee is responsible for ensuring that the Company has a the Committee is not in compliance with the Code, as Roland D’Ieteren is not rigorous and transparent process for the appointment of new Directors. The regarded as an independent non-executive Director and Jean-Pierre Bizet Committee’s key responsibilities are: is an executive Director, but considers it essential that s.a. D’Ieteren n.v., as the majority shareholder of the Company, is represented on the Committee. • periodic review of the Board’s structure and composition The D’Ieteren-appointed Directors abstain from discussion and voting on the • setting objective criteria for new appointments to the Board, including remuneration of any Directors appointed by s.a. D’Ieteren n.v. pursuant to the sufficient time availability for the role, especially for chairmanships Relationship Agreement referred to on page 26. Corporate governance • regular review of succession plans for the Board, members of the Avis Executive Board and other senior executives across the Group to The Chief Executive, Group Finance Director and Group HR Director attend ensure that continuing management capability is available to match the meetings of the Remuneration Committee by invitation of the Chairman of the development needs of the business Committee. • ensuring that Board induction and training requirements are met. Audit Committee During 2010, the Nominations Committee reviewed Board succession The Committee assists the Board by ensuring that the Group presents planning and approved certain changes to the senior management team in a balanced and understandable assessment of its position with regard order to support the business needs of the Group going forward. to financial reporting, including interim, preliminary and other formal announcements relating to the Group’s financial performance. The The members of the Nominations Committee are disclosed on page 25, and Committee’s key responsibilities are: their attendance at meetings in the table overleaf. There were no changes to the composition of the Committee between 1 January 2010 and 25 February • monitoring the integrity of the Group’s financial statements and the 2011. As recommended by the Combined Code, the membership of the effectiveness and independence of the external audit process Committee comprises a majority of independent non-executive Directors. The • ensuring that an appropriate relationship between the Group and the Chief Executive and Group HR Director attend meetings of the Nominations external auditors is maintained, including review and (where appropriate) Committee by invitation of the Chairman of the Committee. approval of any non-audit services to be provided by the auditors, and related fees, in line with the Group’s written policy Remuneration Committee • reviewing the appropriateness of the Group’s accounting policies The Committee’s remit is to ensure that the Company has a rigorous and • reviewing the effectiveness of the system of internal control, as set out transparent process for developing policy on executive remuneration. The under the Internal control and risk management section below Committee’s key responsibilities are: • reviewing the effectiveness of the internal audit and risk management function • determining policy on remuneration and terms of service for senior • approving, upon the recommendation of the Group Finance Director, the executives, including notice periods, termination payments and appointment and termination of the head of the internal audit and risk compensation commitments in the event of early termination management function. • approving the terms of appointment for the Chairman, executive Directors and members of the Avis Executive Board In 2010 the Audit Committee discharged its responsibilities by: • structuring and allocation of the Group’s share incentive schemes, including the setting of appropriate performance targets. • reviewing the Group’s draft annual financial statements, interim results statement, and interim management statements prior to Board approval In setting policy, the Committee ensures that appropriate incentives are • reviewing going concern provided to attract, retain and motivate executives of the appropriate calibre, • reviewing the appropriateness of the Group’s accounting policies and their to encourage performance and, in a fair and responsible manner, to reward compliance with International Financial Reporting Standards, together with individual contributions to the Group. The Committee takes account of market material accounting estimates and judgments practice, the Group’s position relative to other companies and the pay and • reviewing the working capital report and prospectus disclosures in employment conditions of other Group employees. The Committee consults connection with the Rights Issue with the Chairman and/or Chief Executive, as appropriate, when determining • reviewing a report on the Group’s systems of internal control and their the individual remuneration package of each executive Director. However, no effectiveness Director is involved in deciding his own remuneration. • receiving regular updates on the key risk areas set out in the Risks and uncertainties section on pages 30 to 33 The activities of the Committee during the year, together with details of • reviewing the proposed annual internal audit programme and receiving all Directors’ remuneration and service contracts are described in the regular progress reports Remuneration Report on page 34. • assessing the effectiveness of the internal audit and risk management function together with their resources and standing in the Group The members of the Remuneration Committee are disclosed on page 25, and • reviewing the effectiveness of whistleblowing arrangements their attendance at meetings in the table overleaf. There were no changes to • appraising the external auditor’s plan, including key areas of scope and the composition of the Committee between 1 January 2010 and 25 February key areas of risk 2011. Roland D’Ieteren has appointed Jean-Pierre Bizet, another D’Ieteren • considering and approving the audit fee and reviewing non-audit fees appointed Director, who is also an executive Director, as his alternate for the payable to the Group’s external auditors during the year purpose of attendance at Remuneration Committee meetings. The Company • assessing external auditors’ effectiveness and independence, and making recommendations to the Board regarding their reappointment. 28 avis-europe.com Annual Report 2010 Governance Corporate governance report continued
The members of the Audit Committee are disclosed on page 25, and their The Chief Executive oversees an operating board, the Avis Executive Board attendance at meetings in the table below. There were no changes to the (AEB) comprising the key senior management of the Group who meet composition of the Committee between 1 January 2010 and 25 February monthly to review trading and progress with key strategic initiatives and to 2011. As recommended by the Code, the membership of the Committee coordinate the efficient management of the business. AEB members and comprises independent non-executive Directors. their key responsibilities as at 31 December 2010 were as below:
The Group Finance Director, Group Financial Controller and head of internal Group audit and risk management attend meetings of the Audit Committee by Pascal Bazin Chief Executive invitation of the Chairman of the Committee. The external auditors usually Martyn Smith group Finance Director attend meetings, but are not present when the Committee discusses their Jacques Brun group HR Director performance and/ or remuneration. The Committee also meets privately with Corporately-owned both the external and internal auditors without the presence of any of the operations Function Territory executive directors or management. Wolfgang Neumann Commercial Germany Call centre (Barcelona) Board and Committee meeting attendance Stephane Soille operations Austria, Belgium/ The Board meets a minimum of six times each year and more frequently Luxembourg, when business needs require. There were four additional Board meetings in Netherlands, 2010, as well as the six scheduled meetings and two scheduled conference Switzerland, calls. Czech Republic Jan Loning Support services France The attendance of Directors at Board meetings and at meetings of the (Budapest) Nominations Committee, Remuneration Committee and Audit Committee Kevin Bradshaw Information technology uK during the year is detailed below: Roberto Lucchini Fleet initiatives Italy, Portugal Nominations Remuneration Audit Massimo Marsili – Spain Director Board Committee Committee Committee Avis & Budget Licensees Held Attended Held Attended Held¹ Attended Held Attended John McNicholas Licensees Pascal Bazin 12 12 n/a n/a n/a n/a n/a n/a Jean-Pierre Bizet 12 12 1 12 7 72 n/a n/a Corporately-owned operations are managed under a matrix structure with Alun Cathcart 12 11 1 1 7 6 n/a n/a most AEB members being responsible for both a key function/operation Les Cullen 12 12 1 1 7 7 4 4 across the network as well as responsibility for overseeing the operations in 2 2 Roland D’Ieteren 12 10 1 0 7 0 n/a n/a either one or a number of countries. Benoit Ghiot 12 12 n/a n/a n/a n/a n/a n/a Axel von 12 6 1 1 7 4 4 2 Shareholder relations Ruedorffer The Board as a whole is responsible for maintaining regular dialogue Pierre Alain De 12 11 1 1 7 7 4 4 with shareholders. The Chief Executive and Group Finance Director make Smedt presentations to institutional shareholders following the announcement of Martyn Smith 12 12 n/a n/a n/a n/a n/a n/a the interim and preliminary results each year, (which are also published on 1 Includes one conference call. the Company’s website at www.avis-europe.com/investor-centre/financial- 2 Jean-Pierre Bizet attended as alternate for Roland D’Ieteren (see page 27). reports.aspx) and are actively involved in an investor relations programme during the rest of the year. The Chairman is also responsible for maintaining Other Committees a channel through which shareholders can express their views, and for The Board also appoints other Committees from time to time to conduct communicating any shareholder issues or concerns to the Board as a whole. routine business within delegated authority prescribed by the Board and under the supervision of at least one Board member. The Chief Executive makes a presentation at the Annual General Meeting highlighting key business developments during the year. All shareholders In particular, the Board has established a Treasury Review Committee with have the opportunity to put questions at the meeting or leave written delegated authority to review and approve certain Treasury related matters on questions, which will be answered in writing as soon as possible afterwards. behalf of the Company and the Group, including setting policy and granting A copy of the Chief Executive’s presentation may be requested at the Annual authority for financing decisions, bank accounts, treasury credit exposures, General Meeting or from the Investor Relations Department. The Company’s control mechanisms for hedging and foreign exchange transactions, website at www.avis-europe.com provides current and past information guarantees and indemnities and, if appropriate, recommending for about the Group. The Chairman of each of the Nominations Committee, consideration by the Board other treasury management policies. Membership Remuneration Committee and Audit Committee attended the 2010 Annual comprises the Group Finance Director and senior managers, including the General Meeting and were available to answer shareholders’ questions during Group Treasurer and Group Financial Controller. and after the meeting. avis-europe.com Annual Report 2010 29
External auditor Financial reporting process The Company has a written policy regarding auditor independence, which is In addition to the general internal control and risk management framework designed to maintain the objectivity and independence of the external auditor. set out above, the following elements of our internal control system are The policy sets out the circumstances in which the external auditor may specific to the financial reporting process including the preparation of the provide non-audit services to the Group and the internal approval processes Group’s Consolidated Financial Statements: to be followed where this is under consideration. As noted above, the Audit Committee monitors the application of the policy and the independence of • formal reporting processes and accounting policies are aligned the audit process. The Committee’s policy is to review whether other firms • a reporting system designed to ensure visibility and consistency Corporate governance should be invited to tender for the external audit role at least as frequently as of management information, intended to provide a sound basis for audit partner rotation is required. management decision-making, both at Group level and at each business unit within segments (both corporately-owned and licensees) A resolution to reappoint PricewaterhouseCoopers LLP as auditors to the • all such business units are required to produce a monthly financial report Company will be proposed at the forthcoming Annual General Meeting. of business performance, including commentary analysis. These reports are thoroughly reviewed by the Chief Executive, Group Finance Director Internal control and risk management and other members of the Avis Executive Board The Board is responsible for the Group’s systems of internal control and risk • corporately-owned business units are required to produce weekly cash management and for reviewing each year the effectiveness of those systems. flow forecasts, which are reviewed by Group Treasury as part of their Such systems are designed to manage, rather than eliminate, the risk of overall cash management processes failure to achieve business objectives, and can only provide reasonable, and • the Group finance function undertake regular technical training to ensure not absolute, assurance against material misstatement or loss. that they are up to date on financial reporting standards and good practice • a reporting review process, including regular re-forecasting, which The Group has a detailed risk management process to identify, evaluate includes comparison of business unit performance and business plans to and manage the significant risks faced by the Group which is overseen by identify risk areas and determine improvement actions. the Avis Executive Board. The Group conducts an annual risk review across all its operating units and updates its centrally held risk register with each The Board confirms that it has continued to review, through the Audit risk’s impact, probability and mitigation actions. A summary of the principal Committee in particular, the effectiveness of the Group’s internal controls and risks facing the Group has been reviewed by the Audit Committee and risk management processes during 2010 and up to the date of this report communicated to the Board, and is provided in the Risks and uncertainties and that these reviews covered all material controls, including financial, section on pages 30 to 33. operational and compliance controls and risk management systems. Where any weaknesses were identified, appropriate corrective action was agreed The key features of the Group risk management and internal control process and continues to be closely monitored. comprise the following procedures: Corporate governance statement • clearly defined Group policies and business standards covering key The Board of Directors confirms that the Company has complied throughout business areas, including a code of conduct and competition policy the financial year with the provisions set out in Section 1 of the Combined • annual certification process by which the operating unit manager Code 2008 (the Code), with the exception of the following requirements: responsible confirms the adequacy of their systems of internal financial control and their compliance with Group policies and local laws and • that independent non-executive Directors (excluding the Chairman) should regulations, and is also required to report any breakdown in control or comprise not less than 50% of the Board occurrence of fraud if they were to occur • that the Remuneration Committee should comprise the Chairman together • a schedule of regular finance reviews for all corporately-owned businesses with independent non-executive Directors covering material local assets and liabilities • the application of the Code recommendations as to independence criteria • the internal audit function performs regular independent reviews, providing for Directors; and the Audit Committee with an assessment as to the adequacy of key • that a Senior Independent Director be nominated. controls over operating and financial processes and systems • the Audit Committee reviews the effectiveness of the systems of internal The reasons for non-compliance in each of the relevant areas are explained control during the financial year. It reviews reports of any control issues within the review of the Company’s application of the principles of the Code that arise from internal and external audits and any issues that relate to or set out above. In each area of non-compliance, the Directors believe that may need to be included in the risks set out in the Risks and uncertainties current policy is in the best interests of the Company. section on pages 30 to 33 • a Group-wide whistleblowing procedure is in place enabling employees to The Code is available at the Financial Reporting Council’s website at raise any concerns they may have, under which matters can be advised www.frc.org.uk/corporate/combinedcode.cfm anonymously. 30 avis-europe.com Annual Report 2010 Governance Risks and uncertainties
Risk mitigation is a key element of the management role in the Group. We diminished, hence no longer reported. Conversely, on re-assessment, the risk have a consistent process to identify, manage and help mitigate exposure regarding airport and railway stations has been added to the summary below. to issues which may have a negative impact on the business. As part In respect of all such principal risks, we continue to monitor and respond to of the review process, the relative importance of certain identified risks the changing environment. has changed since the prior year end. While risks relating to economic uncertainty on demand and residual values are still key, the risk with regard Summarised below are the main risk factors identified that may affect the to certain counterparties previously identified is viewed to be substantially Group’s business:
Risk Description/potential impact Mitigation
International operations
Local requirements These include unexpected changes to regulations and The Group maintains a broad presence across all its major markets, seeking to balance and regulatory requirements, differing accounting, legal and tax practices exposure to any one particular operation. environment and interpretations, practical difficulties in managing overseas operations and potential political instability. Through day-to-day management of the business these risks are monitored, with procedures in place to escalate and address any significant issues should they arise.
Additionally, there are codes of conduct and agreed business practices that the licensees must comply with and against which Avis audits their compliance.
Dependency on third Revenues received from licensee operations, which represent a We are in frequent dialogue and work closely with our licensees, promoting business parties significant income stream for the Group, are dependent on the across the whole network. We have a team that is experienced in renewing licensee performance of the individual licensee operators which can also be contracts and (where applicable) identifying and establishing new licensees for individual severely impacted by external factors such as political disturbance. territories.
We closely monitor any major external events arising in these territories and work with our partners to minimise any impact.
Demand
Significant reduction in The business faces various risks associated with demand for its We have detailed management reporting systems which monitor both daily rental customer demand services, which in itself is highly seasonal. Disruption could occur patterns and future reservation trends. during the peak summer season at the time when we normally increase staff levels and purchase more vehicles to accommodate Fleet allocation software allows us to readily react to the frequent demand changes the anticipated usual increase in demand. across our network, seeking to optimise the allocation of vehicles. Fleet rotation tools allow us to make strategic decisions on fleet levels in response to demand changes There may be disruptions in air travel patterns or a general through both flexing level and timing of fleet purchases, and/or fleet disposals. decrease in air travel as a result of a significant event such as a natural disaster, terrorist incident or as a consequence of increased The Group maintains a flexible business model, enabling us to readily flex fleet and staff security measures being taken by the authorities in anticipation of when required in response to events such as the recent Icelandic ash cloud. such a threat. Such air travel disruption has been shown to have a clear impact on our rental business. An economic downturn, The introduction of products such as Avis Flex, as well as our overall management of particularly sudden, poses challenges for the Group given its segments in this context, helps to smooth the normal seasonal impact of the business. capital intensity and limited visibility of forward reservations.
Pricing and competitive pressures
Increased pricing The car rental industry faces pressure from increased pricing We monitor competitor activity carefully, but ultimately our only protection from suffering transparency and transparency as a result of the growth of internet travel portals, material damage to our business is to continue to work to provide our customers with a competitive pressures other forms of e-commerce and the rental brokers. high quality and differentiated service at a price they believe is good value.
Large European rental operators compete with the Group in most Through our “We try harder.” and “Avis with the human touch” ethos, and continuing customer categories, and mergers and acquisitions involving those new product development, we seek to differentiate the Avis offer through service and competitors may result in increased competitive pressure. efficiency.
Local rental operators may have lower operating costs, enabling We have systems and processes for monitoring market pricing. Prices are frequently them to charge relatively low prices. reviewed both centrally and at individual rental station level and the impact of any market price changes are assessed with reference to the overall balance of supply and demand and customer group mix.
We do not seek to compete directly on price with local operators but our strength is in our global reach and customer “peace of mind” that the Avis and Budget brands give, and the superior service we seek to offer. We seek to maintain competitive prices in the markets where we operate, typically with a younger average age of fleet. avis-europe.com Annual Report 2010 31
Risk Description/potential impact Mitigation
Fleet
Fleet supply Loss or material change in the terms on which we obtain fleet We have strong long-term relationships with all main fleet suppliers with substantial vehicles from major vehicle suppliers could harm the performance diversification of manufacturer suppliers. In the event that we could not procure all the of the business. There could be risks to business volumes and required vehicles from current sources, vehicles could be obtained from other sources,
to financial and operating results if we had to seek alternative such as dealers. Corporate governance supplier arrangements, particularly in the short term. There is a formal negotiation and approval process to all vehicle sourcing (and disposals) Sales incentive and discount programmes offered by to help control effective costs and manage overall residual values risk. manufacturers to car rental companies tend to keep the average cost of cars relatively low for the car rental industry. In periods Our international operation means that we are also able to source fleet on a multinational when the environment for new car sales improves or when basis, and we are therefore not reliant on any one geographical fleet sourcing market. manufacturers are trying to rebalance capacity for a downward shift in demand, they could decide to reduce their allocation of sales to fleet purchasers such as the Group, and/ or to remove the incentives and discounts thereby increasing the average cost of vehicles.
Fleet re-sale Vehicles not covered by repurchase programmes are sold on the We seek to achieve the best possible prices for re-sale cars through diversification of open market. Residual values of these vehicles are exposed to model type and a well-established network of distribution channels. an adverse movement in used vehicle prices. Equally, a severe or persistent decline in the results of operations or financial We regularly review our fleet levels, rotation plans and operating expenditure levels in condition of one of the major manufacturers supplying vehicles for order to optimise the utilisation and overall economic cost of holding the vehicles. the Group’s fleet could impact overall residual values. Any such movement in used vehicle prices, or poor demand in the used We selectively extend or reduce fleet holding periods depending on market conditions, vehicle market, may hinder our ability to sell these vehicles and but monitor the overall fleet ageing to ensure that average fleet holding periods are could adversely affect the Group’s results. maintained within an acceptable range.
Where difficulties are experienced in sourcing vehicles, or where Our European-wide footprint is also an advantage as we can move rental fleet cross- prevailing economic conditions result in depressed used vehicle border depending upon the relative strengths of used car markets. prices and reduced demand, these risks may be mitigated by extending the holding period of vehicles. However, extended holding periods may introduce new risks including increased maintenance costs, manufacturer warranty expiry, more uncertainty over residual values and the potential impact of older vehicles on customer loyalty and safety considerations.
Relationship with Avis Budget Group
Over-reliance on key Avis Budget Group, Inc. (ABG) licences the Avis and Budget brands The Group does not have any cross-shareholdings with ABG, yet through the close partner to the Group for operation in specified territories through master contractual and business relationship the two companies work together to provide a licensing agreements which expire in 2036. seamless service to customers of both the Avis and the Budget networks.
We use the Wizard rental and reservation system under licence Regular reviews are held with ABG in order to monitor the development and support of from ABG, pursuant to a long-term computer services agreement, the Wizard systems along with the related costs. which is subject to a five-year notice period. Wizard has been operational since 1972, and has been continuously enhanced Both ABG and Avis Europe have a mutual interest in both parties operating businesses and expanded since that time. It is a fully integrated reservation, in a manner that both upholds the value of the global Avis and Budget brands and rental and management information system that is used by Avis allows both parties to provide a similar service in the locations in which it operates. Europe and ABG worldwide. We are obliged to contribute to the We undertake joint marketing initiatives with ABG and share market and customer cost of upgrading and enhancing Wizard; therefore unanticipated information where appropriate. ABG also provides joint services and cross-refers costs could adversely affect the Group’s results. Should Wizard customers, and vice versa, through a formalised agreement. The maintenance of a need to be replaced, process and execution issues could present good relationship with ABG is regarded as very important to the Group, and we seek to a substantial risk to the Group’s operations. manage it as such.
Any adverse changes to the terms of the agreements or any deterioration in ABG or its business or in the relationship with ABG is likely to have an adverse effect on the Group’s financial condition and results of its operations. 32 avis-europe.com Annual Report 2010 Governance Risks and uncertainties continued
Risk Description/potential impact Mitigation
Information systems
Communication The key Wizard rental and reservation systems mentioned above Although such risk cannot be fully eliminated, we design our systems, our service network failure rely heavily on communications service providers to link them provider contracts, business continuity plans and insurance programmes in order to with the business locations these systems serve. A failure of a mitigate such a risk. major system, or a major disruption of communications between the system and the locations it serves, could cause a loss of For example the communications network has been designed and implemented to reservations, interfere with our ability to manage our fleet, slow provide resilience at critical locations and remove single points of failure wherever rental and sales processes and otherwise adversely affect our possible. ability to manage our business effectively.
Data security In addition, as our systems contain identifiable customer and We have developed strong security policies and undertake rigorous security measures to staff personal data and confidential information relating to other protect this data and any systems that have been granted access to it. businesses, if we did not maintain the security of the data we hold, we could suffer reputational damage, potential regulatory We operate under a principle of segregation of duties across all data driven applications enforcement action or, in some circumstances, claims for breach separating IT development and operational resources and responsibilities. of contractual obligations.
Insurance
Availability of suitable Significant risks would exist to the stability of the Group’s business We cover various risks arising from the normal course of business, including damage insurance cover if access to insurance and/or reinsurance was constrained, denied to property and third party general liability. Cover is arranged with a number of major or available only at increased costs that could not be passed on in insurance companies to cost effectively spread risk and we are reliant on their continued increased prices. credit standing. Certain of these insurance policies are supported by letters of credit and parent company guarantees provided by the Group, the extent of which is partly We are legally obliged to provide all vehicle rental customers dependent upon the insurer’s perceived credit standing of the Group. with insurance against accidents caused to third parties. We also provide our customers the option to purchase waivers of liability Where appropriate the captive companies purchase reinsurance to limit their own in the event that the vehicle sustains damage or is stolen whilst in exposure to acceptable levels. their custody.
We provide reinsurance services to some insurers for a capped limit through the Group’s own captive insurance companies.
Airports and railway stations
Dependency on the The Group generates material revenues from rental locations at We seek to maintain strong relationships with all relevant authorities and have a strong granting and renewal airports and train stations pursuant to concessionary arrangements track record of renewing such contracts on a regular basis. Our diversified international of concessionary that generally have terms from three to five years. A certain network means that no single location accounts for more than 2% of the Group’s arrangements proportion of these arrangements will be due for renewal each consolidated rental income. year, and there can be no assurance that they will be renewed, or that they will be renewed on comparable terms. In the event that we could not continue to operate from a location on reasonable terms, we would obtain an alternative operational location to minimise the impact and are investigating other opportunities such as use of online check-in and kiosks.
Funding
Availability of The Group’s operations are by their very nature capital intensive A key feature of our business is a pool of nearly new saleable assets with good asset appropriate funding and are dependent on its various sources of funding. cover over debt providing financial institutions with a higher level of comfort. Leased vehicles are owned by the lessor: all other vehicles are owned by the Group with no Terms of credit between the Group and its principal suppliers security provided to lenders. of fleet vary widely, depending both on the market in which the vehicles are to be used and on the supplier. Certain suppliers also The Group has a policy of keeping a contingency margin between forecast financing provide vehicles on operating lease terms. Any material worsening requirements and committed debt facilities. of credit terms would result in a corresponding increase in debt funding requirements. We seek to ensure that the Group has a core level of long-term committed funding in place with maturities spread over a number of years. This core funding is supplemented As a substantial proportion of the Group’s vehicles are funded with shorter-term committed and uncommitted facilities particularly to cover seasonal with borrowings, including both on and off balance sheet leasing debt requirements. arrangements, the Group depends on access to the debt markets and other forms of financing to fund its fleet. If we are unable to All funding is arranged with a wide range of providers, on both a public and private basis. access such debt facilities on commercially acceptable terms, We maintain a regular dialogue with debt providers to keep them updated on the trading or have difficulty meeting the terms of any lender covenants, the performance and prospects of the business. current business, results of operations, financial condition and future prospects may be adversely affected. During 2010 the Group completed a €181million rights issue to further strengthen its financial position. avis-europe.com Annual Report 2010 33
Risk Description/potential impact Mitigation
Interest and foreign currency
Exposure to fluctuation Interest rate risk arises from the Group’s borrowings which, after To manage these risks, the Group is financed through a combination of both fixed and in interest rates and foreign currency risk hedging, principally arise in euro and sterling. floating rate facilities and enters into various interest rate derivative instruments. Group foreign currencies Borrowings issued at variable rates expose the Group to cash flow policy is to ensure that at the end of each calendar quarter, the average amount of debt interest rate risk whereas borrowings issued at fixed rates expose that is at fixed or capped rates of interest when expressed as a percentage of forecast Corporate governance the Group to fair value interest rate risk. net borrowings is always between a lower and upper limit for various rolling 12 month periods following the relevant quarter-end. When debt facilities mature the Group is The majority of the Group’s business is transacted in euros, exposed to the then market rate credit spreads on its new borrowings. sterling, US dollars and Swiss francs. In each country where the Group has a corporately-owned operation, revenue generated and costs incurred are primarily denominated in the relevant local currency, thereby providing a natural currency hedge. In addition, intra-Group trading transactions are netted and settled centrally. Any remaining material foreign currency transaction exposures are hedged as appropriate into either euros or sterling. Revenue recognised from Licensees is primarily received in sterling providing a natural hedge to the costs of running the European Head Office.
The policy with regard to translation exposures is to match where practicable the average assets of the Group to the equivalent average liabilities in each major currency and thus minimise any impact of changing exchange rates. To the extent that this does not occur, both foreign currency borrowings and forward exchange contracts are used.
Pensions
Pension fund deficit The Group has two principal defined benefit pension schemes, The defined benefit scheme in Germany was closed to new entrants in 2006. a UK scheme which is in deficit, and an unfunded scheme in Germany. The Group’s balance sheet liability against these Actuarial valuations of the Avis UK Pension Plan are performed every three years. The schemes is subject to uncertainty concerning the risks and returns next valuation, as at 31 March 2011, should be available late 2011. around the respective assets and liabilities of the UK scheme and the interest rate applied to the book reserve for the German The previous full defined benefit scheme in the UK was closed to both then existing and scheme. In particular, as detailed in the Notes to the Consolidated new employees in 2007 and replaced by the Retirement Capital Plan, wherein the Group Financial Statements, volatility in interest rates and inflation retains investment and inflation risk, and the employee takes any longevity risk. rates impact on the amount by which future pension liabilities are discounted and affect the returns forecast to be earned. The Following each valuation of the UK scheme, the Group takes appropriate action to Group’s future cash contributions to the defined benefit pension address any deficit that may exist. Currently, the Group has committed to eliminate the schemes and government pension protection funds are also estimated shortfall by means of paying deficit contributions of £8.2 million each year dependent on future scheme performance and underlying actuarial ending on 1 January 2017, with the 2011 due payment already made in 2010. assumptions. 34 avis-europe.com Annual Report 2010 Governance Statement of Directors’ Remuneration report responsibilities The Directors are responsible for preparing the Annual Report, the Directors’ This report has been prepared in accordance with the relevant requirements Remuneration Report and the Financial Statements in accordance with of the Listing Rules of the UK Listing Authority and the Large and Medium- applicable law and regulations. sized Companies and Groups (Accounts and Reports) Regulations 2008. As required by the latter, a resolution to approve the Remuneration Report will Company law requires the Directors to prepare Financial Statements for each be proposed at the forthcoming Annual General Meeting of the Company at financial year. Under that law the Directors have prepared the Group Financial which the Financial Statements will be approved. The Board has also given Statements in accordance with International Financial Reporting Standards full consideration to the best practice provisions on Directors’ remuneration (IFRSs) as adopted by the European Union, and the Parent Company as set out in the Combined Code on Corporate Governance 2008 (the Code). Financial Statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable Part 1 of this report sets out the Group’s policy on executive remuneration law). Under company law the Directors must not approve the Financial and explains the various elements of the Directors’ remuneration packages. Statements unless they are satisfied that they give a true and fair view of the Part 2 of this report, which contains the information on which auditors state of affairs of the Group and the Company and of the profit or loss of the are required to report to the Company’s shareholders, sets out details of Group for that period. In preparing these Financial Statements, the Directors Directors’ earnings and pension entitlements and fees paid to non-executive are required to: Directors in 2010. Directors’ interests in shares, share incentive awards and share options, all of which are beneficial except as noted, are set out on • select suitable accounting policies and then apply them consistently pages 39 to 41. • make judgements and accounting estimates that are reasonable and prudent • state whether IFRSs as adopted by the European Union and applicable Part 1 (Unaudited) UK Accounting Standards have been followed, subject to any material Remuneration Committee departures disclosed and explained in the Group and Parent Company Scope Financial Statements respectively, and The Remuneration Committee is responsible for developing policy on • prepare the Financial Statements on the going concern basis unless it is remuneration for executive Directors and senior management and for inappropriate to presume that the Company will continue in business. determining specific remuneration packages for executive Directors and members of the Avis Executive Board (AEB). The Committee is constituted The Directors are responsible for keeping adequate accounting records that under terms of reference laid down by the Board. These terms are designed are sufficient to show and explain the Company’s transactions and disclose to enable the Company to comply with the requirements relating to with reasonable accuracy at any time the financial position of the Company remuneration policy contained in the Code. and the Group and enable them to ensure that the Financial Statements and the Directors’ Remuneration Report comply with the Companies Act The full terms of reference are set out on the Company’s website: www.avis- 2006 and, as regards the Group Financial Statements, Article 4 of the IAS europe.com and are available upon request. Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the During 2010, the Remuneration Committee’s activities included: prevention and detection of fraud and other irregularities. • review of incentive arrangements for 2010 and 2011 for executive The Directors are responsible for the maintenance and integrity of the Directors, AEB members and senior management Company’s website. Legislation in the United Kingdom governing the • grants of awards under the Long Term Incentive Plan preparation and dissemination of Financial Statements may differ from • approving adjustments to existing awards under the Company’s share legislation in other jurisdictions. incentive schemes to reflect the impact of the Rights Issue and share consolidation completed in July 2010 Each of the Directors, whose names and functions are listed in their • approving certain changes to senior country management and roles biographies on page 25 confirm that, to the best of their knowledge: • overseeing a consultation process regarding the Company’s UK Pension Plan • the Group Financial Statements, which have been prepared in accordance • review of the Committee’s performance in 2010. with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group, and Membership • the Business review includes a fair review of the development and The membership of the Remuneration Committee is set out in the Corporate performance of the business and the position of the Group, together with a Governance report on page 27. description of the principal risks and uncertainties that it faces. The Remuneration Committee is comprised of the Chairman of the Board and four non-executive Directors. All the non-executive Directors on the Committee are regarded as independent, except as explained on page 27 of the Corporate Governance report. The Committee met seven times during the year and each member’s attendance at these meetings is shown in the Corporate Governance report on page 28.
There were no changes to the composition of the Board or the Committee in the period 1 January 2010 – 25 February 2011. avis-europe.com Annual Report 2010 35
Remuneration report
Advisers In 2011, as in the previous year, 80% of the bonus is based on appropriately During the period under review the Chief Executive, Group Finance Director stretching financial targets and 20% on achievement of quantitative individual and Group HR Director attended meetings by invitation and provided advice objectives, which include contribution to the delivery of key Group initiatives. to the Committee to assist it in making informed decisions on relevant matters. No Director was present when his own remuneration was being The base salary, bonus payments and value of benefits in kind for each discussed. External advice was received from Deloitte LLP (Long Term Director are set out in the Directors’ emoluments table on page 39. Incentive Plan), Freshfields Bruckhaus Deringer (share scheme adjustments) A summary is also provided in Note 37 of the Consolidated Financial and PricewaterhouseCoopers LLP (share scheme adjustments). All advisers Statements, together with the remuneration of other key management (being Corporate governance were appointed by the Company. Other than described above, no additional other AEB members). Bonus payments, benefits in kind and cash allowances services were provided by the external advisers during the year. do not form part of pensionable earnings for Directors.
Remuneration policy Share incentive policy Introduction The Remuneration Committee sets policy with regard to share incentives The Group’s executive remuneration policy for 2011 is designed to attract, with the objective of aligning the interests of shareholders and management retain and motivate executive and senior management to ensure that the in growing the value of the business over the longer term. It does this by Group secures the appropriate competencies and experience needed to granting share awards which vest depending on the extent to which the meet its objectives and satisfy shareholder expectations. In general, in business meets targets for both earnings and return on capital over a determining its policy, the Remuneration Committee takes account of market three-year period; the value of the incentive to an executive is also heavily practice, the Group’s position relative to other companies and the Company’s dependent on the level of share price appreciation over the period, also performance. helping to align the interests of the executive and the shareholders. An additional feature of the share incentive policy is that it acts as a highly The Remuneration Committee believes that shareholder interests are best effective retention tool. served by executive remuneration packages that have a large component of performance-related pay linked to annual performance. For 2011 the The Company is proposing to adopt a new UK HM Revenue & Customs relationship between fixed and variable remuneration for achievement approved scheme, the Avis Europe Long Term Approved Share Option Plan, of maximum performance is 30% fixed and 70% variable for the Chief in order to give scope for tax-effective grants to UK participants. A resolution Executive and 40% fixed and 60% variable for the Group Finance Director. to this effect will be proposed at the forthcoming Annual General Meeting. The variable element comprises an annual incentive bonus scheme and an award under the Long Term Incentive Plan. The Deputy Chairman, who is Shareholding guidelines implemented in 2005 require executive Directors to also an executive Director, has a service contract with an annual fee only. build up their personal holdings of shares in the Company. The guidelines are 150% of salary for the Chief Executive and 100% of salary for the Group Salary Finance Director. The Remuneration Committee requires executives to retain In response to the prevailing difficult economic climate, executive salaries 50% of any vested shares (net of tax and exercise costs) arising from any were frozen in 2010. Executive Directors and members of the AEB were share incentive scheme until the shareholding requirement is achieved. granted an incentive opportunity for the year designed to deliver 50% of salary for on-target performance (as defined and agreed by the Remuneration Rights Issue and share consolidation Committee). Executive Directors and members of the AEB also received a Pursuant to the Company’s 9 for 8 Rights Issue in July 2010 and subsequent grant under the Long Term Incentive Plan, details of which are set out below. 10 for 1 share consolidation, the Remuneration Committee approved a number of adjustments to existing awards made under the Company’s share For 2011 salaries for executive Directors and the AEB have again not incentive plans, details of which are set out below. In each case, adjustments been increased and an annual incentive opportunity is being provided on a were designed to maintain unchanged the economic terms of the grants similar basis to 2010. In recognition of this continuing freeze of base salary, made under the plans. the Remuneration Committee has, however, approved an increase in the percentage of base salary for the LTIP grants to be made in 2011 from Outstanding share plans 75% to 150% for the Chief Executive and from 50% to 100% for the Group Outstanding share plans are as follows: Long Term Incentive Plan (last award Finance Director and other AEB members. 2010); Share Retention Plan (last award 2009); and Share Option Schemes (last award April 2004). A description of each of these plans is set out below. For all other employees, the 2011 policy is that salary reviews may take place During the year all outstanding awards under the Performance Share Plan on a country and business unit basis, depending on market conditions and lapsed. The assessment of whether performance conditions have been met is performance. verified by the Remuneration Committee at the time of vesting.
Annual incentive bonus Individual Directors’ share incentive awards are set out pages 40 to 41. Annual incentive bonus plans for executive Directors and key senior management are based on achievement of both profit and return on capital Long Term Incentive Plan employed targets approved by the Remuneration Committee and related directly The Long Term Incentive Plan, introduced in 2007, comprises awards of to the annual plan approved by the Board. Targets and performance measures ordinary shares in the Company, structured as nil cost options or conditional are quantitative and there is a financial threshold below which no bonus payment awards. Awards vest three years after grant, providing certain performance is made. Bonuses are paid following finalisation of the applicable year’s results, conditions are met. It is intended that there will be annual grants of awards at which point the quantum of bonuses is established. under this Plan. 36 avis-europe.com Annual Report 2010 Governance Remuneration report continued
The performance conditions required for vesting purposes are based on The performance targets for awards granted under the Plan in 2008 are set tranches of 50% in respect of the Group’s three-year growth in earnings out below: per share (EPS) and 50% in respect of return on capital employed (ROCE) performance. If one or both of the performance targets are not met at the EPS tranche of Award end of the performance period, 50% or 100% (as appropriate) of the award Percentage of award that vests will lapse on vesting. Percentage growth in EPS in respect of EPS tranche Less than 14.9% per annum1 None The performance targets for awards granted under the Plan in 2010 are set 14.9% per annum1 20% out below: 23.0% per annum1 100% Between 14.9% and Straight-line basis between EPS tranche of Award 23.0% per annum 20% and 100% Percentage of award that vests in Percentage growth in EPS respect of EPS tranche Less than 10% per annum1 None ROCE tranche of Award 10% per annum1 20% Percentage of award that vests 19.5% per annum1 100% Percentage ROCE achieved in respect of ROCE tranche Between 10% and Straight-line basis between Less than 9.2% None 19.5% per annum1 20% and 100% 9.2% 20% 9.6% 100% ROCE tranche of Award Between 9.2% Straight-line basis between Percentage of award that vests and 9.6% 20% and 100%
Percentage ROCE achieved in respect of ROCE tranche 1 Targets shown are before adjustment for the impact of the Company’s 9 for 8 Rights Issue and Less than 11.0% None subsequent 10:1 share consolidation. 11.0% 20% 12.0% 100% The performance targets for awards granted under the Plan in 2007 were not Between 11.0% Straight-line basis between satisfied and accordingly the awards made in 2007 lapsed on 4 June 2010. and 12.0% 20% and 100%
1 Targets shown are before adjustment for the impact of the Company’s 9 for 8 Rights Issue and EPS is calculated on an underlying basis i.e. excluding exceptional items, subsequent 10:1 share consolidation. certain re-measurement items and economic hedge items. However, the Remuneration Committee has discretion to adjust for any exceptional items The performance targets for awards granted under the Plan in 2009 are set which it deems to be within management control, if appropriate, to ensure out below: the outcome is fair to both shareholders and executives. The basis of the ROCE calculation is included in Note 26 to the Consolidated Financial EPS tranche of Award Statements. The Remuneration Committee believes that EPS represents Percentage of award that vests a complete measure of financial performance, capturing both interest and Percentage growth in EPS in respect of EPS tranche tax, and is closely tracked by many of the Company’s investors. Car rental Less than 12.5% per annum1 None is highly asset intensive and the Remuneration Committee also wishes 12.5% per annum1 20% management to be focussed on improving the return the Company achieves 22.8% per annum1 100% on this capital. Between 12.5% and Straight-line basis between 22.8% per annum1 20% and 100% Participation is at the Remuneration Committee’s discretion. In 2010 awards were made to all members of the AEB, which included two of the executive ROCE tranche of Award Directors, and to 39 senior managers. Maximum awards are capped at Percentage of award that vests 100% of salary (150% for the Chief Executive) (see page 40). Dividends, Percentage ROCE achieved in respect of ROCE tranche as and when reinstated, will not accrue on the awards made to date, but Less than 10.8% None it is anticipated that for awards granted in future, dividends would accrue but be paid only on shares that vest. Outstanding awards will vest and 10.8% 20% become exercisable on a change of control, subject to the satisfaction of any 11.9% 100% performance conditions at that time. Between 10.8% Straight-line basis between and 11.9% 20% and 100% Following the Company’s 9 for 8 Rights Issue and subsequent 10:1 share 1 Targets shown are before adjustment for the impact of the Company’s 9 for 8 Rights Issue and consolidation, the Remuneration Committee approved certain adjustments subsequent 10:1 share consolidation. to the awards outstanding: (1) the number of shares comprised in the awards was adjusted by a multiple of 0.1352; (2) the EPS performance condition was adjusted to reflect the impact of the Rights Issue on EPS (no change was made to the ROCE performance condition). All awards were granted at a nil exercise price and therefore no adjustment to the exercise price was necessary. avis-europe.com Annual Report 2010 37
Share Retention Plan discretion of the Board. Outstanding options will vest and become On 1 May 2009 the Share Retention Plan was established as a one-off exercisable on a change of control and, with the exception of the UK discretionary benefit for the sole purpose of retaining the services of the Approved Share Option Scheme, any options vesting will, at the discretion Chief Executive. of the Remuneration Committee, be subject to the satisfaction of any performance conditions at that time. The principal terms of the Plan are as follows. The sole participant is the Chief Executive and the award is in the form of a conditional share award The performance conditions relating to these schemes required that real of ordinary shares in the Company. The Plan provides that in normal growth in EPS should exceed 3% per annum during any period of three Corporate governance circumstances the award vests in three equal tranches on 1 May 2010, consecutive years following the date of grant. The performance conditions 1 May 2011 and 1 May 2012, provided that the Chief Executive is still relating to the outstanding options (all of which were granted prior to 2004) employed by the Group and is not subject to notice of termination of his have been satisfied. employment (whether given or received) on these dates. There are no performance conditions relating to this award. In order to reflect the impact of the Company’s 9 for 8 Rights Issue, the Remuneration Committee approved the following adjustments: (1) for awards Following the Company’s 9 for 8 Rights Issue and subsequent 10:1 share outstanding under the Avis International Share Option Scheme and the Avis consolidation, the Remuneration Committee approved an adjustment to the UK Unapproved Share Option Scheme, the number of shares comprised outstanding tranches of the award whereby the number of shares in each in the award was adjusted by a multiple of 1.352, with the exercise price tranche was adjusted by a multiple of 0.1352. adjusted by the inverse; (2) for awards outstanding under the Avis UK Approved Share Option Scheme, the number of shares comprised in the The award will normally lapse on cessation of employment (save on death, award was adjusted by a multiple of 1.335 in accordance with the rules when the award will vest in full). If employment ceases by reason of injury of the scheme, with the exercise price adjusted by the inverse; and (3) for or disability, or for any other reason if the Remuneration Committee so awards outstanding under the French Share Option Scheme, the number decides, the Remuneration Committee has discretion to decide whether of shares comprised in the award was adjusted by a multiple of 1.339 in or not the award will vest and, if so, the extent to which it will vest. In the accordance with the rules of the scheme, with the exercise price adjusted by event of a takeover, the Remuneration Committee will decide the extent to the inverse. For all schemes, the number of shares comprised in awards was which any outstanding part of the award will vest. In the event of a corporate then reduced by a factor of 10 to reflect the share consolidation. reorganisation, the Remuneration Committee may decide that the award continues over the shares of any new holding company. The rules of the share option schemes limit the number of options that can be granted over new issue shares in a rolling 10-year period to 5% of If there is a demerger or other corporate event which, in the opinion of the issued share capital under discretionary share schemes, and 10% of issued Remuneration Committee, will materially affect the share price, then the share capital under all share schemes. The total number of share options Remuneration Committee may decide that the award vests early. In the outstanding at 31 December 2010 is well within these dilution limits (see event of any increase or variation in the share capital of the Company, the page 41). payment of a capital dividend or other event similarly affecting the award, the number of shares subject to the award may be adjusted. The Remuneration Avis Europe Employee Share Trust Committee may alter the Plan at any time. The Avis Europe Employee Share Trust was established in March 2000 to facilitate provision of shares for the Company’s share incentive schemes. The Performance Share Plan Trust may hold up to 5% of the issued share capital of the Company at any No awards under this Plan have been made since April 2004 and no one time. further grants can be made as the Plan has now expired. The performance conditions relating to all outstanding awards have not been satisfied and At 31 December 2010, the Trust held 1,478,117 ordinary shares of 10 pence accordingly all outstanding awards under the Performance Share Plan lapsed each. It is intended that the shares in the Trust will be used to satisfy share with effect from 17 March 2010. awards made under the Company’s various share incentive schemes as and when these awards vest. The awards outstanding under each of the relevant Share option schemes plans at 31 December 2009 and 31 December 2010 are set out below. No options have been granted under these schemes since April 2004, and no further grants can be made as the schemes have now expired. Share awards outstanding Share awards outstanding Share Incentive Scheme at 31 December 20101 at 31 December 20092 Further details of outstanding share options are set out in Note 31 to the Performance Share Plan Nil 514,875 shares Consolidated Financial Statements. Long Term Incentive Plan 7,673,407 shares 54,426,596 shares The schemes comprise Inland Revenue approved and unapproved share Share Retention Plan 95,150 shares 1,055,662 shares option schemes which have an EPS based performance condition. Employees Total 7,768,557 shares 55,997,133 shares may not normally exercise options earlier than three years, nor more than 1 Share awards outstanding at 31 December 2010 comprise awards over ordinary shares of 10 10 years after the grant (seven years for grants made before April 2000 pence each, following the adjustments made following the Company’s 9 for 8 Rights Issue and for the unapproved scheme). Options lapse upon cessation of employment. subsequent 10:1 share consolidation (see pages 35 to 37 for further information). 2 Share awards outstanding at 31 December 2009 comprise awards over ordinary shares However, special conditions apply if employment ceases because of death, of 1 pence each, prior to the Company’s 9 for 8 Rights Issue and subsequent 10:1 share injury, disability, redundancy, retirement or because the employing business consolidation. or company is transferred outside the Group, or for any other reason at the 38 avis-europe.com Annual Report 2010 Governance Remuneration report continued
The Company periodically reviews the number of shares held by the Trust All executive Directors have service contracts in line with policy as shown. in light of the anticipated vesting dates and performance conditions under the various plans. The Company also regularly reviews its hedging policy Date of service contract Notice period but does not currently hedge any of these awards against potential Social Pascal Bazin 1 January 2008 12 months Security costs that may be incurred across the Group as and when the Jean-Pierre Bizet1 25 May 2004 12 months awards vest. Martyn Smith 11 September 2002 12 months
1 The Deputy Chairman, who is also an executive Director, has a service contract with an annual Total shareholder return (TSR) fee only and his appointment is subject to the terms of the Relationship Agreement (see Corporate The graph below illustrates the performance of Avis Europe plc and a “broad Governance report on page 26). equity market index” over the past five years. As Avis Europe plc has been a constituent of the FTSE All Share Index throughout this five-year period, that The Board believes that it can be of benefit to the Group as a whole for index is considered the most appropriate form of “broad equity market index” the executive Directors to broaden their experience through service as a against which the Group’s performance should be graphed. As required by non-executive Director of other businesses. Subject to individual review, legislation, performance is measured by total shareholder return (share price Group policy is that executive Directors may hold one non-executive plus dividends paid). directorship in another business and may retain the fees. During the year ended 31 December 2010, none of the executive Directors held any relevant Total shareholder return – value of hypothetical £100 holding appointments. The policy does not apply to the role of executive Deputy 150 Chairman which is an appointment made under the Relationship Agreement with s.a. D’Ieteren n.v. nor to charitable or other pro bono appointments.
100 Non-executive Directors The Company’s policy is to engage non-executive Directors on renewable three-year terms, which can be terminated by either party at any time without penalty (subject to the terms of the Relationship Agreement in respect of 50 Directors appointed by s.a. D’Ieteren n.v.).
Date of appointment as Date of current 0 a non-executive Director appointment letter 05 06 07 08 09 10 Alun Cathcart1 25 May 2004 18 May 2010 Avis FTSE All share index Les Cullen 25 May 2004 17 May 2010 Roland D’Ieteren 3 February 1997 2 March 2009 All dates at 31 December. Benoit Ghiot 15 December 2004 1 December 2010 This graph shows the value, by the end of 2010, of £100 invested in Avis Europe plc on 31 Axel von Ruedorffer 27 June 2001 16 June 2010 December 2005 compared with the value of £100 invested in the FTSE All Share Index. The other points plotted are the values at intervening financial year ends. Pierre Alain De Smedt 1 February 2007 17 May 2010
1 Alun Cathcart previously served as an executive Director for the periods 3 February 1997 to Non-executive Directors 31 March 1999 and 1 May 2002 to 24 May 2004, having served as a non-executive Director for Non-executive Directors’ fees are positioned to attract non-executives the intervening period 1 April 1999 to 30 April 2002. with broad business and commercial experience and to be competitive in the marketplace. The Chairman’s fee is determined by the Remuneration All non-executive Directors, including the Chairman, have current letters of Committee. The Chairman and the Chief Executive set the remuneration appointment renewed for a three year term in accordance with policy, except of non-executive Directors based on periodic review of current survey that Axel von Ruedorffer’s current letter of appointment is for a one year term data. Policy is to pay an annual fee of £32,500 with an additional fee for ending on 27 June 2011. chairmanship of a Committee. Non-executive Directors do not receive awards under the Company’s share incentive schemes. Retirement benefits Executive Directors based in the UK can participate in the Avis UK Pension Service Contracts Plan although none of the executive Directors accrued benefits under the Avis Executive Directors UK Pension Plan during 2010. The Company’s policy is to employ each executive Director under a service contract which is subject to 12 months’ notice on either side and runs until Martyn Smith withdrew from the Plan effective 5 April 2006 and has a terminated. The contract provides for salary to be paid for any unexpired preserved pension entitlement under the Final Salary section. From that date period of notice in the event of termination by the Company. Compensation he has received a taxable cash allowance of 20% of base salary in lieu of for contractual benefits and bonus for the unexpired period of notice is at Pension Plan membership. The Final Salary section of the Plan was closed to the discretion of the Remuneration Committee. There is no compensation for new entrants with effect from 1 July 2003. loss of rights under the share and pension schemes. All contracts contain mitigation provisions. There are no special contractual payments associated Pascal Bazin does not participate in any Avis occupational pension plan. with change of control. avis-europe.com Annual Report 2010 39
Part 2 (Audited) Directors’ remuneration Directors’ emoluments The remuneration of Directors, comprising salary or fees, taxable benefits and bonus payments for the year ended 31 December 2010 is set out in the table below. Salary Salary total year to total year to Salary/ taxable supplement supplement Compensation 31 December 31 December fees Bonus Benefits1 Pension Car/fuel for loss of office 2010 2009 £ £ £ £ £ £ £ £ Corporate governance Executive P Bazin 550,760 484,669 11,205 – – – 1,046,634 1,040,498 J-P Bizet 80,000 – – – – – 80,000 80,000 M Smith 330,000 290,400 12,984 66,000 – – 699,384 661,606 Total 960,760 775,069 24,189 66,000 – – 1,826,018 1,782,104
Non-executive W A Cathcart 190,000 – 1,695 – 20,000 – 211,695 211,372 L Cullen 40,000 – – – – – 40,000 40,000 R D’Ieteren 32,500 – – – – – 32,500 32,500 B Ghiot 32,500 – – – – – 32,500 32,500 A von Ruedorffer 32,500 – – – – – 32,500 32,500 P A De Smedt 37,500 – – – – – 37,500 37,500 Total 365,000 – 1,695 – 20,000 – 386,695 386,372 Total 1,325,760 775,069 25,884 66,000 20,000 – 2,212,713 2,168,476
Avis Executive Board (excluding executive Directors): Aggregate 2,033,464 1,543,103 93,450 102,580 – 210,181 3,982,777 3,846,088
1 Taxable benefits include principally car, fuel and medical insurance. Base salaries for the executive Directors during the period 1 January 2010 to 31 December 2010 are: Pascal Bazin €640,000 and Martyn Smith £330,000.
Pensions Details of Directors’ pension entitlements under the Avis UK Pension Plan (a defined benefit scheme) at 31 December 2010: Amount of transfer value of Amount of change remaining Accrued Increase/(decrease) transfer value of transfer value of Increase/(decrease) in accrued change in pension in accrued accrued pension accrued pension in value less benefit due accrued benefit to 31 December pension at 31 December at 31 December Director’s own to inflation during year 2010 excluding inflation 2009 2010 contributions Director £ £ £ £ £ £ £ W A Cathcart1 – – – – 4,726,621 4,614,311 (112,310) M Smith2 – – – – 113,419 120,355 6,936
1 Alun Cathcart is no longer accruing a benefit in the Avis UK Pension Plan and has been in receipt of a pension from 12 September 2005. In the year to 31 December 2010 he received a pension of £316,148 (2009: £315,048). 2 Martyn Smith left the Avis UK Pension Plan on 5 April 2006 with a deferred pension of £6,160 per annum payable from age 62.
Directors’ interests in the Company’s shares The beneficial and non-beneficial interests of the Directors as at 31 December 2010 are shown below. There have been no changes between 31 December 2010 and 25 February 2011:
Executive 31 December 20101 1 January 20102 Non-Executive 31 December 20101 1 January 20102 P Bazin 123,946 284,336 W A Cathcart3 94,216 443,373 J-P Bizet – – L Cullen 4,250 20,000 M Smith 57,235 269,342 R D’Ieteren – –
1 Shares held at 31 December 2010 comprise ordinary shares of 10 pence each, following the B Ghiot – – Company’s 10:1 share consolidation in August 2010. All Directors took up their rights in full in A von Ruedorffer 4,250 20,000 the Company’s 9 for 8 Rights Issue. 2 Shares held at 1 January 2010 comprise ordinary shares of 1 pence each, prior to the P A De Smedt 101,849 479,270 Company’s 10:1 share consolidation in August 2010. 3 Includes 2,693 shares of 10 pence each at 31 December 2010 (12,673 shares of 1 pence each at 1 January 2010) in which Alun Cathcart has a non-beneficial interest as trustee for the beneficial owner. 40 avis-europe.com Annual Report 2010 Governance Remuneration report continued
Directors’ interests in the Company’s share plans Details of awards outstanding at 31 December 2010 under the Group’s share schemes are shown below.
Long Term Incentive Plan The following awards were made over ordinary shares of 1 pence each under this Plan on 15 April 2010. The market price of the Company’s shares at that date was 34.75 pence per share. As at 31 December 2010, no awards under this Plan had vested.
Award in year Vesting date of At 1 January to 31 December Date of 2010 Lapsed during At 31 December outstanding 20101 20101 award 20101 20102 awards P Bazin 389,260 – – 389,260 – – 4,349,234 – – – 588,016 7 October 2011 6,637,205 – – – 897,350 20 March 2012 – 1,219,794 15 April 2010 – 164,916 15 April 2013 M Smith 540,983 – – 540,983 – – 1,943,462 – – – 262,756 7 October 2011 1,849,073 – – 249,994 20 March 2012 – 474,820 15 April 2010 – 64,195 15 April 2013
1 Awards outstanding at 1 January 2010 comprise awards over ordinary shares of 1 pence each. 2 Awards outstanding at 31 December 2010 comprise awards over ordinary shares of 10 pence each, following the adjustments made following the Company’s 9 for 8 Rights Issue and subsequent 10:1 share consolidation (see page 36 for further information).
Performance conditions The performance conditions required for vesting purposes are based 50% on the Company’s three-year growth in earnings per share (EPS) and 50% on return on capital employed (ROCE), based on the Group’s results under International Financial Reporting Standards. These targets are set such that shares will vest only if performance is between a minimum threshold level, where 20% of an award will vest, and the maximum level, where 100% of an award will vest.
At 31 December 2010, 53 qualifying employees and qualifying former employees, including executive Directors, held awards over 7,673,407 shares in total under this Plan. The market price of the Company’s ordinary shares of 10 pence at 31 December 2010 was 237.0 pence per share. During the period 1 January 2010 – 3 August 2010, the market price for each ordinary share of 1 pence ranged between 19.0 pence and 38.0 pence; during the period 4 August 2010 – 31 December 2010, the market price for each ordinary share of 10 pence ranged between 195.5 pence and 240.2 pence.
Share Retention Plan No awards were made under this Plan in 2010. As at 31 December 2010, one-third of the total award has vested. The vesting date was 1 May 2010 and the shares were released on 4 May 2010. The market price of the Company’s ordinary shares of 1 pence at the date of award was 17.0 pence per share and the market price of the Company’s ordinary shares of 1 pence on the date of vesting was 36.75 pence per share.
Award in year to Vested in year to Vesting date of At 1 January 31 December 31 December At 31 December outstanding 20101 2010 20101 20102 awards3 P Bazin 1,055,662 – 351,887 95,150 1 May 2011 1 May 2012
1 Ordinary shares of 1 pence each. 2 Awards outstanding at 31 December 2010 comprise awards over ordinary shares of 10 pence each, following the adjustments made following the Company’s 9 for 8 Rights Issue and subsequent 10:1 share consolidation (see page 37 for further information). 3 Accelerated vesting conditions are disclosed on page 37.
There are no performance conditions relating to awards under the Share Retention Plan. avis-europe.com Annual Report 2010 41
Performance Share Plan All outstanding awards under the Performance Share Plan have lapsed with effect from 17 March 2010 and no further awards can be made as the Plan has now expired. Lapsed At 1 January during At 31 December governance 20101 20101 2010 W A Cathcart2 244,409 244,409 –
M Smith 270,466 270,466 – Corporate
1 Ordinary shares of 1 pence each. 2 The awards held by Alun Cathcart were granted when he was an executive Director of the Company.
Share Option Schemes Directors’ interests in share options granted under the Avis Europe plc share option schemes, all of which are beneficial except as noted, are shown below. All options were granted for nil consideration. No options were exercised during the period under review or the previous year, nor during the period between 31 December 2010 and 25 February 2011. The last grants were made in 2004 and the schemes have now expired.
At January At 31 December Exercise price Date 20101 20102 (pence) exercisable from Expiry date Executive M Smith 35,897 4,792 626.3 September 2005 September 2012 202,702 27,405 618.3 September 2005 September 2012 238,599 32,197 Non-executive W A Cathcart3 17,222 2,299 1,305.1 March 2005 March 2012 340,677 46,059 1,288.4 March 2005 March 2012 71,580 9,677 618.3 September 2005 September 2012 429,479 58,035
1 Options outstanding at 1 January 2010 comprise options over ordinary shares of 1 pence each. 2 Options outstanding at 31 December 2010 comprise options over ordinary shares of 10 pence each, following the adjustments made following the Company’s 9 for 8 Rights Issue and subsequent 10:1 share consolidation (see page 37 for further information). 3 The share options held by Alun Cathcart were granted when he was an executive Director of the Company.
The performance conditions applying to the share option schemes have been based on real growth in earnings per share (EPS). The awards disclosed above relate to options granted before 2004, the performance condition being that options would become exercisable when real growth in EPS exceeds 3% per annum during any period of three consecutive years following the date of grant. The performance conditions relating to these options have been satisfied and the options have therefore vested.
At 31 December 2010, 103 qualifying employees held options over 258,777 shares. No options were granted in 2010, the schemes having expired. The market price of the Company’s ordinary shares of 10 pence at 31 December 2010 was 237.0 pence per share. During the period 1 January 2010 – 3 August 2010, the market price for each ordinary share of 1 pence ranged between 19.0 pence and 38.0 pence. During the period 4 August 2010 – 31 December 2010, the market price for each ordinary share of 10 pence ranged between 195.5 pence and 240.2 pence.
Signed on behalf of the Board
Judith Nicholson Company Secretary 25 February 2011 42 avis-europe.com Annual Report 2010 Governance Directors’ report for the year ended 31 December 2010
The Directors present their report and the audited financial statements for the Share capital year ended 31 December 2010. Details of the share capital of the Company and changes during the year covered by this Report are set out in Note 29 to the Consolidated Financial Principal activities and business review Statements. The rights and obligations attaching to the Company’s ordinary The principal activity of the Group is the supply of rental vehicle services. A shares are set out in the Company’s Articles of Association. There are no full review of the Group’s activities and a report on its business, including Key restrictions on the voting rights attaching to the Company’s ordinary shares Performance Indicators, strategy and likely future developments are set out or on the transfer of securities in the Company. in the Chief Executive’s review and the Business review on pages 6 to 24, incorporated in this report by reference. The last Annual General Meeting authorised the Company to purchase up to 92,052,404 of its own ordinary shares of 1 pence each. This authority will Results and dividends expire, and is due to be renewed, at the next Annual General Meeting. The The results for the year are set out in the Consolidated Financial Statements Company made no purchases of its own shares during 2010 pursuant to this on pages 45 to 78. The Directors do not recommend the payment of an authority. Details of the share capital of the Company are set out in Note 29 interim or final dividend for the year (2009: nil). to the Consolidated Financial Statements.
Directors and their interests Substantial shareholdings The names of the Directors of the Company as at 31 December 2010 appear At 25 February 2011, the Company had been advised of the following in the Corporate governance report on page 26. There were no appointments notifiable interests in its issued ordinary share capital, and the voting rights during the period 1 January – 25 February 2011. attached to those shares:
Details of the Directors’ interests in shares and options to purchase shares % of voting rights are detailed in the Remuneration report on 39 to 41. In addition, Jean-Pierre D’Ieteren Car Rental s.a. 59.59 Bizet and Benoit Ghiot are Directors of D’Ieteren Car Rental s.a., an indirect Odey Asset Management LLP 13.25 wholly-owned subsidiary of s.a. D’Ieteren n.v., which held 116,574,579 Schroders plc 4.67 ordinary shares of 10 pence each in the capital of the Company as at 31 December 2010. Details of significant contracts entered into with s.a. The Company entered into an agreement with s.a. D’Ieteren n.v. at the time D’Ieteren n.v. are disclosed below. There have been no changes in the above of its flotation in 1997 which governs the relationship between s.a. D’Ieteren Directors’ interests between 31 December 2010 and 25 February 2011. n.v. and the Company. The agreement includes restrictions on s.a. D’Ieteren n.v.’s power to appoint Directors and obligations on those Directors to ensure Except as noted above, none of the Directors had any interests in the shares that the majority of the Board is independent of s.a. D’Ieteren n.v. It also of the Company or in any material contract or arrangement with the Company provides that all transactions between the Company and s.a. D’Ieteren n.v. or any of its subsidiary undertakings. will be on an arm’s length basis. The agreement also contains certain anti- dilution rights for s.a. D’Ieteren n.v. provided that the D’Ieteren Group owns Appointment of Directors and Articles of Association more than 30% of the issued ordinary share capital of the Company. The Company’s Articles of Association provide that the Company may appoint Directors by ordinary resolution. The Company’s Articles of Association During the year, the Group has entered into transactions with the D’Ieteren themselves may be amended by special resolution of the shareholders. Group on an arm’s length basis with respect to the purchase and sale of Details of the Relationship Agreement with s.a. D’Ieteren n.v., which includes vehicles and the provision of finance. Further details of these transactions are rights for s.a. D’Ieteren n.v. to appoint and remove up to three Directors, are set out in Note 37 to the Consolidated Financial Statements. set out below. Employee involvement and share schemes Directors’ liability cover Details of employee involvement are included in the Corporate social As recommended by the Combined Code the Company carries directors’ responsibility report on pages 12 to 17. Details of the Company’s employee and officers’ liability insurance which is arranged under an umbrella policy share schemes, including any provisions relating to a change of control, are effected by s.a. D’Ieteren n.v. The Company has entered into indemnities to set out in the Remuneration report on pages 34 to 41. the extent permitted by English law, indemnifying the Directors against claims brought against them. Health and safety at work The Company has a health and safety policy approved by the Board. The Conflicts of interest Chief Executive is responsible for oversight of policy and each operating The Company has implemented procedures to deal with any Directors’ unit in the UK has a nominated member of senior management who has conflicts of interest which may arise, and considers that these procedures overall responsibility for setting goals and performance targets. Measures of are operating effectively. The Company carries out an annual review of performance are reviewed regularly, and include work-related accidents and authorisations given by the Board. ill health, health and safety training and risk assessment activities. avis-europe.com Annual Report 2010 43
Charitable and political donations During the year, the Group made charitable donations totalling €22,872; £19,682 (2009: €14,000; £13,000). The Group made no political donations during the year (2009: nil).
Payments to creditors Given the number of countries in which the Group operates it is practice to agree the terms of payment at the start of business with each supplier and to Corporate governance pay in accordance with contractual and other legal obligations. The Company had no trade creditors at 31 December 2010 (2009: nil) and hence the number of creditor days outstanding for the Company was nil (2009: nil).
Post balance sheet events There are no significant events affecting the Group since year end.
Financial instruments The Group’s financial risk management objective is set out in Note 26 to the Consolidated Financial Statements.
Significant agreements The Group has entered into the following significant agreements which are subject to change of control provisions: (1) Trademark and System Licences dated 4 April 1997 for use of the Avis trademarks and operating system in Europe, Africa, the Middle East and Asia which can be terminated in the event that a major competitor obtains control of 35% or more of voting capital, whereupon associated agreements, including the Computer Services Agreement dated 1 January 1991 for use of the Wizard system, would also terminate. (2) Trademark Licence dated 11 March 2003 for use of the Budget trademarks in Europe, Africa and the Middle East which can be terminated in the event that a major competitor obtains control of 35% or more of voting capital. (3) A €375,000,000 Facilities Agreement dated 24 June 2010 under which lenders have the right to cancel their commitments in the event of a change of control. (4) €250,000,000 Senior Floating Rate Notes due 2013 dated 21 July 2006 which can be accelerated in the event of a change of control.
Disclosure of information to auditors So far as each Director is aware, there is no relevant audit information of which the Company’s auditors, PricewaterhouseCoopers LLP, are unaware and each Director has taken all the steps that he ought to have taken as a Director in order to make himself aware of any relevant audit information and to establish that the Company’s auditors are aware of this information.
Auditors PricewaterhouseCoopers LLP have expressed their willingness to continue in office and a resolution to reappoint them will be proposed at the Annual General Meeting.
By order of the Board
Judith Nicholson Company Secretary 25 February 2011 44 avis-europe.com Annual Report 2010 Financial statements Independent Auditors’ Report to the Members of Avis Europe plc
We have audited the Group Financial Statements of Avis Europe plc for Matters on which we are required to report by exception the year ended 31 December 2010 which comprise Consolidated Income We have nothing to report in respect of the following: Statement, the Consolidated Statement of Comprehensive Income, the Consolidated Balance Sheet, the Consolidated Statement of Changes in Under the Companies Act 2006 we are required to report to you if, in our Equity, the Consolidated Cash Flow Statement, the Significant Accounting opinion: Policies and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial • certain disclosures of Directors’ remuneration specified by law are not Reporting Standards (IFRSs) as adopted by the European Union. made; or • we have not received all the information and explanations we require for Respective responsibilities of Directors and auditors our audit; or As explained more fully in the Directors’ responsibilities statement set out • a corporate governance statement has not been prepared by the Parent on page 34, the Directors are responsible for the preparation of the Group Company. Financial Statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the Group Under the Listing Rules we are required to review: Financial Statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to • the Directors’ statement, set out on page 23 in relation to going concern; comply with the Auditing Practices Board’s Ethical Standards for Auditors. • the part of the Corporate governance statement relating to the company’s compliance with the nine provisions of the June 2008 Combined Code This report, including the opinions, has been prepared for and only for the specified for our review; and company’s members as a body in accordance with Chapter 3 of Part 16 • certain elements of the report to shareholders by the Board on Directors’ of the Companies Act 2006 and for no other purpose. We do not, in giving remuneration. these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may Other matter come save where expressly agreed by our prior consent in writing. We have reported separately on the Parent Company Financial Statements of Avis Europe plc for the year ended 31 December 2010 and on the Scope of the audit of the Financial Statements information in the Directors’ Remuneration report that is described as having An audit involves obtaining evidence about the amounts and disclosures been audited. in the Financial Statements sufficient to give reasonable assurance that the Financial Statements are free from material misstatement, whether Stephen Wootten (Senior Statutory Auditor) caused by fraud or error. This includes an assessment of: whether the for and on behalf of PricewaterhouseCoopers LLP accounting policies are appropriate to the Group’s circumstances and have Chartered Accountants and Statutory Auditors been consistently applied and adequately disclosed; the reasonableness Reading of significant accounting estimates made by the Directors; and the overall 25 February 2011 presentation of the Financial Statements.
Opinion on Financial Statements In our opinion the Group Financial Statements: Notes: a) The maintenance and integrity of the Avis Europe plc website is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters • give a true and fair view of the state of the Group’s affairs as at 31 and, accordingly, the auditors accept no responsibility for any changes that may have occurred December 2010 and of its profit and cash flows for the year then ended; to the Financial Statements since they were initially presented on the website. • have been properly prepared in accordance with IFRSs as adopted by the b) Legislation in the United Kingdom governing the preparation and dissemination of Financial European Union; and Statements may differ from legislation in other jurisdictions. • have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the lAS Regulation.
Opinion on other matters prescribed by the Companies Act 2006 In our opinion:
• the information given in the Directors’ report for the financial year for which the Group Financial Statements are prepared is consistent with the Group Financial Statements; and • the information given in the Corporate governance statement set out on pages 26 to 29 with respect to internal control and risk management systems and about share capital structures is consistent with the Group Financial Statements. avis-europe.com Annual Report 2010 45 Financial statements Consolidated Income Statement for the year ended 31 December
2010 2009 Amounts Amounts excluded from excluded from underlying underlying Underlying1 (Note 6) Total Underlying1 (Note 6) Total Notes €m €m €m €m €m €m Revenue 2,3 1,521.9 – 1,521.9 1,395.5 – 1,395.5 Cost of sales (989.6) – (989.6) (875.8) – (875.8) Financial statements Gross profit 532.3 – 532.3 519.7 – 519.7 Administrative expenses (424.1) (2.5) (426.6) (416.3) (33.5) (449.8) Operating profit/(loss) 3,4,6 108.2 (2.5) 105.7 103.4 (33.5) 69.9 Finance income 6,7 1.1 0.2 1.3 1.0 4.4 5.4 Finance costs 6,7 (60.6) 1.0 (59.6) (69.3) (1.6) (70.9) Share of profit of joint ventures and associate 15 2.3 – 2.3 0.1 – 0.1 Profit/(loss) before taxation 51.0 (1.3) 49.7 35.2 (30.7) 4.5 Taxation 6,8 (23.1) 2.2 (20.9) (10.4) 6.1 (4.3)
Profit/(loss) after taxation for the year attributable to equity holders of the Company 27.9 0.9 28.8 24.8 (24.6) 0.2 Earnings per share (euro cents) As restated2 As restated2 Basic 10 17.8 18.4 20.0 0.2 Diluted 10 17.7 18.2 20.0 0.2
1 Underlying excludes net exceptional items, certain re-measurement items and economic hedges – see Basis of Preparation. 2 Comparative restated following the Rights Issue and share consolidation (see Note 29). The accompanying Notes form an integral part of these Consolidated Financial Statements. 46 avis-europe.com Annual Report 2010 Financial statements Consolidated Statement of Comprehensive Income for the year ended 31 December
2010 2009 Amounts Amounts excluded from excluded from Underlying1 underlying Total Underlying1 underlying Total Notes €m €m €m €m €m €m Profit/(loss) after taxation for the year attributable to equity holders of the Company 27.9 0.9 28.8 24.8 (24.6) 0.2 Actuarial gains/(losses) on retirement benefit obligations 23 – 7.4 7.4 – (17.6) (17.6) Cash flow hedges: – net fair value losses – (7.4) (7.4) – (3.4) (3.4) – reclassified to Income Statement – 10.0 10.0 – 2.7 2.7 Exchange differences on translation of foreign operations – 9.4 9.4 – 5.5 5.5 Tax (charge)/credit on other net comprehensive income/(expense) 8 – (1.1) (1.1) – 6.6 6.6 Other comprehensive income/(expense) net of taxation for the year – 18.3 18.3 – (6.2) (6.2) Total comprehensive income/(expense) for the year attributable to equity holders of the Company 27.9 19.2 47.1 24.8 (30.8) (6.0)
1 Underlying excludes net exceptional items, certain re-measurement items and economic hedges – see Basis of Preparation. The accompanying Notes form an integral part of these Consolidated Financial Statements. avis-europe.com Annual Report 2010 47 Financial statements Consolidated Balance Sheet as at 31 December
2010 2009 Notes €m €m Goodwill 11 0.2 0.2 Other intangible assets 12 11.1 13.1 Property, plant and equipment: – vehicles not subject to manufacturer repurchase agreements 13 353.5 364.5 – other property, plant and equipment 14 58.8 64.9 Investments accounted for using the equity method 15 16.3 12.2 Financial statements Other financial assets: – investments held for sale 16 0.5 0.4 – derivative financial instruments 26 7.0 1.9 Deferred tax assets 17 41.4 42.5 Non-current assets 488.8 499.7 Inventories 18 7.1 8.4 Trade and other receivables 19 1,026.1 989.6 Current tax assets 1.6 1.7 Other financial assets: – held for trading 16 – 2.7 – derivative financial instruments 26 2.7 2.4 Cash and short-term deposits 20 231.7 60.6 Current assets 1,269.2 1,065.4 Total assets 1,758.0 1,565.1 Trade and other payables 21 463.5 422.7 Other taxes and social security 64.8 42.6 Current tax liabilities 20.3 41.2 Obligations under finance leases 24 184.3 167.9 Other financial liabilities: – borrowings 25a) 112.9 74.0 – deferred consideration 25c) 0.3 0.3 – derivative financial instruments 26 19.0 32.1 Provisions 22 20.9 18.6 Current liabilities 886.0 799.4 Deferred tax liabilities 17 6.9 6.4 Provisions 22 27.4 32.7 Retirement benefit obligations 23 68.0 89.1 Obligations under finance leases 24 0.1 – Other financial liabilities: – borrowings 25a) 435.6 509.5 – deferred consideration 25c) 24.8 23.8 – derivative financial instruments 26 17.3 41.8 Non-current liabilities 580.1 703.3 Total liabilities 1,466.1 1,502.7 Net assets 291.9 62.4 Equity Called-up share capital 29 25.6 13.1 Share premium 381.5 381.5 Own shares held 30 (3.9) (2.5) Retained deficit (91.5) (295.6) Translation reserve (11.6) (24.3) Hedging reserve (9.0) (10.6) Shareholders’ equity 291.1 61.6 Non-controlling interest 0.8 0.8 Total equity 291.9 62.4 The accompanying Notes form an integral part of these Consolidated Financial Statements. The Consolidated Financial Statements, including accompanying Notes, were approved by the Board on 25 February 2011 and were signed on its behalf by: Pascal Bazin Martyn Smith Chief Executive Group Finance Director Avis Europe plc Registered No. 3311438 48 avis-europe.com Annual Report 2010 Financial statements Consolidated Statement of Changes in Equity
Attributable to equity holders of the Company Own Share shares Non- capital Share held Retained Merger Translation Hedging controlling Total (Note 29) premium (Note 30) deficit reserve reserve reserve Total interest equity Notes €m €m €m €m €m €m €m €m €m €m At 1 January 2009 13.1 381.5 (0.4) (283.9) – (30.8) (10.2) 69.3 0.8 70.1
Profit for the year attributable to equity holders of the Company – – – 0.2 – – – 0.2 – 0.2 Net actuarial losses on retirement benefit obligations – – – (17.6) – – – (17.6) – (17.6) Cash flow hedges: – net fair value losses – – – – – – (3.4) (3.4) – (3.4) – reclassified to Income Statement – – – – – – 2.7 2.7 – 2.7 Taxation 8 – – – 5.3 – 1.0 0.3 6.6 – 6.6 Exchange differences on translation of foreign operations – – – – – 5.5 – 5.5 – 5.5 Total comprehensive (expense)/ income for the year – – – (12.1) – 6.5 (0.4) (6.0) – (6.0) Increase in equity reserve arising from charge to income for share options in the year 5 – – – 0.4 – – – 0.4 – 0.4 Purchase of own shares – – (2.0) – – – – (2.0) – (2.0) Other exchange movements – – (0.1) – – – – (0.1) – (0.1) At 31 December 2009 13.1 381.5 (2.5) (295.6) – (24.3) (10.6) 61.6 0.8 62.4 At 1 January 2010 13.1 381.5 (2.5) (295.6) – (24.3) (10.6) 61.6 0.8 62.4
Profit for the year attributable to equity holders of the Company – – – 28.8 – – – 28.8 – 28.8 Net actuarial gains on retirement benefit obligations – – – 7.4 – – – 7.4 – 7.4 Cash flow hedges: – net fair value losses – – – – – – (7.4) (7.4) – (7.4) – reclassified to Income Statement – – – – – – 10.0 10.0 – 10.0 Taxation 8 – – – (3.4) – 3.3 (1.0) (1.1) – (1.1) Exchange differences on translation of foreign operations – – – – – 9.4 – 9.4 – 9.4 Total comprehensive income for the year – – – 32.8 – 12.7 1.6 47.1 – 47.1 Net proceeds of Rights Issue 29 12.5 – – – 168.1 – – 180.6 – 180.6 Purchase of own shares upon Rights Issue 30 – – (1.4) – – – – (1.4) – (1.4) Realisation of merger reserve 29 – – – 168.1 (168.1) – – – – – Increase in equity reserve arising from charge to income for share options in the year 5 – – – 2.1 – – – 2.1 – 2.1 Decrease in equity reserve and own shares released on vesting of share awards – – 0.1 (0.1) – – – – – – Deferred tax credit on share-based payments – – – 1.2 – – – 1.2 – 1.2 Other exchange movements – – (0.1) – – – – (0.1) – (0.1) At 31 December 2010 25.6 381.5 (3.9) (91.5) – (11.6) (9.0) 291.1 0.8 291.9
Goodwill of €1,080.4 million arising before 1 March 1998 is fully written off to reserves. The hedging reserve reflects changes in the fair value of derivative financial instruments that are designated and effective as hedges of future cash flows.
The accompanying Notes form an integral part of these Consolidated Financial Statements. avis-europe.com Annual Report 2010 49 Financial statements Consolidated Cash Flow Statement for the year ended 31 December
2010 2009 Notes €m €m Operating profit 105.7 69.9 Reverse amortisation of other intangible assets 4 5.1 4.8 Reverse depreciation on vehicles and other property, plant and equipment 4 118.5 129.1 Reverse adjustments arising on differences between sales proceeds and depreciated amounts 4 (2.9) (1.0) Reverse non-cash operating lease charge on manufacturer repurchase agreements 4 143.4 135.7 Payments in respect of manufacturer repurchase agreements (838.9) (865.5) Financial statements Receipts in respect of manufacturer repurchase agreements 739.2 998.3 Purchase of vehicles not subject to manufacturer repurchase agreements (387.0) (293.4) Proceeds on disposal of vehicles not subject to manufacturer repurchase agreements 336.2 249.9 (Increase)/decrease in non-vehicle inventories (1.0) 1.7 (Increase)/decrease in receivables (35.6) 36.6 Increase in payables 52.9 2.5 Decrease in provisions (3.8) (9.0) Decrease in retirement benefit obligations (15.4) (1.5) Reverse share-based payment charges 5 2.1 0.4 Reverse exceptional impairment – 0.6 Reverse re-measurement items and economic hedging adjustments 6 2.8 4.0 Cash flow on derivative financial instruments – non-debt (3.9) (2.2) Net cash generated from operating activities before taxation 217.4 460.9 Tax paid (40.4) (12.0) Net cash generated from operating activities 177.0 448.9 Investing activities Purchase of other intangible assets 12 (2.6) (2.2) Purchase of other property, plant and equipment (7.2) (8.7) Proceeds on disposal of other property, plant and equipment 0.9 0.6 Purchase of financial assets – available for sale investments (0.1) – Sale/(purchase) of financial assets held for trading 32a) 2.7 (2.7) Investment in associate 33 – (0.4) Net cash used in investing activities (6.3) (13.4) Financing activities Net proceeds of Rights Issue 29 180.6 – Finance revenue received 1.1 1.0 Finance costs paid (52.9) (61.6) Finance cost element of finance lease payments (7.8) (10.6) Net capital element of finance lease payments 32a) (46.7) (54.3) Purchase of own shares 30 (1.4) (2.0) Repayment of bank and other loans 32a) (46.9) (261.4) Cash flow on derivative financial instruments – debt 32a) (29.1) (19.4) Net cash used in financing activities (3.1) (408.3) Increase in cash and cash equivalents (excluding exchange rate changes) 167.6 27.2 Effects of exchange rate changes 32a) 0.5 (0.1) Net increase in cash and cash equivalents 168.1 27.1 Cash and cash equivalents at 1 January 32a) 51.8 24.7 Cash and cash equivalents at 31 December 32a) 219.9 51.8
The accompanying Notes form an integral part of these Consolidated Financial Statements. 50 avis-europe.com Annual Report 2010 Financial statements Significant Accounting Policies Applicable to the Consolidated Financial Statements for the year ended 31 December 2010
Basis of preparation with similarly titled profit measurements reported by any other company. It is The Consolidated Financial Statements have been prepared in accordance with not intended to be a substitute for, or superior to, IFRS measures of profit. International Financial Reporting Standards (IFRSs) as adopted by the European These underlying measures are calculated based on reported profit before Union, International Financial Reporting Interpretations Committee (IFRIC) exceptional items, certain re-measurement items and adjustments to reflect the interpretations and the Companies Act 2006 applicable to companies reporting realised gains and losses on foreign exchange forward contracts and accrued under IFRS. Avis Europe plc is a public limited company incorporated, listed and interest cash flows on certain derivative financial instruments (economic hedge domiciled in the UK. The Consolidated Financial Statements have been adjustments). These are detailed below. prepared under the historical cost convention as modified (as described below) by the revaluation of certain derivative instruments and borrowing balances, the Exceptional items recognition of retirement benefit obligations using the “projected unit method”, These are material non-recurring items that derive from events or transactions and the recognition in the Income Statement of the fair value of share based that fall within the ordinary activities of the Group, and which individually or, if payments. The Consolidated Financial Statements are prepared in accordance of a similar type, in aggregate, are separately disclosed by virtue of their size or with the accounting policies set out below. incidence.
These policies are consistent with those followed in the preparation of the Certain re-measurement items Consolidated Financial Statements for the year ended 31 December 2009, Items that represent re-measurement of underlying assets or liabilities (for except for the adoption of the following new standards, interpretations and example due to interest rate or exchange rate changes) are presented as amendments to published standards which are effective in year ended certain re-measurement items. Events which may give rise to the classification 31 December 2010, where applicable: of gains and losses as certain re-measurement items include fair value gains and losses on derivatives in accordance with the financial instruments and The following new standards, amendments to standards or interpretations are hedge accounting policy below; and exchange gains and losses arising upon mandatory for the first time for the financial year beginning 1 January 2010 the translation of foreign currency borrowings at the closing rate. and have been applied by the Group where relevant and have had no significant impact on the Group’s Consolidated Financial Statements. Economic hedge adjustments Under IAS 39, the Group applies hedge accounting to hedge relationships • IFRS 3 (revised 2008), Business combinations (effective from 1 July 2009). (primarily forward exchange contracts, cross currency interest rate swaps and • IFRS 5 (Amendment), Non-current assets held-for-sale and discontinued interest rate swaps) where it is both permissible and practicable to do so. Due operations, and consequential amendment to IFRS 1, First-time adoption of to the nature of its economic hedging relationships, in a number of International Financial Reporting Standards (effective from 1 July 2009). circumstances the Group is unable to apply hedge accounting to these • IFRIC 17, Distributions of non-cash assets to owners (effective from 1 July derivatives. The Group continues, however, to enter into these arrangements as 2009). they provide certainty of the exchange rates applying to the foreign currency • IFRIC 18, Transfers of assets from customers (effective from 1 July 2009). transactions entered into by the Group and the interest rate on the Group’s debt. These arrangements result in fixed and determined cash flows. The Group Note that the following new standards, interpretations and amendments to believes that these arrangements remain effective as economic hedges, and published standards are effective for annual periods beginning on or after the therefore adjustment is made to reported profit measures such that the stated effective date, and have therefore not been adopted to date: underlying profit reflects full application of hedge accounting.
• IFRS 9, Financial instruments (effective 1 January 2013). Basis of consolidation • IAS 24 (revised), Related party disclosures (effective 1 January 2011). The Consolidated Financial Statements comprise a consolidation of the • IAS 32, Financial instruments: presentation (amendment – ‘Classification of accounts of the Company and its subsidiary undertakings. rights issues’) (effective 1 February 2010). • IFRIC 14 (Amendment), Prepayments of a minimum funding requirement The accounting reference dates of certain of the Group’s subsidiary (effective 1 January 2011). undertakings and its associated undertaking are governed by local • IFRIC 19, Extinguishing financial liabilities with equity instruments requirements and are not coterminous with the Group’s 31 December year (effective 1 July 2010). end. For those companies with non-coterminous year ends, management accounts for the relevant period to 31 December have been consolidated. The Management are currently reviewing the impact of the above. The application main subsidiary undertaking with such a non-coterminous year end is Avis of IFRS9, Financial Instruments, and IAS24, Related party disclosures, will Autonoleggio SpA (30 June). In the opinion of the Directors, the expense of result in further disclosure amendments once those standards become providing such additional coterminous statutory accounts, together with effective. The other new standards, interpretations and amendments are not potential consequential delay in producing the Group’s Consolidated Financial currently expected to have a material impact on the Group’s financial Statements, would outweigh any benefit to the shareholders. statements. Subsidiary undertakings Underlying measures Subsidiary undertakings are those entities in which the Group has, directly or In addition to total performance measures, the Group also discloses additional indirectly, an interest of more than half of the voting rights or otherwise has the underlying performance measures, including underlying profit and underlying power to exercise control over the operations. Subsidiaries are accounted for earnings per share. The Group believes that these underlying performance using the acquisition method of accounting. The amount of profits or losses for a measures provide additional useful information on business trends. The term reporting period allocated to non-controlling interests is adjusted (and separately “underlying” is not defined under IFRS, and may therefore not be comparable disclosed in the Income Statement) against income of the Group for the year. avis-europe.com Annual Report 2010 51
Joint ventures and associate undertaking Consistent with presentation in its management accounts, the Group separately Joint ventures are undertakings in which the Group has an interest and which discloses the results of its corporately-owned operations, Avis Licensee and are jointly controlled by the Group and one or more other parties. Associates Budget Licensee businesses. The Chief Executive focuses on these separate are undertakings in which the Group has an investment and can exercise business segments given their relative contribution to overall Group profitability, significant influence. Such interests are accounted for using the equity method and with their significantly different risks and rewards. and are stated in the Consolidated Balance Sheet at cost, adjusted for
movement in the Group’s share of their net assets and liabilities. The Group’s Due to the network nature of the Group’s operations and the extensive Financial statements share of the profit or loss after tax of joint ventures and associates is included interdependencies within that network, the corporately-owned business unit is in the Group’s share of profit before taxation. managed under a matrix structure with key management personnel responsible for both functions across the whole of the corporately-owned business Functional currency and foreign exchange segment, as well as for the performance of certain geographies. The functional currency of the Company is sterling. However, as a significant proportion of the Group’s revenues, costs, assets and funding arise in euro, the Revenue Consolidated Financial Statements of the Group are presented in euro. Revenue includes both vehicle rental income and income from the disposal of vehicles not subject to manufacturer repurchase agreements, and excludes Foreign exchange translation: inter-company sales, value added and sales taxes. Revenue is recognised The Group consolidation is prepared in sterling. Income statements of foreign when the outcome of a transaction involving the rendering of services operations are translated into sterling at the weighted average exchange rates (including the provision of licence rights) can be estimated reliably by reference for the period and balance sheets are translated into sterling at the exchange to the stage of completion of the transaction at the balance sheet date. The rate ruling on the balance sheet date. Goodwill and fair value adjustments outcome of a transaction can be estimated reliably when all of the following are arising on the acquisition of a foreign entity are treated as local currency assets satisfied: a) the amount of revenue can be measured reliably; b) it is probable and liabilities of the foreign entity and are translated at the closing rate. that the economic benefits associated with the transaction will flow to the Group; c) the stage of completion of the transaction at the balance sheet date Foreign currency transactions are accounted for at the exchange rate prevailing can be measured reliably; and d) the cost incurred for the transaction and the at the date of the transactions. Gains and losses resulting from the settlement costs to complete the transaction can be measured reliably. of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in the Income Statement. Rental income Exchange movements arising from the retranslation at closing rates of the Rental revenue comprises charges for the rental of a vehicle and is recognised Group’s net investment in subsidiaries, joint ventures and associates are taken on a daily rental basis. Other revenue including charges arising from the to the translation reserve. The Group’s net investment includes the Group’s provision of services incidental to vehicle rental (such as the sale of fuel and share of net assets of subsidiaries, joint ventures and associates, and certain the provision of foreign exchange services to rental customers) are recognised inter-company loans. The net investment definition includes certain loans in line with underlying rental revenue. Other revenue also includes fees between Group companies and other inter-company items denominated in any receivable from sub-licensees which is ordinarily recognised as a contracted currency. Other exchange movements are taken to the Income Statement. percentage of the rental revenue of each individual sub-licensee.
The Consolidated Financial Statements are presented in euro. The Licensee fees from Avis and Budget Licensees are ordinarily recognised as a consolidated sterling assets and liabilities at each balance sheet date are contracted percentage of the rental revenue of each individual licensee. Where recalculated into euro at the closing rate at that balance sheet date. The licensee arrangements include both up-front and ongoing fees, the consolidated sterling income and expenses are recalculated into euro at components are assigned across accounting periods based on the relative fair the average monthly exchange rates. All resulting exchange differences are value of the service provided. The Group generally determines the fair value of taken to the translation reserve. individual elements based on prices at which the service component is regularly sold on a standalone basis. Net investment hedges: Where the Group hedges net investments in foreign operations, the gains and Charges recovering the cost of damages incurred to vehicles are not losses relating to the effective portion of the hedging instrument is recognised recognised as revenue, but are netted against the related damage repair costs in the translation reserve in equity. The gain or loss relating to any ineffective within cost of sales. portion is recognised in the Income Statement. Gains and losses accumulated in equity are included in the Income Statement when the foreign operation is Disposal of vehicles not subject to manufacturer repurchase agreements disposed of. Income from the disposal of vehicles not subject to manufacturer repurchase agreements, is recognised in revenue upon the transfer of legal title of the Segment reporting vehicle. In accordance with IFRS8, Operating segments, the Group adopts a “management approach” to segment reporting such that segmental Customer loyalty programmes information is in the form which management uses internally for assessing The Group operates a small number of customer loyalty/reward programmes of segment performance and deciding how to allocate resources to operating its own, whereby certain regular customers can accumulate credits that entitle segments. Operating segments are reported in a manner consistent with the them to a choice of various awards and discounts, primarily free future rentals. internal reporting provided to the chief operating decision-maker being the In accordance with IFRIC 13, Customer loyalty programmes, the fair value Group Chief Executive. attributed to the awarded credits is netted against revenue, deferred as a liability and recognised as revenue on redemption of the rewards. 52 avis-europe.com Annual Report 2010 Financial statements Significant Accounting Policies continued Applicable to the Consolidated Financial Statements for the year ended 31 December 2010
Cost of sales Goodwill Cost of sales includes selling, revenue and rental related costs (e.g. Goodwill (being the difference between the fair value of consideration paid for commissions and credit card fees) and vehicle costs. Cost of sales also new interests in group companies and the fair value of the Group’s share of includes the book value of vehicles not subject to manufacturer repurchase their identifiable net assets and contingent liabilities at the date of acquisition) agreements disposed in the period. The Group participates in third party reward is capitalised. Goodwill is not amortised, but is subject to annual review for schemes (primarily airline frequent flyer loyalty programmes) which involves the impairment (or more frequently if necessary). Any impairment is charged to the purchasing of ‘air miles’ or ‘points’ which are then used in promotional activity. Income Statement as it arises. These costs are recognised as part of selling costs upon customers qualifying to receive these rewards. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash Administrative expenses generating units, or groups of cash generating units, that are expected to Administrative expenses primarily comprise staff costs, non-vehicle related benefit from the synergies of the combination, irrespective of whether assets or rental charges and other overheads, and are recognised as an expense in the liabilities of the acquired business are assigned to those units or group of units. period in which they are incurred. Each unit, or group of units to which the goodwill is allocated represents the lowest level within the Group at which goodwill is monitored for internal Finance costs management purposes, and is not larger than an operating segment. Any finance costs directly attributable to capital projects are capitalised as part of the individual project costs. All other finance costs are recognised as an Other intangible assets expense in the period in which they are incurred. Other intangible assets are valued at cost less any accumulated amortisation and any accumulated impairment losses. Costs that are directly associated Taxation with identifiable and unique software products, and which have probable The current tax payable is based on taxable profit for the year. Taxable profit economic benefits exceeding the cost beyond one year, are recognised as differs from net profit as reported in the Income Statement because it excludes intangible assets. Costs associated with maintaining computer software, or that items of income or expense that are taxable or deductible in other years. It are not directly associated with identifiable and unique software products, are further excludes items that are never taxable or deductible. The Group’s liability expensed as incurred. Computer software programmes are amortised on a for current tax is calculated using tax rates that have been enacted or straight-line basis over periods varying between two and 10 years. substantively enacted at the balance sheet date. Vehicles not subject to manufacturer repurchase agreements Current tax for current and prior periods, to the extent unpaid, is recognised as Vehicles are initially measured at cost, comprising the purchase price (including a liability. If the amount already paid in respect of current and prior periods any import duties and non-refundable purchase taxes, after deducting trade exceeds the amount due for those periods, the excess is recognised as a discounts and rebates), plus any costs directly attributable to bringing the current asset. The benefit relating to a tax loss that can be carried back to vehicle to the location and condition necessary for it to be capable of operating. recover current tax of a previous period is recognised as an asset. After initial recognition, the vehicle is carried at its cost less any accumulated depreciation and any provisions for accumulated impairment losses. Straight- Deferred tax is provided in full using the balance sheet liability method, on line depreciation is based on initial cost, after consideration of expected holding temporary differences between the carrying amount of assets and liabilities for periods (ordinarily between 6 months and 3 years) and estimated residual financial reporting purposes and the corresponding tax bases for taxation values. Where the carrying amount of a vehicle is greater than its estimated purposes. Deferred taxes are not calculated on the following temporary recoverable amount, it is written down immediately to its anticipated differences: (i) the initial recognition of goodwill and (ii) the initial recognition of recoverable amount. Recoverable amount is the higher of fair value less costs assets and liabilities that affect neither accounting nor taxable profit. The to sell and value in use. amount of deferred tax provided is based on the expected basis of realisation or settlement of the carrying amount of assets and liabilities, using tax rates Vehicles not subject to manufacturer repurchase agreements are transferred to enacted or substantively enacted at the balance sheet date. A deferred tax inventories when a disposal is highly probable, the vehicle is available for asset is recognised only to the extent that it is probable that future taxable immediate sale in its present condition and management are committed to the profits will be available against which the unused tax losses and credits can be asset disposal which is ordinarily imminent. utilised. Deferred tax assets previously recognised are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Other property, plant and equipment Other property, plant and equipment is stated at cost less depreciation and Deferred tax is not recognised in relation to temporary differences associated impairment. Cost comprises the purchase price (including any import duties with unremitted earnings of the Group’s overseas subsidiaries where the Group and non-refundable purchase taxes, after deducting trade discounts and is in a position to control the timing of the reversal of the temporary differences rebates), plus any costs directly attributable to bringing the asset to the location and it is probable that such differences will not reverse in the foreseeable future. and condition necessary for it to be capable of operating. If applicable, initial estimates of the cost of dismantling and removing the item and restoring the site are also included in the cost of the item. Depreciation is provided on a Current and deferred tax are charged or credited to the Income Statement straight line basis based on the expected average useful lives of the assets and except when they relate to items charged or credited directly to equity, in which the residual values. The main useful lives are as follows: case the tax is also dealt with in equity.
avis-europe.com Annual Report 2010 53
a) Buildings: 40 to 50 years Inventories b) Plant and equipment: 3 to 15 years Vehicles not subject to manufacturer repurchase agreements c) Leased assets: depending on the length of the lease Vehicles not subject to manufacturer repurchase agreements are classified within inventories if their carrying amount will be recovered through a sale Other property, plant and equipment is subject to review for impairment at each transaction rather than through continuing use. Vehicles classified within balance sheet date or if triggering events or circumstances indicate this is inventories cease to be depreciated and are measured at the lower of carrying
necessary. Any impairment is charged to the Income Statement as it arises. amount and fair value less selling costs. Financial statements
Leases Fuel and vehicle parts Leases in which a significant portion of the risks and rewards of ownership are Inventories are measured at the lower of cost and net realisable value. The cost retained by the lessor are classified as operating leases. of inventories comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their location and condition at the Operating leases for which the Group is the lessor balance sheet date. Items are valued using the first in, first out method. When Rental income is recognised on a straight-line basis over the lease term. inventories are used, the carrying amount of those inventories is recognised as Vehicles leased out under operating leases are classified within “property, plant an expense in the period in which the related revenue is recognised. and equipment – vehicles not subject to manufacturer repurchase agreements”, unless they are held under operating leases for which the Group Financial Instruments is the lessee (see below). These vehicles are depreciated over their expected Financial assets useful lives. The classification of financial assets is determined at initial recognition depending on the purpose for which they were acquired. Any impairment is Operating leases for which the Group is the lessee recognised in the Income Statement as it arises. Lease payments under operating leases (net of any incentive received from the lessor) are recognised as expenses in the Income Statement on a straight-line Trade and other receivables: basis over the lease term. Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, Vehicles subject to manufacturer repurchase agreements less provision for impairment. Vehicles subject to manufacturer repurchase agreements are not recognised as non-current assets since these arrangements are accounted for as operating Cash and short term deposits: leases (lessee accounting). The difference between the initial payment and the Cash comprises cash in hand, demand deposits and bank overdrafts. Cash fair value at inception of the final repurchase price (the obligation of the equivalents include short-term, highly liquid investments that are readily manufacturer) is considered as a deferred charge and is classified as prepaid convertible to known amounts of cash and which are subject to an insignificant vehicle operating lease charges within trade and other receivables. This risk of changes in value. Bank overdrafts are shown within “borrowings” in deferred charge is recognised within cost of sales on a straight line basis over “current liabilities” in the Balance Sheet. the relevant vehicle holding period as “hire of vehicles under repurchase agreements”. At inception of the arrangement, a separate repurchase Impairment of financial assets: agreement receivable is recognised within “trade and other receivables” for the At each balance sheet date the Group assesses whether there is objective fair value of the final repurchase price. Thereafter this repurchase agreement evidence that a financial asset or a group of financial assets is impaired. receivable is recognised at amortised cost with the unwinding of the initial fair A provision for impairment of trade receivables is established when there value discount also recognised within cost of sales as part of the “net operating is objective evidence that the Group will not be able to collect all amounts lease charge on manufacturer repurchase agreements”, reflecting the due according to the original terms of the receivables. The amount of the substance of the overall arrangement. provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows. The carrying amount is Finance leases for which the Group is the lessee reduced through the use of an allowance account, and the amount Leases of vehicles (including vehicles subject to manufacturer repurchase is recognised in the Income Statement within administrative expenses. agreements) and other property, plant and equipment, where the Group has When a trade receivable is uncollectible, it is written off against the substantially all the risks and rewards of ownership, are classified as finance allowance account for trade receivables, with any subsequent recoveries leases. Finance leases are capitalised at the inception of the lease at the lower credited to administrative expenses. of the fair value of the leased asset or the present value of the minimum lease payments. Each lease payment is allocated between the liability and the Financial liabilities finance charge so as to achieve a constant rate of return on the finance Financial liabilities (including borrowings) are recognised initially at fair value, balance outstanding. The corresponding rental obligations, net of finance net of transaction costs. They are subsequently held at amortised cost unless charges, are included in interest-bearing liabilities. The interest element of the part of a fair value hedge. Any difference between the amount on initial finance cost is charged to the Income Statement over the lease period. The recognition and redemption value is recognised in the Income Statement using leased assets are depreciated over their expected useful lives on a basis the effective interest method. Short-term liabilities (including trade and other consistent with similar owned vehicles or other property, plant and equipment. payables) are measured at original invoice amount. If there is no reasonable certainty that ownership will be acquired by the end of the lease term, the asset is depreciated over the shorter of the lease term and its useful life.
54 avis-europe.com Annual Report 2010 Financial statements Significant Accounting Policies continued Applicable to the Consolidated Financial Statements for the year ended 31 December 2010
Derivatives Provisions The fair values of derivative financial instruments are determined using a A provision is recognised when there is a present obligation (legal or number of methods and assumptions based on prevailing conditions at the constructive) as a result of a past event, it is probable that an outflow of balance sheet date including market forward interest rates and exchange rates resources embodying economic benefits will be required to settle the at the balance sheet date. Changes in fair value of derivative financial obligation, and a reliable estimate can be made of the amount of the obligation. instruments that do not qualify for hedge accounting are recognised in the Provisions are measured at the value of the expenditures expected to be Income Statement as they arise. required to settle the obligation. Where the time value of money is material, provisions are discounted using an appropriate rate that takes into account the Where hedge accounting is applied, the Group documents at the inception of risks specific to the liability. the transaction: the relationship between the hedging instruments and hedged item; its risk management objectives and strategy for undertaking the Uninsured claims transaction; its assessment (both at inception and then ongoing) of whether the The Group limits its exposure to the cost of motor, employer and public liability derivatives are highly effective in offsetting changes in fair values or cash flows claims through insurance policies issued by third parties, but self insures of the related hedged items. The fair value of a hedging derivative is classified subject to excess limits and annual aggregate stop losses for total claims. A as a non-current asset or liability if the remaining maturity of the hedged item provision is made for the estimated cost to the Group to settle claims for is more than 12 months, and as a current asset or liability if the remaining incidents occurring prior to the balance sheet date, together with an estimate maturity of the hedged item is less than 12 months. Trading derivatives are of settlements that will be made in respect of incidents occurring prior to the classified as a current asset or liability. balance sheet date but that have not yet been reported to the Group (subject to the overall stop losses) based on an assessment of the expected settlement on Cash flow hedges: known claims, and after taking appropriate professional advice. Changes in the fair value of derivative financial instruments that are designated and effective as hedges of future cash flows are recognised directly in equity Retirement benefit obligations and any ineffective portion is recognised immediately in the Income Statement. The Group operates various defined benefit and defined contribution retirement If the cash flow hedge is a firm commitment or the forecast transaction results benefit plans. in the recognition of an asset or a liability, then, at the time the asset or liability is recognised, the associated gains or losses on the derivative that had The charges to the Income Statement for defined contribution plans are the previously been recognised in equity are included in the initial measurement of Group contributions payable, and the assets and liabilities of such plans are not the asset or liability. For hedges that do not result in the recognition of an asset included in the balance sheet of the Group. or a liability, amounts deferred in equity are recognised in the Income Statement in the same period in which the hedged item affects net profit or loss. All defined benefit schemes are subject to regular actuarial review by external consultants using the “projected unit method”. Service costs are systematically When a hedging instrument expires or is sold, or when a hedge no longer allocated over the service lives of employees, and financing costs are meets the criteria for hedge accounting, any cumulative gain or loss existing in recognised in the periods in which they arise. The costs of individual events equity at that time remains in equity and is recognised when the forecast such as past service benefit enhancements, settlements and curtailments are transaction is ultimately recognised in the Income Statement. When a forecast recognised immediately in the Income Statement. Variations from expected transaction is no longer expected to occur, the cumulative gain or loss that was costs, arising from experience of the plans, or changes in actuarial reported in equity is immediately reclassified to the Income Statement. assumptions, are recognised immediately in the Statement of Comprehensive Income. The defined benefit deficit or surplus in the balance sheet comprises Fair value hedges: the value for each plan of the fair value of the plan assets less the present For an effective hedge of an exposure to changes in the fair value of a hedged value of the defined benefit obligation (using a discount rate based on high item, the hedged item is adjusted for changes in fair value attributable to the quality corporate bonds). risk being hedged with a corresponding entry in the Income Statement. Gains or losses from re-measuring the derivative, or for non-derivatives the foreign Equity currency component of its carrying amount, are also recognised in the Income Own shares held Statement. If the hedge no longer meets the criteria for hedge accounting, the Where the Company (or its subsidiaries) re-acquires its own equity instruments, adjustment to the carrying amount of a hedged item for which the effective those instruments are deducted from equity as own shares held. Where such interest method is used is amortised to the Income Statement over the period equity instruments are subsequently sold, any consideration received is to maturity. recognised in equity.
Embedded derivatives: Share-based payments Derivatives embedded in other financial instruments or other host contracts are The economic cost of awarding shares and share options is reflected by treated as separate derivatives when their risks and characteristics are not recording a charge in the Income Statement equivalent to the fair value of the closely related to those of the host contracts and the host contracts are not benefit awarded over the relevant performance period. Fair value is determined carried at fair value. Embedded derivatives are held at fair value, with with reference to the share price at the date of grant. Employer national unrealised gains and losses recognised in the Income Statement as they arise. insurance contributions which are expected to be paid upon vesting of such options are also recognised in the Income Statement over the relevant performance period.
avis-europe.com Annual Report 2010 55
Critical accounting policies and judgements Share-based payments The preparation of the Consolidated Financial Statements requires The cost of options granted to employees is measured by reference to the fair management to make estimates and assumptions that affect the reported value at the date at which they are granted. This cost is recognised in the amounts of revenues, expenses, assets and liabilities, and disclosure of Income Statement over the period from grant to vesting date, being the date on contingencies at the date of the Consolidated Financial Statements. If the which the relevant employees become fully entitled to the award, with a original estimates and assumptions are different to the subsequent actual corresponding increase in equity. The cumulative expense recognised at each
outcome, they are modified as appropriate in the period in which the reporting date, reflects the extent to which the period to vesting has expired and Financial statements circumstances change. The following policies are considered to be particularly the Directors’ best estimate of the number of options that will ultimately vest. complex and/or subject to the exercise of considerable judgement.
Exceptional items Exceptional items are those that, by virtue of their size or incidence, should be separately disclosed in the Income Statement. The determination of which items should be separately disclosed as exceptional items requires judgement.
Fleet Given the nature of the Group’s business, the main asset in the Balance Sheet is the vehicle fleet, a proportion of which has no guaranteed residual value and therefore the value at the end of the rental life will depend on the market for those vehicles at the time of disposal. Judgement is therefore required in the estimation of residual values, with reference made to recent disposal experience, and external market data.
Trade and other receivables The Group regularly assesses the recoverability of its trade and other receivable balances. Where there is evidence that the Group will not be able to collect all amounts outstanding, a provision for impairment is recognised. The Group utilises previous customer history, debtor ageing profiles and other relevant information in assessing the level of provision required.
Retirement benefit obligations Judgement is required in the setting of assumptions used by the actuaries in assessing the financial position of each defined benefit scheme. The Group determines the assumptions to be adopted in discussion with its actuaries, and believes these assumptions to be in line with generally accepted practice, but the application of different assumptions could have a significant effect on the amounts reflected in the Income Statement and Balance Sheet in respect of post-employment benefits. The sensitivity of principal scheme liabilities to changes in the assumptions used by actuaries is set out in Note 23.
Provisions The Group continues to carry provisions against exposures that arise in the normal course of trading, which include uninsured losses for which there is self-insurance using management’s best estimate of the likely settlement of incidents. The estimated settlement is reviewed on a regular basis and the amount provided is adjusted as required. Provisions also cover areas such as termination and reorganisation activities and property reserves. Judgement is involved in assessing the exposures in these areas and hence in setting the level of the required provision.
Taxation The Group is subject to taxation in a number of jurisdictions. Significant judgement is required in determining the Group’s provision for current tax as there are many transactions and calculations for which the ultimate tax determination is uncertain in the ordinary course of business. Further judgement is used when assessing the extent to which deferred tax assets and liabilities should be recognised with consideration given to the timing and level of future taxable income. 56 avis-europe.com Annual Report 2010 Financial statements Notes to the Consolidated Financial Statements for the year ended 31 December
1 General information 1 See Basis of Preparation. 2 Arise in the corporately-owned business segment. The Company is a public limited company with a premium listing on the London Stock No adjustment is made between segments to recharge in the Income Statement the Exchange. The address of its registered office is Avis House, Park Road, Bracknell, value of the Avis brand, licence rights, or to allocate the value of goodwill written off to Berkshire, RG12 2EW. The Company’s ultimate majority shareholder is s.a. D’Ieteren n.v. reserves in previous periods. Avis goodwill of €1,080.4 million arising before 1 March which is incorporated in Belgium. The ultimate controlling party of s.a. D’Ieteren n.v. is 1998 was fully written off to reserves, and Budget goodwill of €33.9 million arising on 12 the D’Ieteren family. March 2003 was fully impaired and charged to the Income Statement in previous periods. The remaining book value of goodwill at 31 December 2010 is allocated to the This set of Consolidated Financial Statements was approved for issue on corporately-owned segment. Had the value of Avis goodwill, brand or licence rights been 25 February 2011. charged to the segments, the individual segment results would be materially affected. An element of the value of Budget brand rights is recharged between corporately-owned and 2 Revenue Budget Licensee operations where the Budget brand is used, amounting to €1.2 million The Group provides international vehicle rental services. Revenue is derived entirely from (2009: €0.8 million). continuing activities. The Group experiences a natural increase in demand from Leisure customers over the European summer holiday months which generally results in lower Assets Liabilities Net assets 2010 2009 2010 2009 2010 2009 revenue generated in the first half of the year as compared to the second half. Balance sheet €m €m €m €m €m €m Corporately-owned Revenue is analysed below and comprises rental income, licensee income and the operations: 1,732.3 1,544.4 (1,462.9) (1,501.1) 269.4 43.3 disposal of vehicles not subject to manufacturer repurchase agreements. Licensees: 2010 2009 Revenue €m €m Avis 6.8 5.4 – – 6.8 5.4 Rental income (see Note 3) 1,200.3 1,162.4 Budget 2.6 3.1 (3.2) (1.6) (0.6) 1.5 Disposal of vehicles not subject to manufacturer 9.4 8.5 (3.2) (1.6) 6.2 6.9 repurchase agreements 321.6 233.1 Share of joint ventures and Total 1,521.9 1,395.5 associate (see Note 15) 16.3 12.2 – – 16.3 12.2 Total 1,758.0 1,565.1 (1,466.1) (1,502.7) 291.9 62.4 3 Segment information Segment assets include software, vehicles, other property, plant and equipment, (a) Operating segments 2010 2009 inventories, receivables (including vehicles under manufacturer repurchase agreements) Rental income1 €m €m and operating cash, goodwill (see Note 11) and investments. Segment liabilities include Corporately-owned operations: operating liabilities and certain corporate borrowings. Rental revenue 1,034.8 1,011.4 Other revenue2 118.6 107.8 Capital expenditure, depreciation/amortisation and impairment losses arise only in the 1,153.4 1,119.2 corporately-owned segment. Accordingly, a tabular analysis is not presented. Capital Licensees: expenditure comprises other intangible assets of €2.6 million (2009: €2.2 million), Avis licensee fees 37.3 32.9 vehicles not subject to manufacturer repurchase agreements of €421.4 million (2009: Budget licensee fees 9.6 10.3 €316.5 million) and other property, and other plant and equipment of €7.3 million (2009: 46.9 43.2 €8.7 million). Rental income1 1,200.3 1,162.4 b) Geographical segments 1 For management purposes the Group does not apply IAS 16 in terms of reporting revenue from Revenue Non-current assets1 Capital expenditure disposal of vehicles not subject to manufacturer repurchase agreements, and instead nets such 2010 2009 2010 2009 2010 2009 €m €m €m €m €m €m revenue against the related net book value arising upon disposal in cost of sales. The revenue France 274.9 270.1 53.4 66.5 50.9 51.6 from the sale of such vehicles was €321.6 million (2009: €233.1 million) (see Note 2). 2 Other revenue includes income from the sale of fuel, sub-licensee income, the provision of Germany 298.9 288.5 29.4 50.5 74.4 88.1 foreign exchange services to rental customers and other incidental operating income. Italy 291.4 250.7 113.3 137.0 105.1 82.1 Spain 251.7 215.3 89.4 104.2 95.3 66.3 2010 2009 United Kingdom 250.5 221.3 81.4 28.7 90.8 25.0 Amounts Amounts excluded excluded Other Europe 182.2 173.7 32.4 33.5 25.4 23.1 from from Underlying1 underlying Total Underlying1 underlying Total Rest of the world 6.4 7.1 14.3 11.0 4.3 3.1 Operating profit/(loss) €m €m €m €m €m €m 1,556.0 1,426.7 413.6 431.4 446.2 339.3 Corporately-owned operations: 68.5 (2.5) 66.0 68.1 (32.2) 35.9 Share of joint ventures and associate (see Note 15) – – 16.3 12.2 – – Licensees: Elimination of inter-segment (34.1) (31.2) – – (16.5) (16.1) Avis 34.6 – 34.6 31.0 – 31.0 Headquarters – – 10.0 11.3 1.6 4.2 Budget 5.1 – 5.1 4.3 (1.3) 3.0 Total 1,521.9 1,395.5 439.9 454.9 431.3 327.4 39.7 – 39.7 35.3 (1.3) 34.0 1 In accordance with IFRS 8, other financial assets and deferred tax assets are excluded from Operating profit/(loss) 108.2 (2.5) 105.7 103.4 (33.5) 69.9 non-current assets for the purpose of segmental reporting. Both categories of asset are included Finance income2 1.1 0.2 1.3 1.0 4.4 5.4 within non-current assets in the Group Consolidated Balance Sheet. Finance costs2 (60.6) 1.0 (59.6) (69.3) (1.6) (70.9) Share of profit of joint ventures and associate 2.3 – 2.3 0.1 – 0.1 Profit/(loss) before taxation 51.0 (1.3) 49.7 35.2 (30.7) 4.5 avis-europe.com Annual Report 2010 57
4 Operating profit/(loss) 5 Directors and employees 2010 2009 2010 2009 Analysis by nature €m €m €m €m Operating profit is stated after charging/(crediting): Staff costs Retirement benefit charges under defined contribution schemes 6.1 6.1 Underlying profit1: Retirement benefit charges under defined benefit schemes On balance sheet fleet charges: (see Note 23) 7.4 8.0
– Hire of vehicles under repurchase agreements 177.1 168.4 Retirement benefit charges 13.5 14.1 Financial statements – Unwinding of discount on vehicle repurchase agreements (33.7) (32.7) Wages and salaries 208.2 205.2 – Net operating lease charge on manufacturer repurchase 143.4 135.7 Social security costs 41.7 41.2 agreements Share-based payments 2.1 0.4 Underlying Directors’ and employee costs 265.5 260.9 – Depreciation on vehicles – owned (see Note 13) 94.5 101.6 – Depreciation on vehicles – under finance lease (see Note 13) 10.8 12.6 Exceptional staff costs (see Note 6) – Adjustments arising on differences between sales proceeds and Retirement benefit charges – exceptional curtailments depreciated amounts – fleet (2.7) (1.1) (see Note 6a) – 0.1 On balance sheet fleet charges 246.0 248.8 Severance and other (0.1) 15.6 (0.1) 15.7 Other fleet charges: – Hire of motor vehicles 74.1 59.6 Directors’ and employee costs 265.4 276.6
Non-fleet fixed asset charges: Further details of Directors’ remuneration for the year are provided in Note 37 and – Amortisation of other intangible assets (see Note 12) 5.1 4.8 the audited part of the Remuneration Report on pages 39 to 41 which forms part – Depreciation on other property, plant and equipment (see Note 14) 13.2 14.9 of these Financial Statements. There were no employee costs in respect of the Company – Adjustments arising on differences between sales proceeds and (2009: nil), excluding Directors’ costs. 2010 2009 depreciated amounts – non fleet (0.2) 0.1 Number Number Non-fleet fixed asset charges 18.1 19.8 Staff numbers (average full time equivalent) France 1,253 1,283 Hire of other plant and equipment 1.5 1.1 Germany 594 642 Contingent operating lease rentals2 52.0 51.3 Italy 514 528 Other operating lease rentals 51.5 54.9 Spain 906 897 Exchange movements 3.4 (0.6) United Kingdom 937 948 Others 959 1,021 Net amounts excluded from underlying1: Staff numbers 5,163 5,319 Total net exceptional items, certain re-measurement items and economic hedge adjustments (see Note 6) 2.5 33.5 There were no staff employed by the Company (2009: nil).
1 See Basis of Preparation. 2 Contingent operating lease rentals primarily arise with respect to airport concessions, and are typically based on the level of revenue generated by the individual concession.
2010 2009 Auditors’ remuneration is analysed as follows: €m €m Fees payable to the Company’s auditor for the audit of the Company’s: – annual accounts 0.6 0.6 – subsidiaries pursuant to legislation 0.8 0.9 1.4 1.5
Fees payable to the Company’s auditor and its associates for other services: – taxation services 0.2 0.3 – litigation 0.2 0.1 – other 0.1 0.2 0.5 0.6
Auditors’ remuneration 1.9 2.1
In addition to the remuneration above, the auditors received fees of €0.5 million in respect of professional services connected with the Rights Issue and which has been charged against the Merger Reserve (see Note 29). 58 avis-europe.com Annual Report 2010 Financial statements Notes to the Consolidated Financial Statements continued for the year ended 31 December
6 Amounts excluded from underlying e) During the year, the Group recognised realised losses of €3.8 million (2009: losses of 2010 2009 €2.2 million) and unrealised gains of €0.7 million (2009: losses of €3.5 million) on Adminis- Adminis- non debt-related financial instruments, and realised losses of €29.2 million (2009: trative Finance trative Finance expenses items Total expenses items Total losses of €19.3 million) and unrealised gains of €24.6 million (2009: gains of €17.0 €m €m €m €m €m €m million) on debt-related financial instruments. Net exceptional expenses: a) Refinancing and capital f) Economic hedging arrangements have been entered into for which the Group is restructuring costs 4.6 0.9 5.5 – – – unable to apply hedge accounting under IAS 39. To the extent that IAS 39 does not b) Disposal of permit hedge accounting, economic hedge adjustments are applied to recognise in leasehold interest (4.8) – (4.8) – – – the Group’s underlying results those movements in the fair value of derivatives that c) Restructuring costs (0.1) – (0.1) 21.8 – 21.8 offset movements in the value of the items being economically hedged (which d) Securitisation themselves are recognised in the Group’s underlying results). preparation costs – – – 7.8 – 7.8 Other – – – (0.1) – (0.1) 7 Finance income, finance costs and foreign exchange on net debt (0.3) 0.9 0.6 29.5 – 29.5 2010 2009 Certain re-measurement items and economic hedges: Amounts Amounts Re-measurement gains excluded excluded from from on derivative Underlying1 underlying Total Underlying1 underlying Total financial instruments (0.2) (0.2) (0.4) (1.7) (4.4) (6.1) €m €m €m €m €m €m Finance income Re-measurement losses Interest receivable 1.1 – 1.1 1.0 – 1.0 on derivative Re-measurement gains financial instruments 3.3 4.8 8.1 7.4 6.7 14.1 on debt-related derivative e) Net re-measurement financial instruments – 0.2 0.2 – 4.4 4.4 losses on derivative 1.1 0.2 1.3 1.0 4.4 5.4 financial instruments 3.1 4.6 7.7 5.7 2.3 8.0
f) Economic hedge Finance costs adjustments (0.3) (8.7) (9.0) (1.7) (7.6) (9.3) Interest payable under Foreign exchange loss finance lease obligations (7.8) – (7.8) (10.6) – (10.6) on borrowings Interest payable on bank (see Note 7) – 2.0 2.0 – 2.5 2.5 loans, overdrafts and 2.8 (2.1) 0.7 4.0 (2.8) 1.2 loan notes (42.1) (0.9) (43.0) (49.2) – (49.2) Net amounts excluded Interest payable on from underlying profit deferred consideration (2.0) – (2.0) (1.9) – (1.9) before tax 2.5 (1.2) 1.3 33.5 (2.8) 30.7 Re-measurement losses on Tax on amounts excluded debt-related derivative from underlying profit financial instruments – (4.8) (4.8) – (6.7) (6.7) (see Note 8) (0.7) (1.5) (2.2) (3.8) (2.3) (6.1) Economic hedge adjustment Net amounts excluded from on interest payable2 (8.7) 8.7 – (7.6) 7.6 – underlying profit after tax 1.8 (2.7) (0.9) 29.7 (5.1) 24.6 Foreign exchange loss on net debt – (2.0) (2.0) – (2.5) (2.5) a) Professional, legal, consultancy and other costs were incurred in the year in (60.6) 1.0 (59.6) (69.3) (1.6) (70.9) conjunction with a refinancing and Rights Issue. Certain of these costs, together with
the write-off of unamortised issue costs arising upon cessation of existing facilities, Net finance costs (59.5) 1.2 (58.3) (68.3) 2.8 (65.5) have been recognised as exceptional costs.
1 See Basis of Preparation. b) The Group disposed of a leasehold interest in a UK property. Prior to sale, a carrying 2 Economic hedging arrangements have been entered into for which the Group is unable to apply amount of €2.0 million regarding the Group’s interest in the property was recognised hedge accounting under IAS 39. To the extent that IAS 39 does not permit hedge accounting, as a current asset. The total disposal proceeds, net of expenses, were €6.8 million. economic hedge adjustments are applied to recognise in the Group’s underlying results those Accordingly, a premium of €4.8 million has been recognised. movements in the fair value of derivatives that offset movements in the value of the items being economically hedged (which themselves are recognised in the Group’s underlying results). c) During the year, a re-assessment of remaining restructuring provisions which had previously been recognised led to a €0.1 million exceptional credit. In the prior year, €21.8 million of restructuring costs were recognised in respect of a rationalisation of the Group’s operations.
d) In the prior year, €7.8 million of advisory, legal and other costs were expensed in the development of corporate and operational structures to support a potential securitisation of the Group’s fleet. avis-europe.com Annual Report 2010 59
8 Taxation b) Tax charge/(credit) taken directly to the Statement of Comprehensive Income a) Analysis of tax charge 2010 2009 2010 2009 Amounts Amounts Amounts Amounts excluded excluded excluded excluded from from from from 1 1 1 1 Underlying underlying Total Underlying underlying Total Underlying underlying Total Underlying underlying Total €m €m €m €m €m €m €m €m €m €m €m €m Current UK tax Deferred tax charge/(credit)
UK corporation tax on on cash flow hedges – 1.0 1.0 – (0.3) (0.3) Financial statements profits for the year before Current tax credit on exceptional items 5.4 – 5.4 13.2 (0.3) 12.9 exchange movements Tax on exceptional items – (2.2) (2.2) – (3.0) (3.0) offset in reserves – (3.3) (3.3) – (1.0) (1.0) Adjustments in respect Tax charge/(credit) of prior years 0.5 (0.3) 0.2 0.7 (0.4) 0.3 on actuarial gains – 3.4 3.4 – (5.3) (5.3) Current UK tax 5.9 (2.5) 3.4 13.9 (3.7) 10.2 – 1.1 1.1 – (6.6) (6.6)
1 See Basis of Preparation. Current foreign tax Foreign corporation tax c) Reconciliation of tax charge on profits for the year 2010 2009 before exceptional items 11.2 – 11.2 13.2 – 13.2 Amounts Amounts excluded excluded Current tax on from from Underlying1 underlying Total Underlying1 underlying Total exceptional items – – – – (0.1) (0.1) €m €m €m €m €m €m Adjustments in respect Profit/(loss) before taxation 51.0 (1.3) 49.7 35.2 (30.7) 4.5 of prior years 3.9 – 3.9 (3.4) – (3.4) Tax at the UK corporation Current foreign tax 15.1 – 15.1 9.8 (0.1) 9.7 tax rate of 28% (2009: 28%) 14.3 (0.4) 13.9 9.9 (8.6) 1.3 Differing rates applied Current tax 21.0 (2.5) 18.5 23.7 (3.8) 19.9 to overseas profits (2.8) – (2.8) (4.3) (0.4) (4.7) Expenses not deductible Analysed as: for tax purposes 3.9 (1.3) 2.6 0.2 0.3 0.5 Corporation tax on profits Utilisation of tax losses (9.2) (0.3) (9.5) (1.5) 0.2 (1.3) for the year before Adjustments in respect exceptional items 16.6 – 16.6 26.4 (0.3) 26.1 of prior years 1.6 (0.2) 1.4 (1.8) – (1.8) Tax on exceptional items – (2.2) (2.2) – (3.1) (3.1) Deferred tax assets Adjustments in respect not recognised 11.3 – 11.3 9.0 4.9 13.9 of prior years 4.4 (0.3) 4.1 (2.7) (0.4) (3.1) Business and other taxes 3.1 – 3.1 – – – Current tax 21.0 (2.5) 18.5 23.7 (3.8) 19.9 Re-measurement of deferred tax – change in tax rate 0.9 – 0.9 – – – Deferred tax Joint ventures and associate (0.3) – (0.3) (0.3) – (0.3) Origination and reversal Other 0.3 – 0.3 (0.8) (2.5) (3.3) of temporary differences 4.9 – 4.9 (14.2) – (14.2) Taxation 23.1 (2.2) 20.9 10.4 (6.1) 4.3 Deferred tax on exceptional items – 0.2 0.2 – (2.7) (2.7) 1 See Basis of Preparation. Adjustments in respect of prior years (2.8) 0.1 (2.7) 0.9 0.4 1.3 As announced in the 2010 UK Budget, the UK corporation tax rate will decrease to 27% Deferred tax (see Note 17) 2.1 0.3 2.4 (13.3) (2.3) (15.6) from the current rate of 28% (2009: 28%) with effect from 1 April 2011. Further reductions are proposed to reduce the main rate of UK corporation tax by 1% per annum Taxation 23.1 (2.2) 20.9 10.4 (6.1) 4.3 to 24% by 1 April 2014.
1 See Basis of Preparation. 9 Dividends
The Group’s share of tax charge on joint ventures and associate (included within Group No interim dividend was paid during the year (2009: nil). The Directors do not propose profit/(loss) before taxation) is €0.3 million (2009: €0.3 million). the payment of a final dividend for the year ended 31 December 2010 (2009: nil). 60 avis-europe.com Annual Report 2010 Financial statements Notes to the Consolidated Financial Statements continued for the year ended 31 December
10 Earnings per share 11 Goodwill 2010 2009 Basic and diluted earnings per share are based on the earnings for the year and the €m €m weighted average number of shares in issue for the year attributable to equity holders Cost of the Company. At 1 January 37.2 37.2 Disposals – (1.5) Options have been granted to certain Directors and employees over ordinary shares of Exchange movements 1.4 1.5 the Company and constitute the only category of potentially dilutive ordinary shares. At 31 December 38.6 37.2 These options increased the weighted average number of shares in 2010 as certain related performance conditions were fully satisfied and the prevailing market price was Accumulated impairment provisions in excess of the option exercise price. In 2009, either the option exercise prices were in At 1 January 37.0 37.0 excess of the prevailing market share price or exercise of the options was subject to Disposals – (1.5) performance conditions which had not been fully satisfied by the period end. Exchange movements 1.4 1.5 At 31 December 38.4 37.0 The weighted average number of shares is as follows: Net book amount 2009 2009 Millions of shares 2010 As restated1 As reported At 31 December 0.2 0.2 Basic 156.3 124.1 917.7 Dilutive ordinary shares – share options 1.7 – – Goodwill of €1,080.4 million arising before 1 March 1998 is fully written off to reserves. Diluted 158.0 124.1 917.7 Accumulated impairment provisions represent amounts provided in respect of acquired After adjusting for the Rights Issue and own shares held, the weighted average number former Budget operations, and certain former Avis sub-licensee operations in France, of shares in issue for the year was 156,345,847 (2009 restated: 124,072,781) Germany and Holland. The remaining net book amount of goodwill as at both 31 (see Notes 29 and 30). December 2009 and 31 December 2010 relates to the acquisition of a former sub- licensee operation in France and is part of the corporately-owned segment. Basic and diluted earnings per share is as follows: The Directors review at each year end the carrying values of the capitalised goodwill 2009 2009 2009 2009 2010 As restated1 As reported 2010 As restated1 As reported disclosed above, together with goodwill relating to the joint venture in China (see Note Underlying Euro Euro Euro Sterling Sterling Sterling 15). This review (undertaken by calculating value in use) did not result in the need for any Earnings for the year impairment provision to be recognised as at 31 December 2009 or 31 December 2010. attributable to equity holders of the In determining the value in use, the Directors calculated the present value of the Company (million) 27.9 24.8 24.8 24.0 22.1 22.1 estimated future cash flows expected to arise from the continuing use of the assets using a pre-tax discount rate of 7.9% based upon the Group’s weighted average cost of capital Earnings per share: Cents Cents Cents Pence Pence Pence Basic 17.8 20.0 2.7 15.4 17.8 2.4 with appropriate adjustment for the relevant risks associated with the businesses. Diluted 17.7 20.0 2.7 15.2 17.8 2.4 Estimated future cash flows are based on management’s five-year plans for each cash- generating unit, with extrapolation thereafter based on long-term average nominal growth 2009 2009 2009 2009 rate of 4.0% into perpetuity and the introduction of a notional royalty rate to Avis Budget 2010 As restated1 As reported 2010 As restated1 As reported Total Euro Euro Euro Sterling Sterling Sterling Group, Inc. as from 2036. Earnings for the year attributable to equity holders of the Company (million) 28.8 0.2 0.2 24.8 0.2 0.2
Earnings per share: Cents Cents Cents Pence Pence Pence Basic 18.4 0.2 – 15.9 0.2 – Diluted 18.2 0.2 – 15.7 0.2 –
1 Restated following the Rights Issue and share consolidation (see Note 29). avis-europe.com Annual Report 2010 61
12 Other intangible assets 14 Other property, plant and equipment Assets Other intangible assets comprise internally generated software development costs and Freehold Short Plant in the externally acquired software. Amortisation charged in the year is reported in the Income land and leasehold and course of buildings property equipment construction Total Statement within “administrative expenses”. The average remaining amortisation period €m €m €m €m €m of such software is approximately 2.2 years (2009: 2.6 years). Cost At 1 January 2009 38.8 43.4 60.5 2.2 144.9 Software Software Additions 0.5 1.6 5.9 0.7 8.7
Internally Externally Internally Externally Financial statements generated acquired Total generated acquired Total Disposals (0.7) (5.3) (4.0) – (10.0) 2010 2010 2010 2009 2009 2009 €m €m €m €m €m €m Transfers 0.3 0.2 2.2 (2.7) – Cost Exchange movements 0.1 1.2 1.3 0.1 2.7 At 1 January 18.9 12.7 31.6 17.0 11.1 28.1 At 31 December 2009 39.0 41.1 65.9 0.3 146.3 Additions 1.0 1.6 2.6 0.9 1.3 2.2 Disposals (1.0) (2.8) (3.8) – – – At 1 January 2010 39.0 41.1 65.9 0.3 146.3 Exchange movements 1.1 0.4 1.5 1.0 0.3 1.3 Additions 0.2 2.3 4.1 0.7 7.3 At 31 December 20.0 11.9 31.9 18.9 12.7 31.6 Disposals (0.1) (3.7) (9.1) – (12.9) Transfers 0.2 0.6 – (0.8) – Amortisation Exchange movements – 1.2 1.9 – 3.1 At 1 January 6.7 11.8 18.5 3.9 9.5 13.4 At 31 December 2010 39.3 41.5 62.8 0.2 143.8 Charges for the year (see Note 4) 4.0 1.1 5.1 2.8 2.0 4.8 Depreciation and impairment Exceptional impairment loss1 – – – – 0.1 0.1 At 1 January 2009 6.1 22.0 45.1 – 73.2 Disposals (1.0) (2.8) (3.8) – – – Charges for the year 1.9 4.1 8.9 – 14.9 Exchange movements 0.6 0.4 1.0 – 0.2 0.2 Exceptional impairment loss1 – 0.4 0.1 – 0.5 At 31 December 10.3 10.5 20.8 6.7 11.8 18.5 Disposals (0.7) (5.1) (3.5) – (9.3) Exchange movements 0.1 0.8 1.2 – 2.1 Net book amount At 31 December 2009 7.4 22.2 51.8 – 81.4 At 31 December 9.7 1.4 11.1 12.2 0.9 13.1 At 1 January 2010 7.4 22.2 51.8 – 81.4 1 The exceptional impairment loss of €0.1 million in the prior year was classified within Charges for the year 1.8 3.9 7.5 – 13.2 “exceptional restructuring costs” in the Income Statement (see Note 6). Disposals (0.1) (3.3) (8.8) – (12.2) Exchange movements 0.3 1.1 1.2 – 2.6 13 Property, plant and equipment – vehicles not subject to manufacturer At 31 December 2010 9.4 23.9 51.7 – 85.0 repurchase agreements 2010 2009 Net book amount €m €m At 31 December 2010 29.9 17.6 11.1 0.2 58.8 Cost At 31 December 2009 31.6 18.9 14.1 0.3 64.9 At 1 January 472.9 526.5 Additions 421.4 316.5 1 The exceptional impairment losses of €0.5 million in the prior year were classified within Transfers to “inventories” (504.3) (385.3) “exceptional restructuring costs” in the Income Statement (see Note 6). Transfers from “vehicles subject to manufacturer repurchase agreements” 12.7 34.5 Other property, plant and equipment held under finance leases are included in the above Exchange movements 2.5 8.0 at 31 December at the following amounts: At 31 December 432.5 472.9 2010 2009 €m €m Depreciation and impairment Cost 3.4 4.1 At 1 January 108.4 85.5 Depreciation and impairment (0.7) (1.5) Charges for the year 105.3 114.2 Net book amount 2.7 2.6 Transfers to “inventories” (139.4) (97.4) Transfers from “vehicles subject to manufacturer At 31 December 2010, the Group had capital commitments for other property, repurchase agreements” 2.7 5.8 plant and equipment contracted, but not provided for, amounting to €0.6 million Exchange movements 2.0 0.3 (2009: €1.2 million). At 31 December 79.0 108.4
Net book amount At 31 December 353.5 364.5
Vehicles held under finance leases are included in the above at 31 December at the following amounts:
2010 2009 €m €m Cost 45.1 65.0 Depreciation and impairment (4.9) (11.4) Net book amount 40.2 53.6
At 31 December 2010, the Group had capital commitments for vehicles contracted, but not provided for, amounting to €46.8 million (2009: €54.4 million). 62 avis-europe.com Annual Report 2010 Financial statements Notes to the Consolidated Financial Statements continued for the year ended 31 December
15 Investments accounted for using the equity method 17 Deferred tax Joint Temporary differences ventures Associate Total Accelerated Losses €m €m €m tax Employee available At 1 January 2009 11.7 0.5 12.2 depreciation Fair value benefits Other for offset Total Deferred tax provided €m €m €m €m €m €m Acquisitions (see Note 33) – 0.4 0.4 At 1 January 2009 (6.5) 4.6 8.8 (13.8) 12.5 5.6 Share of profit/(loss) 0.4 (0.3) 0.1 Recognised in Income Exchange movements (0.7) 0.2 (0.5) Statement (see Note 8) 19.2 – (1.6) 1.1 (3.1) 15.6 At 31 December 2009 11.4 0.8 12.2 Transfer to current tax (0.2) – – 10.1 – 9.9 Recognised in Statement At 1 January 2010 11.4 0.8 12.2 of Comprehensive Income Share of profit 2.5 (0.2) 2.3 (see Note 8) – 0.3 5.3 – – 5.6 Exchange movements 1.9 (0.1) 1.8 Exchange movements (0.4) 0.1 (0.2) (0.1) – (0.6) At 31 December 2010 15.8 0.5 16.3 At 31 December 2009 12.1 5.0 12.3 (2.7) 9.4 36.1
During the year, the Group held a 50% share in both its joint ventures, Anji Car Rental and At 1 January 2010 12.1 5.0 12.3 (2.7) 9.4 36.1 Leasing Company Limited (incorporated in China) and OKIGO (incorporated in France). Recognised in Income Subsequent to the year end, the Group purchased the remaining 50% share of OKIGO, Statement (see Note 8) 2.3 (0.2) (5.2) 0.9 (0.2) (2.4) which is being re-branded as ‘Avis on Demand’. The consideration paid and net assets Transfer to current tax 0.1 – – 1.7 – 1.8 acquired were not material to the Group. The Group also held a 33% share in its associate Recognised in Statement Mercury Car Rentals Limited (incorporated in India). The Group’s share of results for the of Comprehensive Income year were as follows: (see Note 8) – (1.0) (3.4) – – (4.4)
Joint ventures Associate Total Recognised in equity reserve – – 1.2 – – 1.2 2010 2009 2010 2009 2010 2009 Exchange movements 1.4 (0.1) 0.8 0.1 – 2.2 Share of: €m €m €m €m €m €m At 31 December 2010 15.9 3.7 5.7 – 9.2 34.5 Revenue 26.1 19.9 4.1 3.7 30.2 23.6
Expenses (22.0) (18.3) (4.1) (3.9) (26.1) (22.2) Analysed as: Operating profit/(loss) 4.1 1.6 – (0.2) 4.1 1.4 At 31 December 2010 Net finance costs (1.1) (0.8) (0.2) (0.2) (1.3) (1.0) Deferred tax assets 19.1 3.4 9.0 8.4 1.5 41.4 Profit/(loss) before tax 3.0 0.8 (0.2) (0.4) 2.8 0.4 Deferred tax liabilities (3.2) 0.3 (3.3) (8.4) 7.7 (6.9) Taxation (0.5) (0.4) – 0.1 (0.5) (0.3) Net 15.9 3.7 5.7 – 9.2 34.5 Net profit/(loss) for the year 2.5 0.4 (0.2) (0.3) 2.3 0.1
At 31 December 2009 At the year end, the Group’s interest in Anji Car Rental and Leasing Company Limited, Deferred tax assets 22.2 4.8 12.7 2.3 0.5 42.5 OKIGO and Mercury Car Rentals Limited, comprised: Deferred tax liabilities (10.1) 0.2 (0.4) (5.0) 8.9 (6.4)
Joint ventures Associate Total Net 12.1 5.0 12.3 (2.7) 9.4 36.1 2010 2009 2010 2009 2010 2009 Share of: €m €m €m €m €m €m Deferred tax assets have been recognised in respect of tax losses and other temporary Non-current assets 37.9 26.5 1.9 1.7 39.8 28.2 differences where it is probable that these assets will be recovered. Deferred tax assets Current assets 9.7 4.7 1.1 1.7 10.8 6.4 and liabilities are only offset where there is a legally enforceable right of offset and there Current liabilities (32.7) (20.7) (0.6) (0.8) (33.3) (21.5) is an intention to settle the balances net. Non-current liabilities – – (1.9) (1.8) (1.9) (1.8) 14.9 10.5 0.5 0.8 15.4 11.3 At the year end, the Group had unused tax losses of €211.2 million (2009: €236.8
million) available for offset against future profits. A deferred tax asset has been Goodwill (see Note 11) 0.9 0.9 – – 0.9 0.9 recognised in respect of €31.9 million (2009: €33.1 million) of such losses. No deferred 15.8 11.4 0.5 0.8 16.3 12.2 tax asset has been recognised in respect of the remaining unused tax losses of €179.3 million (2009: €203.7 million) due to the unpredictability of future profit streams. At the year end there were no capital commitments or contingent liabilities relating to the joint ventures in China and France, and the associate in India (2009: €nil). Deferred tax has not been recognised in respect of other temporary differences which would give rise to deferred tax assets of €12.7 million (2009: €20.6 million) due to the 16 Other financial assets unpredictability of future profit streams. 2010 2009 €m €m Non-current assets – available for sale investments 0.5 0.4 At the year end, the aggregate amount of other temporary differences associated with Current assets – held for trading – 2.7 unremitted earnings of the Group’s overseas subsidiaries for which deferred tax liabilities have not been recognised was €208.5 million (2009: €246.2 million). No liability has Non-current financial assets of €0.5 million (2009: €0.4 million) primarily comprises an been recognised in respect of these differences because it is likely that the majority of equity non-controlling interest in overseas companies. In the prior year, current financial overseas earnings would qualify for the UK dividend exemption and therefore no tax assets comprised finance lease collateral of €2.7 million which attracted interest at 0.6%. liability is expected to arise. avis-europe.com Annual Report 2010 63
18 Inventories The ageing analysis of past due but not impaired is as follows: 2010 2009 €m €m 2010 2009 €m €m Vehicles 0.7 3.1 Up to three months past due 59.1 51.3
Three to six months past due 2.1 4.3 Fuel 5.9 4.9 Over six months past due 4.2 1.8 Vehicle parts 0.5 0.4 65.4 57.4
Other inventories 6.4 5.3 Financial statements
The other classes within trade and other receivables do not contain impaired assets. 7.1 8.4
The provision for bad and doubtful debt has been determined by reference to past Vehicles comprise ex-rental vehicles formerly used in the corporately-owned segment, experience. Movements in the provision are as follows: where the Group is committed to the disposal of the vehicle. Adjustments arising on differences between sales proceeds and depreciated amounts totalled a gain of 2010 2009 €2.7 million (2009: gain of €1.1 million). €m €m At 1 January (26.2) (19.7) The cost of fuel and vehicle parts inventories recognised as an expense in the Income Bad and doubtful bad debt expense recognised in the Statement in the year totalled €47.0 million (2009: €44.9 million). Income Statement (10.2) (8.7) Receivables written off as uncollectible 9.7 2.5 19 Trade and other receivables Exchange movements (0.4) (0.3) 2010 2009 At 31 December (27.1) (26.2) €m €m Repurchase agreement receivables 555.3 530.9 20 Cash and short-term deposits Prepaid vehicle operating lease charges 43.5 43.6 2010 2009 Vehicles subject to manufacturer repurchase agreements 598.8 574.5 €m €m Other vehicle receivables (after the end of vehicle holding period) 110.0 141.4 Cash at bank and in hand 92.3 38.7 Amounts due from leasing companies 49.6 35.8 Short-term deposits 139.4 21.9 Vehicle related receivables 758.4 751.7 231.7 60.6 Other trade debtors 147.7 136.4 Other debtors 40.0 45.4 Cash and short-term deposit balances are floating rate assets which earn interest at Other prepayments 80.0 56.1 various rates set with reference to the prevailing EURIBID and LIBID or equivalent. The 1,026.1 989.6 majority of the Group’s cash and short-term deposits are held with banks and financial institutions that have a minimum Standard and Poor’s credit rating of A. Vehicles subject to manufacturer repurchase agreements effectively reflects the book value of such vehicles held on the Group’s rental fleet – see Significant Accounting Policies. Short-term deposits mature within five months (2009: three months) and include €nil (2009: €0.6 million) of deposits required by insurers to be held by Aegis Motor Other vehicle receivables include amounts due after exercising of manufacturer Insurance Limited (a subsidiary of the Group) to settle claims. repurchase agreements. The carrying amounts of trade and other receivables are denominated primarily in euros. 21 Trade and other payables 2010 2009 €m €m Vehicle related receivables include €151.4 million (2009: €125.4 million) held under Vehicle payables 109.0 108.9 finance lease arrangements in respect of repurchase agreements. Amounts due to leasing companies 42.9 27.2 Vehicle related payables 151.9 136.1 Credit risk with regard to vehicle related receivables is concentrated with the main Other trade payables 56.0 46.6 European vehicle manufacturers. Concentrations of credit risk with respect to non-vehicle Finance cost creditors 6.0 6.0 related receivables are limited by the diversity of the Group’s customers. The maximum Other creditors 16.5 16.4 exposure to credit risk at the reporting date is the fair value of each class of receivable Accruals and deferred income 233.1 217.6 mentioned above. Carrying values are stated net of any provisions made for bad and 463.5 422.7 doubtful debts, and accordingly, the Directors believe that the maximum credit risk exposure is the carrying amount of the receivables in the balance sheet, as shown below.
The main categories of trade and other receivables that are subject to credit risk are: other vehicle receivables (after the end of vehicle holding period), amounts due from leasing companies, other trade debtors and other debtors. These categories are analysed on an aged basis as follows:
2010 2009 €m €m Trade and other receivables subject to credit risk 374.4 385.2 Neither past due nor impaired (281.9) (301.6) Past due 92.5 83.6 Provision for bad and doubtful debts (27.1) (26.2) Past due but not impaired 65.4 57.4 64 avis-europe.com Annual Report 2010 Financial statements Notes to the Consolidated Financial Statements continued for the year ended 31 December
22 Provisions 23 Retirement benefit obligations Trade provisions The Group operates funded defined benefit pension schemes for qualifying employees in Dilapidation and Onerous Other Uninsured Total the United Kingdom, France, Spain and Austria. In addition, there is an unfunded defined environmental lease trading Sub-total losses provisions €m €m €m €m €m €m benefit pension scheme for employees in Germany which is closed to new employees At 1 January 2010 7.2 4.2 3.7 15.1 36.2 51.3 and a statutorily determined unfunded defined benefit termination scheme for employees Charged 1.1 0.2 2.8 4.1 18.3 22.4 in Italy. The principal schemes are in the United Kingdom and Germany. The Group’s Utilised in the year (0.3) (1.1) (2.2) (3.6) (22.8) (26.4) main defined benefit scheme, being in the United Kingdom, was closed on 31 March Exchange movements 0.1 0.2 0.1 0.4 0.6 1.0 2007 when it was replaced by a hybrid scheme, the Retirement Capital Plan, whereby At 31 December 2010 8.1 3.5 4.4 16.0 32.3 48.3 the Group underwrites the investment risk and members are responsible for the effects of any changes to longevity. Non-current 9.0 18.4 27.4 Current 7.0 13.9 20.9 a) Valuation and assumptions At 31 December 2010 16.0 32.3 48.3 Valuations of the defined benefit obligations have been based on the most recent actuarial funding valuations, taking into account the financial and demographic Trade provisions assumptions at each of the balance sheet dates. Dilapidation and environmental represents provisions to cover the costs of the Funded schemes – Unfunded schemes – remediation of certain properties held under operating leases. Onerous lease UK Germany represents provisions to cover future lease payments due in respect of vacant office Main assumptions (weighted average) 2010 2009 2010 2009 space. These property provisions are primarily euro denominated and non-interest Discount rate 5.4% 5.7% 5.4% 6.0% 1 1 bearing, and the ultimate expenditure is expected to be coterminous with the Inflation rate 3.1% 3.7% 2.0% 2.0% underlying remaining lease periods (see Note 35). Expected rate of salary increases 5.4% 5.5% 2.5% 2.5% Rate of pension increases in payment 2.6% 2.9% 2.0% 2.0% Other trading provisions comprise: Rate of pension increases in deferment 3.1% 3.9% 0.0% 0.0% a) Loyalty scheme provisions of €1.0 million (2009: €0.5 million), which represent Expected return on plan assets: amounts due under Group-operated customer loyalty programmes. These provisions are – equities 7.7% 8.0% n/a n/a expected to crystallise within two years of the balance sheet date. – bonds 5.0% 5.8% n/a n/a b) Other provisions of €3.4 million (2009: €3.2 million), which primarily comprise – other 4.2% 3.8% n/a n/a reorganisation, employee termination and legal claim provisions to cover certain claims – weighted average 5.8% 7.2% n/a n/a that arise in the normal course of business. These provisions have been discounted where applicable at the rate commensurate with the underlying risk, and are expected to 1 The inflation assumption is based on the consumer price index (2009: retail price index). crystallise within five years of the balance sheet date. In the Directors’ opinion, after taking appropriate legal advice, the outcomes of these claims are not expected to give The assumptions relating to other defined benefit schemes are not material to the Group. rise to any significant loss beyond amounts provided at 31 December 2010. Regarding the principal schemes, the expected rates of return on plan assets are based on market expectations at the beginning of each year for returns over the expected The (undiscounted) maturity profile of trade provisions is detailed in Note 26. period of the related obligation. The expected return on equities is based on qualitative and quantitative market analysis including consideration of market equity risk premiums. Uninsured losses The expected return on bonds is based on most applicable long-term bond yields. Uninsured losses represent provisions for losses under third party liabilities or claims primarily in respect of third party motor liability insurance programmes. Provisions are Assumptions regarding future longevity experience are set based on professional advice. made for claims incurred but not reported at each year end, allowing for potential claims The longevity assumption for the principal funded scheme reflects the “2000” series for a number of years after policy inception, and measured at the value of the tables along with certain improvements (known as “medium cohort”) whereby the Group expenditure expected to be required to settle the obligation. The expected maturity of recognises a further 1% per annum minimum level of improvement. The longevity such uninsured losses based on historic claims experience was as follows: assumption in the principal schemes applied a post retirement life expectancy for a member aged 65 in 2010 as follows: Due between Due between Due within one and two and Due after Funded schemes – Unfunded schemes – one year two years five years five years Total UK Germany €m €m €m €m €m Post retirement life expectancy (years) 2010 2009 2010 2009 At 31 December 2010 13.9 8.2 9.7 0.5 32.3 Males 22 21 18 18 At 31 December 2009 12.6 10.1 12.2 1.3 36.2 Females 24 24 22 22 avis-europe.com Annual Report 2010 65
23 Retirement benefit obligations continued d) Balance Sheet b) Income Statement The amounts recognised in the Balance Sheet are analysed as follows:
The amounts recognised in the Income Statement are as follows: 2010 2009 Funded Unfunded Funded Unfunded 2010 2009 schemes schemes Total schemes schemes Total Funded Unfunded Funded Unfunded €m €m €m €m €m €m schemes schemes Total schemes schemes Total Fair value of scheme assets 161.6 – 161.6 123.4 – 123.4 €m €m €m €m €m €m Present value of defined Current service costs 3.2 0.5 3.7 2.9 0.5 3.4 Financial statements Past service costs 0.1 – 0.1 0.1 – 0.1 benefit obligations (189.7) (39.9) (229.6) (177.5) (35.0) (212.5) Interest on scheme liabilities 10.4 2.0 12.4 9.0 2.0 11.0 Retirement benefit Expected return on obligation (28.1) (39.9) (68.0) (54.1) (35.0) (89.1) scheme assets (8.8) – (8.8) (6.5) – (6.5) 2010 2009 Underlying charge before Analysis of movements Funded Unfunded Funded Unfunded schemes schemes Total schemes schemes Total tax to Income Statement in the scheme assets €m €m €m €m €m €m (see Note 5) 4.9 2.5 7.4 5.5 2.5 8.0 At 1 January 123.4 – 123.4 97.2 – 97.2
Exceptional curtailments Expected return on assets 8.8 – 8.8 6.5 – 6.5 (see Note 6) – – – 0.1 – 0.1 Actuarial gain: experience Exceptional charge before gain on assets 7.2 – 7.2 11.3 – 11.3 tax to Income Statement – – – 0.1 – 0.1 Actual return on scheme assets 16.0 – 16.0 17.8 – 17.8 Net charge before tax to Income Statement 4.9 2.5 7.4 5.6 2.5 8.1 Contributions by the Group 21.8 1.4 23.2 8.4 1.5 9.9 Contributions by employees 0.8 – 0.8 0.8 – 0.8 Scheme settlements had no impact on the amounts recognised in the Income Statement. Benefits paid from the fund (3.5) (0.9) (4.4) (3.6) (0.8) (4.4) The charge before tax is reported in “administrative expenses” in the Income Statement. Settlements paid (3.7) (0.5) (4.2) (3.3) (0.7) (4.0) Exchange gain 6.8 – 6.8 6.1 – 6.1 c) Statement of Comprehensive Income At 31 December 161.6 – 161.6 123.4 – 123.4 Amounts recognised through the Statement of Comprehensive Income are as follows: Analysis of movements 2010 2009 Funded Unfunded Funded Unfunded in the present value of 2010 2009 schemes schemes Total schemes schemes Total defined benefit Funded Unfunded Funded Unfunded €m €m €m €m €m €m schemes schemes Total schemes schemes Total Actual return less expected scheme obligations €m €m €m €m €m €m return on assets 7.2 – 7.2 11.3 – 11.3 At 1 January (177.5) (35.0) (212.5) (133.9) (34.2) (168.1) Experience gain/(loss) Current service costs (3.2) (0.5) (3.7) (2.9) (0.5) (3.4) on liabilities 1.1 (0.1) 1.0 3.2 0.4 3.6 Past service costs (0.1) – (0.1) (0.1) – (0.1) Gain/(loss) on change of Exceptional curtailments assumptions (financial (see Note 6) – – – (0.1) – (0.1) and demographic) 2.9 (3.7) (0.8) (32.5) – (32.5) Interest on scheme liabilities (10.4) (2.0) (12.4) (9.0) (2.0) (11.0) 11.2 (3.8) 7.4 (18.0) 0.4 (17.6) Actuarial gain/(loss): – experience gain/(loss) Cumulative actuarial losses recognised in the Statement of Comprehensive Income since on liabilities 1.1 (0.1) 1.0 3.2 0.4 3.6 1 January 2004 (the date of adoption of IAS 19) are €26.1 million (at 31 December – gain/(loss) on change 2009: €33.5 million). of assumptions 2.9 (3.7) (0.8) (32.5) – (32.5) Contributions by employees (0.8) – (0.8) (0.8) – (0.8) The contributions paid by the Group into funded schemes during 2010 were €21.8 Benefits paid from the fund 3.5 0.9 4.4 3.6 0.8 4.4 million (2009: €8.4 million), which include certain accelerated one-off payments in the Other benefits paid 0.2 – 0.2 – – – United Kingdom scheme of €9.5 million to fund the net actuarial obligations over time. Settlements paid 3.7 0.5 4.2 3.3 0.7 4.0 The cash contributions expected to be made by the Group into funded schemes during Exchange loss (9.1) – (9.1) (8.3) (0.2) (8.5) the 2011 annual period are €1.6 million. At 31 December (189.7) (39.9) (229.6) (177.5) (35.0) (212.5)
Funded schemes 2010 2009 Defined benefit scheme assets €m % €m % Equities 82.9 51% 74.3 60% Corporate bonds and index linked gilts 56.3 35% 42.6 35% Other 22.4 14% 6.5 5% Fair value of scheme assets 161.6 100% 123.4 100%
The fair value of scheme assets did not include any property or other assets used by the Group, nor any financial instruments of the Group. 66 avis-europe.com Annual Report 2010 Financial statements Notes to the Consolidated Financial Statements continued for the year ended 31 December
23 Retirement benefit obligations continued 24 Obligations under finance leases Present value of minimum The indicative sensitivity of principal scheme liabilities as at 31 December 2010 to Minimum lease payments lease payments changes in the above assumptions is as follows: 2010 2009 2010 2009 €m €m €m €m Change in Indicative increase in Amounts payable under finance leases assumption scheme liabilities (€m) Within one year 189.8 172.6 184.3 167.9 Assumption UK Germany Discount rate –0.1% 3.7 0.6 Between two and five years 0.1 – 0.1 – Inflation rate +0.1% 2.6 0.3 189.9 172.6 Real rate of salary increases +0.5% 1.4 0.2 Less: future finance charges (5.5) (4.7) Longevity +1 year 4.1 0.9 Present value of finance lease obligations 184.4 167.9 184.4 167.9 Analysed as: The sensitivity of other defined benefit scheme liabilities to the changes in the Current liabilities (due for settlement within one year) 184.3 167.9 assumptions shown above is not material to the Group. Non-current liabilities (due for settlement after more than one year) 0.1 – 184.4 167.9 e) Retirement benefit obligation history An analysis of the retirement benefit obligation history is below: It is the Group’s policy to fund certain of its vehicles (including certain vehicles held under repurchase arrangements) and some plant and equipment under finance leases. Funded schemes 2010 2009 2008 2007 2006 The average lease term is less than one year. For the year ended 31 December 2010 Retirement benefit obligation history €m €m €m €m €m the average effective interest rate was 2.9% (2009: 3.7%). All finance leases are on Fair value of scheme assets 161.6 123.4 97.2 146.7 140.4 a fixed repayment basis and interest rates are fixed at the contract date. Present value of defined No arrangements have been entered into for contingent rental payments. benefit obligation (189.7) (177.5) (133.9) (209.2) (220.5) Retirement benefit obligation (28.1) (54.1) (36.7) (62.5) (80.1) The fair value of the Group’s obligations under finance leases approximates to their carrying amount, and is secured by the lessors either having legal title or charges over Actual return less expected the leased assets. In the prior year, collateral was held against certain of the leases return on assets 7.2 11.3 (27.0) (2.5) (0.6) (see Note 16). Percentage of scheme assets at year end 4.5% 9.2% (27.8)% (1.7)% (0.4)% 25 Other financial liabilities Experience gain/(loss) on liabilities 1.1 3.2 1.5 (0.5) (2.0) a) Borrowings Percentage of scheme liabilities 2010 2009 at year end (0.6)% (1.8)% (1.1)% 0.2% 0.9% €m €m Bank overdrafts 11.8 8.8 Unfunded schemes Bank loans and other loans 8.5 5.2 2010 2009 2008 2007 2006 Retirement benefit obligation history €m €m €m €m €m Commercial paper 1.0 26.7 Retirement benefit obligation (39.9) (35.0) (34.2) (35.0) (41.9) Loan notes 527.2 542.8 Experience gain/(loss) on liabilities (0.1) 0.4 (0.5) 0.1 1.5 548.5 583.5 Percentage of scheme liabilities Analysed as: at year end 0.3% (1.1)% 1.5% (0.3)% (3.6)% Current liabilities (due for settlement within one year) 112.9 74.0 Non-current liabilities (due for settlement after more than one year) 435.6 509.5 548.5 583.5
All borrowings were unsecured as at both 31 December 2010 and 31 December 2009. Covenants, all of which were complied with in both years, are attached to certain of the borrowing facilities.
Bank overdrafts Bank overdrafts are primarily denominated in euros and sterling and attract floating rate interest by reference to EURIBOR and LIBOR plus margins ranging from 2.0% to 6.0%.
Bank loans and other loans Bank loans and other loans are primarily floating rate, with a weighted average cost at 31 December 2010 of 2.1% (2009: 2.1%).
Commercial paper Avis Finance Company plc, an indirect wholly owned subsidiary of the Company, has a commercial paper facility in Belgium, guaranteed by the Company, which can provide borrowings of up to €200.0 million (2009: €200.0 million). Amounts drawn under the facility attract interest at floating rates by reference to EURIBOR plus a margin which varies depending upon market conditions at the time of issue. avis-europe.com Annual Report 2010 67
25 Other financial liabilities continued c) Deferred consideration 2010 2009 Loan notes €m €m At 31 December, Avis Finance Company plc has outstanding the following loan notes: Current liabilities (due for settlement within one year) 0.3 0.3 Non-current liabilities (due for settlement after more than one year) 24.8 23.8 2010 2009 25.1 24.1 Principal Principal Issued m Maturing m Maturing August 2000 – – $48.0 2010 Deferred consideration comprises €25.1 million (2009: €24.1 million) arising on the Financial statements June 2002 €26.8 2012 €26.8 2012 acquisition of shares in Avis Europe Investment Holdings Limited from Avis Inc in 1997. June 2004 $240.0 2011, $240.0 2011, The liability is denominated in sterling, attracts an interest rate of 8.0% (2009: 8.0%) 2012 2012 fixed for 27 years (2009: 28 years) and is repayable in annual instalments (including and and interest) of £1.9 million. 2014 2014 June 2004 €65.0 2012 €65.0 2012 26 Financial risk management July 2006 €250.0 2013 €250.0 2013 a) Financial risk management objectives and policies The Group’s financial risk management objective is to reduce the financial risks and The US$ loan notes bear interest at an average fixed rate of 5.9% (2009: 6.3%). The exposures facing the business with respect to changes in interest and foreign exchange euro denominated loan notes issued prior to July 2006 bear interest at an average fixed rates, and to ensure constant access to sufficient liquidity. To achieve this the Group rate of 5.8% (2009: 5.8%). These loan notes are at fixed rates such that their contractual undertakes an active hedging policy, including the use of derivatives (interest rate and repricing profile is coterminous with their maturity profile. foreign exchange swaps, options, forward rate agreements and caps and collars), which are entered into under policies approved and monitored by a sub-committee of the The €250.0 million Senior Floating Rate Notes bear interest at EURIBOR plus 2.625%. Board, chaired by the Group Finance Director. These transactions are only undertaken to These notes reprice EURIBOR quarterly and include a call option, permitting the Group reduce exposures arising from underlying commercial transactions and at no time are to repay the notes with effect from 31 July 2008. This option is separately recognised transactions undertaken for speculative reasons. as an embedded derivative at fair value (see Note 26). Foreign currency risk Proceeds of the loan notes issued in June 2004 totalling US$240.0 million (2009: The majority of business is transacted in euros, sterling, US dollars and Swiss francs. US$240.0 million) are swapped to a fixed rate euro liability. Proceeds of the Senior The principal commercial currency of the Group is the euro and the Group seeks to Floating Rate Notes issued in July 2006 totalling €200.0 million (2009: €200.0 million) manage currency exposure wherever possible. are swapped into a fixed rate euro liability. In the prior year, the proceeds of the loan notes issued in August 2000 totalling US$48.0 million were swapped into a fixed rate In each country within the corporately-owned business unit, revenue generated and euro liability. costs incurred are primarily denominated in the relevant local currency, so providing a natural currency hedge. In addition, intra-group trading transactions are netted and Further details are provided in Note 26. settled centrally. Any remaining material foreign currency transaction exposures are hedged as appropriate into either euro or sterling. b) Undrawn borrowings The committed borrowing facilities of the Group, drawn and undrawn, are as follows: With regard to translation exposures the policy is to match where possible the average assets to the equivalent average liabilities in each major currency and thus minimise 2010 2009 Drawn Undrawn Total Drawn Undrawn Total any impact. To the extent that this cannot be fully achieved, then the Group borrows in €m €m €m €m €m €m currencies to match average currency assets. Revolving syndicated credit facility 24.6 350.4 375.0 26.5 553.5 580.0 Long-term borrowings undertaken to benefit from the liquidity of the US dollar Bilateral facilities and denominated capital markets are swapped into euros. finance leases 195.4 230.8 426.2 172.2 296.1 468.3 220.0 581.2 801.2 198.7 849.6 1,048.3 Interest rate risk The Group’s interest rate risk primarily arises from the Group’s cash and short-term The drawn amount of the revolving syndicated credit facility includes €24.6 million deposits and borrowings which, after foreign currency hedging, principally arises in euro in respect of letters of credit (2009: €26.5 million). and sterling. Cash and short-term deposits/borrowings, held/issued at variable rates, expose the Group to cash flow interest rate risk. Short-term deposits/borrowings, held/ The maturity profile of the Group’s undrawn committed borrowing facilities at issued at fixed rates, expose the Group to fair value interest rate risk. 31 December is as follows: To manage these risks, the Group finances its business through a combination of fixed 2010 2009 €m €m and floating rate facilities and enters into various derivatives. The Group’s policy is to Expiring within one year 160.1 192.1 ensure that the proportion of fixed rate debt to the annual average net debt (defined for Expiring within one and two years – 629.5 this purpose to include the net book value of fleet under operating leases) for the next Expiring within two and five years 421.1 28.0 three years will be maintained in the range of 65% to 85%, 55% to 80%, and 45% to 581.2 849.6 75% respectively.
At 31 December 2010 there were additional uncommitted facilities available to the Liquidity risk Group of €338.4 million (2009: €312.4 million). The Group ensures that it has a core level of long-term funding in place with maturities spread over a variety of dates. The seasonal nature of the business necessitates higher fleet levels in the summer months and hence proportionately higher debt requirements. The core funding is supplemented by shorter term committed revolving facilities to cover requirements through the year, together with a range of uncommitted facilities, including operating leases. 68 avis-europe.com Annual Report 2010 Financial statements Notes to the Consolidated Financial Statements continued for the year ended 31 December
Capital risk management (see Note 19) are ordinarily less than vehicle payables (see Note 21) for the majority The Group’s objectives when managing capital are to safeguard the ability to continue as of the year. a going concern, help facilitate returns to shareholders and appropriate benefits for other stakeholders. The Group seeks to maintain debt and equity structures to optimise the With regard to cash and short-term deposits, monies are only placed with approved cost of capital. financial institutions with strong credit ratings.
During the year the Group undertook a Rights Issue to strengthen the Group’s balance Where derivatives are settled gross, International Swaps and Derivatives Association sheet. The net proceeds of the Rights Issue are being used to ensure that the Group has (ISDA) based agreements are applied which include close-out netting provisions effective sufficient financial flexibility to meet its investment needs going forward and to provide if the counterparty defaults. At the reporting date there were no other significant global for the repayment of loan notes that mature during 2011. offsetting agreements that reduce credit risk, nor were there any significant financial guarantees for third-party obligations that increase this risk. The Group monitors the use of capital on the basis of return on capital employed (“ROCE”) and average fleet utilisation. The Group’s ROCE is based on the underlying b) Fair value of derivative financial instruments operating profit of the business plus the operating result of joint ventures and associates, Recognised fair values adjusted to reverse: any non-exceptional goodwill impairments; the interest cost of of derivative financial 2010 2009 retirement benefit obligations; and the expected return on retirement benefit scheme Assets Liabilities Net Assets Liabilities Net instruments €m €m €m €m €m €m assets. Capital employed comprises the following: Hedging instruments:
2010 2009 – forward foreign €m €m exchange contracts – (1.2) (1.2) 0.4 (1.1) (0.7) Goodwill (see Note 11) 0.2 0.2 Non-hedging instruments: Other intangible assets (see Note 12) 11.1 13.1 – forward foreign Property, plant and equipment – vehicles not subject to exchange contracts 2.3 (0.5) 1.8 2.0 (1.1) 0.9 manufacturer repurchase agreements (see Note 13) 353.5 364.5 Non-debt derivatives 2.3 (1.7) 0.6 2.4 (2.2) 0.2 Other property, plant and equipment (see Note 14) 58.8 64.9 Investments accounted for using the equity method (see Note 15) 16.3 12.2 Hedging instruments: Inventories (see Note 18) 7.1 8.4 – interest rate swaps – (12.4) (12.4) – (13.0) (13.0) Trade and other receivables (see Note 19) 1,026.1 989.6 – cross currency interest Trade and other payables (see Note 21) (463.5) (422.7) rate swaps 4.8 (13.8) (9.0) – (46.4) (46.4) – exclude finance cost creditors included in the above (see Note 21) 6.0 6.0 Non-hedging instruments: Other taxes and social security (64.8) (42.6) – interest rate swaps 0.4 (2.0) (1.6) – (5.8) (5.8) Provisions (see Note 22) (48.3) (51.3) – callable interest rate swaps – (5.8) (5.8) – (6.0) (6.0) Capital employed 902.5 942.3 – interest rate caps and collars – (0.6) (0.6) – (0.5) (0.5) Average capital employed for a 12 month period is based on the current and previous – embedded derivatives 2.2 – 2.2 1.9 – 1.9 two (semi-annually) reported period end closing balances. This definition of ROCE may Debt derivatives 7.4 (34.6) (27.2) 1.9 (71.7) (69.8) not be comparable to other similarly titled measures used by other companies. Average fleet utilisation is calculated as the average period of time during which vehicles are on 9.7 (36.3) (26.6) 4.3 (73.9) (69.6) rent as a percentage of their holding period. Non-current portion: Hedging instruments: Other price risks – interest rate swaps – (12.4) (12.4) – (13.0) (13.0) As part of the presentation of market risks, IFRS 7 requires disclosures on how – cross currency interest hypothetical changes in risk variables affect the price of financial instruments. Important rate swaps 4.8 (4.9) (0.1) – (28.8) (28.8) risk variables include stock exchange prices or indices. As at 31 December 2009 and Non-hedging instruments: 31 December 2010 the Group did not hold any such material investments to be – embedded derivatives 2.2 – 2.2 1.9 – 1.9 classified as available for sale. Debt derivatives 7.0 (17.3) (10.3) 1.9 (41.8) (39.9)
Credit risk Analysed as: The Group’s principal financial assets comprise: vehicles classified within inventories; Current assets/(liabilities) other financial assets held for trading; trade and other receivables; derivative financial (due for settlement within instrument assets; and cash and short-term deposits which in aggregate represent the one year) 2.7 (19.0) (16.3) 2.4 (32.1) (29.7) Group’s maximum exposure to credit risk at each year end. Non-current assets/(liabilities) (due for settlement after The Group is exposed to credit risk from its operating activities and certain financing more than one year) 7.0 (17.3) (10.3) 1.9 (41.8) (39.9) activities. The maximum exposure to credit risk is represented by the balance sheet 9.7 (36.3) (26.6) 4.3 (73.9) (69.6) values of the original loans and receivables, including derivatives with positive market values. This risk is controlled from a treasury perspective by only entering into Non-hedging derivatives (excluding the embedded derivative) are classified as a current transactions involving financial instruments with authorised counterparties of strong asset or liability. The full fair value of hedging derivatives is classified as a non-current credit quality, and monitoring such positions regularly. asset or liability if the remaining maturity of the hedged item is more than 12 months, and as a current asset or liability if the remaining maturity of the hedged item is less than With regard to trade and other receivables, outstanding amounts are regularly monitored 12 months. Trading derivatives are classified as a current asset or liability. The embedded at an operational level. Bad debt provisions are made against known credit risks (see derivative is classified as a non-current asset consistent with the maturity of the Note 19). The credit ratings of vehicle manufacturers, the key suppliers, are monitored borrowing in which it is embedded. separately. With respect to certain vehicle manufacturers, the Group has a natural hedge to its exposure to credit risk as vehicle receivables (after the end of the holding period) avis-europe.com Annual Report 2010 69
26 Financial risk management continued Fair value hedge adjustments of €(1.8) million (2009: €(2.9) million) arise from the Fair values of the derivative financial instruments are determined using a number of hedging of the principal value of the exposures to euro denominated liabilities. Equivalent methods and assumptions based on conditions at the balance sheet date as none are (but opposite) fair value differences have been recognised on the hedging cross currency traded in an active market. The fair values of interest rate swaps, forward rate interest rate swaps for the same underlying risk. The whole of this adjustment in both the agreements and cross currency interest rate swaps are calculated as the present value current and prior years relate to hedged items due for settlement after one year. Cash of future estimated cash flows. The fair value of the embedded derivative, callable flow hedges of €0.1 million (2009: €3.6 million) arise from the conversion of the semi- interest rate swaps and interest rate caps and collars are valued using option valuation annual US$ denominated interest payments to euro denominated interest payments. Financial statements techniques. The fair value of forward exchange contracts is determined using forward Amounts recognised within equity are reclassified to the Income Statement when the underlying fixed interest payments occur at various dates between the year end and exchange market rates at the balance sheet date. 2014. There was no ineffectiveness of these hedges recorded at the balance sheet date. Hedging instruments Non-hedging instruments The effectiveness of hedging relationships is tested by means of statistical methods In certain circumstances, transactions to reduce economic exposure do not qualify for using either regression analysis (for forward foreign exchange contracts and cross hedge accounting. currency interest rate swaps), or the closest offset method (for interest rate swaps). This involves defining the performance of the hedged item as the independent variable Forward foreign exchange contracts and the performance of the hedging item as the dependent variable. A hedging Forward foreign exchange contracts as at 31 December 2010 were in place to convert relationship is classified as effective when the value of the hedging item moves between foreign currency notional amounts of Swiss francs 25.2 million (2009: Swiss francs 0.8% and 1.25% for each 1.0% movement in the hedged item. All hedging relationships, 41.4 million), Singapore dollar 10.2 million (2009: Singapore dollar 8.1 million), having been tested using statistical methods, were effective at the reporting date. Hungarian forint 155.7 million (2009: Hungarian forint nil), US$3.3 million (2009: US$2.6 million) and sterling £186.9 million (2009: £178.0 million) into Forward foreign exchange contracts a total euro equivalent of €254.3 million (2009: €232.3 million). Forward foreign exchange contracts as at 31 December 2010 with aggregate values of US$ nil (2009: US$6.0 million), South African rand 66.2 million (2009: South African rand Interest rate swaps 69.1 million), Israeli shekel 6.5 million (2009: Israeli shekel 7.2 million), Norwegian krone The notional principal amount of outstanding interest rate swap contracts not qualifying 10.1 million (2009: Norwegian krone 7.4 million) and Swedish krona 9.3 million (2009: for hedge accounting as at the year end was €225.0 million (2009: €50.0 million) Swedish krona 6.9 million) were used to hedge expected foreign currency income of US$ with fixed interest rates payable at 1.3%. The notional principal amounts of 1.3 million (2009: US$10.4 million), South African rand 83.0 million (2009: South African outstanding interest rate caps and collars as at the year end was €100.0 million rand 88.0 million), Israeli shekel 10.7 million (2009: Israeli shekel 8.6 million), Norwegian (2009: €100.0 million). krone 20.3 million (2009: Norwegian krone 14.0 million) and Swedish krona 18.5 million (2009: Swedish krona 12.7 million) into sterling of £8.6 million (2009: £11.1 million). The aggregate average notional principal amounts of outstanding variable principal Forward foreign exchange contracts as at 31 December 2010 with aggregate values of interest rate swaps as at the end of the year was €40.8 million (2009: €99.2 million) US$4.1 million (2009: US$ nil) were used to hedge expected foreign currency payments with average fixed rates payable at 4.3%. of US$5.1 million (2009: US$ nil) into sterling of £2.6 million (2009: £nil).
Callable interest rate swaps Forward foreign exchange contracts as at 31 December 2010 with aggregate values of At the year end the Group had outstanding variable principal callable interest rate swaps US$1.9 million (2009: US$30.1 million) and Hungarian forint 2,295.0 million (2009: with aggregate average notional principals of €30.6 million (2009: €32.4 million). In each Hungarian forint 1,503.0 million) were used to hedge expected foreign currency income case the swap has an initial maturity in December 2011, at which time the counterparty of US$3.8 million (2009: US$23.4 million) and expected foreign currency payments of has the option to extend the swap at no additional cost for a further three years. Hungarian forint 2,862.0 million (2009: Hungarian forint 1,724.3 million) into euro of The fixed rate payable on the swaps is 3.9% if the swaps are not extended, and 4.3% €1.4 million (2009: €16.3 million) and €8.2 million (2009: €5.2 million) respectively. if the extension option is exercised. These forward exchange contracts and corresponding foreign currency receipts will Forward rate agreements mature within 12 months of each year end. Movements in the fair value of these forward In 2010 the Group had outstanding forward rate agreements with aggregate notional foreign exchange contracts are recognised as cash flow hedges in the hedging reserve principals of €50.0 million (2009: €nil) covering various three month periods during within equity. These amounts are then transferred to the Income Statement when the 2011. These converted the prevailing floating interest rate to an average fixed rate amounts are received at various dates between within 12 months of the year end. of 1.2%. There was no material ineffectiveness of these hedges recorded as at the balance sheet date. Embedded derivative The €250.0 million Senior Floating Rate Notes due 2013 include a call option permitting Interest rate swaps the Group to repay the notes with effect from 31 July 2008. Under the option, the notes Interest rate swaps of aggregate notional principal amounts of €200.0 million (2009: may be redeemed at par with effect from 31 July 2010. In accordance with IAS 39, this €200.0 million) with average fixed interest payable of 4.03% (2009: 4.03%) were used option is separately recognised from the underlying Senior Floating Rate Notes as an to hedge variable quarterly interest payments arising under the Senior Floating Rate embedded derivative. Notes due 2013. The aim of the hedge relationship is to convert the variable interest borrowing into a fixed interest borrowing, and result in cash flow hedges of €11.4 million (2009: €11.8 million). Credit risks do not form part of the hedge designation. There was no material ineffectiveness of these hedges recorded as at the balance sheet date.
Cross currency interest rate swaps Cross currency interest rate swaps of aggregate notional principal amounts of US$240.0 million (2009: US$288.0 million) were used to hedge the Group’s US$ denominated loan notes (see Note 25). 70 avis-europe.com Annual Report 2010 Financial statements Notes to the Consolidated Financial Statements continued for the year ended 31 December
26 Financial risk management continued The sensitivity of profit after tax, translation reserve and cash flow hedge reserve to c) Risk and sensitivity analysis a 1% change in the interest rate are detailed in the table below:
Foreign currency risk Profit after tax Translation reserve Hedging reserve In accordance with IFRS 7, foreign currency risk sensitivities are calculated by reference 2010 2009 2010 2009 2010 2009 to the currency profile of the Group’s balance sheet as at each year end, with all other €m €m €m €m €m €m Loss arising from 1% variables kept constant. These sensitivities do not therefore reflect any trading impacts increase in interest rates arising from changes in exchange rates during the year, or any impacts arising from the (post tax) 0.5 1.6 – – 20.4 21.1 translation of monthly non-euro Income Statement results.
The decrease in profit after tax partly arises due to the revaluation of non-hedging The table below details the sensitivity to each of the Group’s profit after tax, translation derivatives. The increase/(decrease) in underlying profit after tax to a 1% increase in reserve, and cash flow hedge reserve to a hypothetical 10% strengthening of the euro market interest rates is €0.9 million (2009: €(0.7) million). against sterling, US$ and Swiss francs from a translation perspective. Sensitivities to a 10% strengthening of the euro has been selected given the current level of exchange Liquidity risk rates, exchange rate volatility observed on a historic basis and market expectations for The following is an analysis of the contractual undiscounted cash flows payable under future movements. Similar but opposite sensitivities would arise upon a 10% weakening financial liabilities together with derivative financial instrument assets and liabilities at of the euro against these currencies: the balance sheet date: Profit after tax Translation reserve Hedging reserve 2010 2009 2010 2009 2010 2009 Due Due (Profit)/loss €m €m €m €m €m €m between between Due within one and two and Due after Euro/sterling (7.1) 1.6 8.3 1.3 – – one year two years five years five years Total At 31 December 2010 €m €m €m €m €m Euro/US$ 0.4 0.3 – – (0.1) (1.3) Non-derivative financial liabilities Euro/Swiss francs 0.8 (3.6) 3.1 2.4 – – Borrowings (112.9) (107.0) (326.1) – (546.0) Interest payments on borrowings (15.5) (10.9) (4.8) – (31.2) Profit after tax sensitivities primarily arise from the revaluation of non-hedging derivatives Trade and other payables comprising forward foreign contracts where the Group has not applied hedge accounting. (including Finance cost creditors) The majority of these sensitivities do not affect the Group’s underlying profit after tax (see Note 21) (463.5) – – – (463.5) as they impact upon amounts excluded from the underlying result. Translation reserve Trade provisions (7.0) (3.1) (4.1) (2.1) (16.3) sensitivities effectively arise from the retranslation of the net assets of head office and Obligations under finance leases trading operations in the UK, and trading operations in Switzerland, from sterling and Swiss (see Note 24) (184.3) (0.1) – – (184.4) francs respectively, into euro. Hedging reserve sensitivities to sterling balances arise from Interest payments on finance leases (5.5) – – – (5.5) the hedging of forward foreign exchange contracts, whilst the US$ sensitivities arise from Deferred consideration (0.3) (0.3) (1.1) (23.4) (25.1) both forward foreign exchange contracts and cross currency interest rate swaps. Derivative financial instrument assets and liabilities – gross settled Interest rate risk Derivative contracts – receipts 220.9 11.3 70.9 – 303.1 In accordance with IFRS 7, interest rate sensitivities are calculated by reference to the Derivative contracts – payments (225.9) (10.0) (66.9) – (302.8) interest rate profile of the Group’s balance sheet as at each year end, with all other Derivative financial instrument variables kept constant. To manage interest rate risk the Group is financed through assets and liabilities – net settled a combination of fixed and floating rate facilities and enters into various interest rate Derivative contracts – payments (13.2) (4.8) (3.6) – (21.6) derivatives, as outlined in section (a), above. Sensitivities to a 1% increase in interest rates have been selected given the current level of market interest rates, interest rate The following comparative analysis has been restated to disclose components consistent volatility observed on a historic basis and market expectations for future movements. with those above: Similar but opposite sensitivities would arise upon a 1% reduction in interest rates. Due Due between between The interest rate sensitivities are calculated based on the following: Due within one and two and Due after one year two years five years five years Total At 31 December 2009 €m €m €m €m €m (a) Changes in the market interest rates of non-derivative financial instruments with fixed Non-derivative financial liabilities interest rates only affect income if these are recognised at their fair value. As such, Borrowings (74.0) (82.6) (424.4) – (581.0) all financial instruments with fixed interest rates that are carried at amortised cost Interest payments on borrowings (33.4) (29.6) (33.1) – (96.1) are not subject to interest rate risk as defined in IFRS 7. Trade and other payables (including Finance cost creditors) (b) Changes in the market interest rate of financial instruments that were designated as (see Note 21) (422.7) – – – (422.7) hedging instruments in a cash flow hedge, to hedge payment fluctuations resulting from Trade provisions (6.0) (3.2) (3.8) (2.5) (15.5) interest rate movements, affect the cash flow hedge reserve in shareholder’s equity and Obligations under finance leases are therefore taken into consideration in the equity-related sensitivity calculations. (see Note 24) (167.9) – – – (167.9) Interest payments on finance leases (4.7) – – – (4.7) (c) Changes in market interest rates affect the interest income or expense of non- Deferred consideration (0.3) (0.3) (0.9) (22.6) (24.1) derivative variable interest financial instruments. As a consequence, they are included Derivative financial instrument in the calculation of income-related sensitivities, other than where the interest assets and liabilities – gross settled payments are designated as part of a cash flow hedge against interest rate risk. Derivative contracts – receipts 115.1 90.0 93.6 – 298.7 Derivative contracts – payments (133.7) (108.8) (104.9) – (347.4) (d) Changes in the market interest rate of interest rate derivatives (interest rate swaps, Derivative financial instrument callable interest rate swaps, caps and collars) that are not part of a hedging assets and liabilities – net settled relationship as set out in IAS 39, affect other financial income or expense (net gain/ Derivative contracts – payments (16.8) (4.5) (7.8) – (29.1) loss from remeasurement of the financial fair value) and are therefore taken into consideration in the income-related sensitivity calculations.
(e) Currency derivatives are not directly exposed to interest rate risks and therefore do not affect the interest rate sensitivities. avis-europe.com Annual Report 2010 71
27 Net debt Interest rate and currency profile The interest rate and currency profile of the Group’s net debt balances is as follows: The maturity profile of the Group’s net debt balances (excluding deferred consideration) is as follows: 2010 2009 Fixed Floating Fixed Floating rate rate Total rate rate Total Less than One to Two to €m €m €m €m €m €m one year two years five years Total At 31 December 2010 €m €m €m €m Gross debt (excluding Derivative financial instrument assets impact of derivatives) (see Note 26) 0.4 – 7.0 7.4 Euro (91.8) (456.9) (548.7) (91.8) (457.4) (549.2) Financial statements Derivative financial instrument liabilities Sterling – (0.1) (0.1) – (1.9) (1.9) (see Note 26) (17.3) (1.7) (15.6) (34.6) US$ (182.2) – (182.2) (197.4) – (197.4) Derivative financial instruments (see Note 26) (16.9) (1.7) (8.6) (27.2) Other – (0.1) (0.1) – – – Bank overdrafts (see Note 25) (11.8) – – (11.8) (274.0) (457.1) (731.1) (289.2) (459.3) (748.5) Bank loans and other loans (see Note 25) (8.5) – – (8.5) Net impact of derivatives Commercial paper (see Note 25) (1.0) – – (1.0) Euro (537.4) 419.1 (118.3) (596.4) 338.6 (257.8) Loan notes (see Note 25) (91.6) (107.0) (328.6) (527.2) Sterling – (101.0) (101.0) – 14.0 14.0 Obligations under finance leases (see Note 24) (184.3) (0.1) – (184.4) US$ 182.7 – 182.7 198.2 1.8 200.0 Gross debt (including net derivatives) (314.1) (108.8) (337.2) (760.1) Other – 7.6 7.6 – (28.9) (28.9) Cash and short-term deposits (see Note 20) 231.7 – – 231.7 (354.7) 325.7 (29.0) (398.2) 325.5 (72.7) Interest bearing assets 231.7 – – 231.7 Gross debt Net debt (82.4) (108.8) (337.2) (528.4) (net of derivatives) Euro (629.2) (37.8) (667.0) (688.2) (118.8) (807.0) Less than One to Two to one year two years five years Total Sterling – (101.1) (101.1) – 12.1 12.1 At 31 December 2009 €m €m €m €m US$ 0.5 – 0.5 0.8 1.8 2.6 Derivative financial instrument assets Other – 7.5 7.5 – (28.9) (28.9) (see Note 26) – – 1.9 1.9 (628.7) (131.4) (760.1) (687.4) (133.8) (821.2) Derivative financial instrument liabilities (see Note 26) (29.9) (11.8) (30.0) (71.7) Interest bearing assets Derivative financial instruments (see Note 26) (29.9) (11.8) (28.1) (69.8) Euro – 223.2 223.2 – 55.6 55.6 Bank overdrafts (see Note 25) (8.8) – – (8.8) Sterling – 4.7 4.7 – 6.3 6.3 Bank loans and other loans (see Note 25) (5.2) – – (5.2) Other – 3.8 3.8 – 1.4 1.4 Commercial paper (see Note 25) (26.7) – – (26.7) – 231.7 231.7 – 63.3 63.3 Loan notes (see Note 25) (33.3) (89.3) (420.2) (542.8) Net debt Obligations under finance leases (see Note 24) (167.9) – – (167.9) Euro (629.2) 185.4 (443.8) (688.2) (63.2) (751.4) Gross debt (including net derivatives) (271.8) (101.1) (448.3) (821.2) Sterling – (96.4) (96.4) – 18.4 18.4 Current assets – held for trading (see Note 16) 2.7 – – 2.7 US$ 0.5 – 0.5 0.8 1.8 2.6 Cash and short-term deposits (see Note 20) 60.6 – – 60.6 Other – 11.3 11.3 – (27.5) (27.5) Interest bearing assets 63.3 – – 63.3 (628.7) 100.3 (528.4) (687.4) (70.5) (757.9)
Net debt (208.5) (101.1) (448.3) (757.9) The net impact of derivatives in 2010 of €(29.0) million (2009: €(72.7) million), comprises the recognition of the fair value of the debt-related derivative financial instruments of €(27.2) million (2009: €(69.8) million), adjusted for the fair value hedge adjustment of €(1.8) million (2009: €(2.9) million) (see Note 26).
The above fixed/floating rate analysis excludes the impact of interest rate caps and collars. Including the impact of such caps and collars, a further €100.0 million (2009: €100.0 million) of net debt would be classified as fixed rate.
The range of interest rates applicable to euro-denominated gross debt (net of derivatives) is as follows:
2010 2009 % % Fixed interest rate charge 5.7–6.8 5.7–6.8 Floating rate interest charge margin above: – EURIBOR 0.3–2.6 0.3–2.6 – LIBOR n/a n/a 72 avis-europe.com Annual Report 2010 Financial statements Notes to the Consolidated Financial Statements continued for the year ended 31 December
28 Additional disclosures on financial instruments Other financial assets: Level 2 Level 3 Total Measurement of financial instruments by category At 31 December 2010 €m €m €m Fair value Assets: Fair value recognised Book Amortised recognised in Income Other financial assets: amount cost in equity Statement At 31 December 2010 €m €m €m €m – cross currency interest rate swaps Assets: (cash flow hedges) 4.8 – 4.8 Other financial assets: Derivative hedging instruments (held for trading) 4.8 – 4.8 Derivative hedging instruments – forward foreign exchange contracts 2.3 – 2.3 (held for trading) 4.8 – – 4.8 – interest rate swaps 0.4 – 0.4 Derivative non-hedging instruments – embedded derivative – 2.2 2.2 (held for trading) 4.9 – – 4.9 Derivative non-hedging instruments Cash and short-term deposits 231.7 231.7 – – (held for trading) 2.7 2.2 4.9 Trade and other receivables1 902.6 902.6 – –
Liabilities and shareholders’ equity: Liabilities and shareholders’ equity: Other financial liabilities: Other financial liabilities: – forward foreign exchange contracts Derivative hedging instruments (cash flow hedges) (1.2) – (1.2) (held for trading) (27.4) – (12.7) (14.7) – interest rate swaps (cash flow hedges) (12.4) – (12.4) Derivative non-hedging instruments – cross currency interest rate swaps (held for trading) (8.9) – – (8.9) (cash flow hedges) (0.1) – (0.1) Bank overdrafts (11.8) (11.8) – – – cross currency interest rate swaps Bank loans and other loans (8.5) (8.5) – – (fair value hedges) (13.7) – (13.7) Commercial paper (1.0) (1.0) – – Derivative hedging instruments Loan notes (527.2) (527.2) – – (held for trading) (27.4) – (27.4) Obligations under finance leases (184.4) (184.4) – – – forward foreign exchange contracts (0.5) – (0.5) Deferred consideration (25.1) (25.1) – – – interest rate swaps (2.0) – (2.0) Trade and other payables (463.5) (463.5) – – – callable interest rate swaps (5.8) – (5.8) Trade provisions (16.0) (16.0) – – – interest rate caps and collars (0.6) – (0.6) Derivative non-hedging instruments The following comparative analysis has been restated to disclose components consistent (held for trading) (8.9) – (8.9) with those above: Fair value Fair value recognised Total (28.8) 2.2 (26.6) Book Amortised recognised in Income amount cost in equity Statement At 31 December 2009 €m €m €m €m Level 2 Level 3 Total At 31 December 2009 €m €m €m Assets: Assets: Other financial assets: Other financial assets: Derivative hedging instruments – forward foreign exchange contracts (held for trading) 0.4 – – 0.4 (cash flow hedges) 0.4 – 0.4 Derivative non-hedging instruments Derivative hedging instruments (held for trading) 3.9 – – 3.9 (held for trading) 0.4 – 0.4 Cash and short-term deposits 60.6 60.6 – – – forward foreign exchange contracts 2.0 – 2.0 Trade and other receivables1 889.9 889.9 – – – embedded derivative – 1.9 1.9 Derivative non-hedging instruments Liabilities and shareholders’ equity: (held for trading) 2.0 1.9 3.9 Other financial liabilities:
Derivative hedging instruments Liabilities and shareholders’ equity: (held for trading) (60.5) – (16.2) (44.3) Other financial liabilities: Derivative non-hedging instruments – forward foreign exchange contracts (held for trading) (13.4) – – (13.4) (cash flow hedges) (1.1) – (1.1) Bank overdrafts (8.8) (8.8) – – – interest rate swaps (cash flow hedges) (13.0) – (13.0) Bank loans and other loans (5.2) (5.2) – – – cross currency interest rate swaps Commercial paper (26.7) (26.7) – – (cash flow hedges) (3.0) – (3.0) Loan notes (542.8) (542.8) – – – cross currency interest rate swaps Obligations under finance leases (167.9) (167.9) – – (fair value hedges) (43.4) – (43.4) Deferred consideration (24.1) (24.1) – – Derivative hedging instruments Trade and other payables (422.7) (422.7) – – (held for trading) (60.5) – (60.5) Trade provisions (15.1) (15.1) – – – forward foreign exchange contracts (1.1) – (1.1) – interest rate swaps (5.8) – (5.8) 1 Excludes “prepaid vehicle operating lease charges” and “other prepayments” as these are not – callable interest rate swaps (6.0) – (6.0) financial assets under IFRS 7, Financial instruments: disclosures. – interest rate caps and collars (0.5) – (0.5) Derivative non-hedging instruments IFRS 7 requires disclosure of how the above fair value measurements fit within the fair (held for trading) (13.4) – (13.4) value measurement hierarchy. The following table presents the Group’s financial assets and liabilities measured at fair value within the hierarchy. Total (71.5) 1.9 (69.6) avis-europe.com Annual Report 2010 73
28 Additional disclosures on financial instruments continued The Directors consider that the book value of non-current assets – available for sale Measurement of financial instruments by category (continued) investments; trade and other receivables; current assets – held for trading; cash and Level 1 financial instruments cash equivalents; and trade and other payables, approximate to their fair value. Level 1 comprises those financial instruments measured at fair value where the valuation is based on quoted prices (unadjusted) in active markets for identical assets The fair value of obligations under finance leases approximates to their book value as or liabilities. As at 31 December 2010 the Group had no such instruments. the majority of these obligations are due within one year (see Note 24). Financial statements Level 2 financial instruments The fair value of borrowings and deferred consideration for disclosures are based either Level 2 comprises those financial instruments measured at fair value where the on tradable market values, or where such market values are not readily available are valuation is based on inputs other than quoted prices included within Level 1 that are estimated by discounting the future contractual cash flows at the current market observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, interest rate that is available to the Group for similar financial instruments. derived from prices). The fair values of all the Group’s derivative hedging instruments, and derivative non-hedging instruments are determined using valuation techniques. 29 Called-up share capital These valuation techniques maximise the use of observable market data where it is 2010 2009 Number €m Number €m available, and rely as little as possible on entity specific estimates. If all significant Issued and fully paid share inputs required to fair value an instrument are observable, the instrument is included in capital – ordinary shares Level 2. In cases where a valuation technique for these instruments is based on one or of 10 pence more significant unobservable inputs, such instruments are included in Level 3. (2009: 1 pence) each At 1 January 920,524,047 13.1 920,524,047 13.1 The fair value of the Group’s derivative hedging instruments, and derivative non- Issued during the year 1,035,583,564 12.5 – – hedging instruments (other than the embedded derivative) are calculated as the present Share consolidation (1,760,496,850) – – – value of the estimated future cash-flows based on observable yield curves, and are At 31 December 195,610,761 25.6 920,524,047 13.1 therefore included in Level 2. On 25 June 2010, the Board announced that the Company proposed to raise Level 3 financial instruments approximately £151 million (net of estimated expenses), by way of a Rights Issue. Level 3 comprises those financial instruments measured at fair value where the The basis of the Rights Issue was nine new shares at a price of 15 pence per share for valuation is based on inputs for the asset or liability that are not based on observable every eight existing shares held at the close of business on 9 July 2010. The Rights data. The fair value of the embedded derivative contract is determined using option Issue was approved by the shareholders at an Extraordinary General Meeting on valuation techniques which are based on both observable market rates, but also 12 July 2010. assumptions with respect to estimates of exercise probabilities. The embedded derivative is therefore included in Level 3. Movements in the fair value of the embedded A total of 1,035,583,564 new shares of 1 pence each were issued pursuant to the derivative are recognised within gains/(losses) on debt-related financial instruments in Rights Issue. The new shares issued rank equally in all respects with the existing the Consolidated Income Statement. The following table presents the changes in Level shares. The proceeds of the issue were fully received by 2 August 2010 and have 3 instruments for the year ended 31 December 2010. resulted in a strengthened balance sheet, a significant reduction in borrowings and
Non-hedging instruments improved credit ratios. Given the Group’s euro functional currency, to mitigate the effect – embedded derivative of any foreign exchange impact between launch and receipt of proceeds, the Group 2010 2009 €m €m initially entered into a foreign exchange option contract to protect against any downside At 1 January 1.9 0.7 arising from an adverse movement in the euro:sterling exchange rate up to 13 July, Gains reported within “finance costs” in the year 0.3 1.2 when the Rights Issue was intended to become unconditional. A premium of €0.2 At 31 December 2.2 1.9 million on this option contract has been recognised as an exceptional charge in the year (see Note 6). Once the Rights Issue became unconditional on 13 July 2010, the Group 2010 2009 then entered into forward exchange contracts to fix the euro:sterling exchange rate for Book Fair Book Fair amount value amount value the expected proceeds. €m €m €m €m Fair value of financial assets and The proceeds of the Rights Issue, net of expenses and associated purchase of own financial liabilities: shares (see Note 30), have been recognised as follows: Non-current assets – available for sale investments (see Note 16) 0.5 0.5 0.4 0.4 Rights Issue £m €m Trade and other receivables1 902.6 902.6 889.9 889.9 Share capital 10.4 12.5 Current assets – held for trading Merger reserve 139.8 168.1 (see Note 16) – – 2.7 2.7 Net proceeds 150.2 180.6 Cash and cash equivalents (see Note 20) 231.7 231.7 60.6 60.6 Own shares (1.2) (1.4) Trade and other payables (see Note 21) (463.5) (463.5) (422.7) (422.7) Net proceeds including own shares 149.0 179.2 Obligations under finance leases (see Note 24) (184.4) (184.4) (167.9) (167.9) Financial liabilities – borrowings: The merger reserve was recognised as a consequence of the Company taking merger – Current (see Note 25) (112.9) (113.4) (74.0) (63.0) relief under sections 612-613 of the Companies Act 2006, on shares issued to acquire, – Non-current (see Note 25) (435.6) (428.1) (509.5) (339.8) as part of the Rights Issue process, an investment in the ordinary and redeemable Financial liabilities – deferred consideration: preference shares in Cirrus Capital (Jersey) One Limited and Cirrus Capital (Jersey) Two – Current (see Note 25) (0.3) (0.3) (0.3) (0.3) Limited (both companies incorporated in Jersey). Following the subsequent redemption of – Non-current (see Note 25) (24.8) (23.1) (23.8) (23.9) the preference shares acquired, the related amount previously standing to the credit of the merger reserve has become realised and has been transferred to retained earnings. 1 Excludes “prepaid vehicle operating lease charges” and “other prepayments” as these are not financial assets under IFRS 7, Financial instruments: disclosures. On 3 August 2010, the Company also completed a share consolidation of one ordinary share for every ten existing shares to ensure that following the Rights Issue the number The above comparative analysis has been restated to disclose components consistent of shares in issue and the share price is appropriate for a business of the Group’s size. with those disclosed as at 31 December 2010. 74 avis-europe.com Annual Report 2010 Financial statements Notes to the Consolidated Financial Statements continued for the year ended 31 December
30 Own shares held Approved and Share Unapproved Retention Performance Long-Term Own shares are held by the Avis Europe Employee Share Trust, a discretionary trust, Share Plan Share Incentive 1 to partially satisfy options and awards under a number of the Group’s share schemes. Number (’000) Schemes 2009 Plan Plans Total The Company’s shares have a nominal value of 10 pence (2009: 1 pence) per share. Outstanding options as at 1 January 2009 2,899.2 – 514.9 31,274.3 34,688.4 At 31 December 2010, the Trust held 1,478,117 shares (2009: 7,307,735), which has Granted in the year – 1,055.7 – 27,307.6 28,363.3 been recognised as a reduction in shareholders’ equity. The movement in the number Lapsed in the year (318.8) – – (4,155.2) (4,474.0) of shares held primarily comprises the full take-up of the Rights Issue allocation offset Expired in the year – – (514.9) – (514.9) by an adjustment upon the share consolidation (see Note 31). The market price of the Outstanding options as at shares as at 31 December 2010 was 237 pence per share (2009 rebased: 197 pence 31 December 2009 2,580.4 1,055.7 – 54,426.7 58,062.8 per share; 2009 as reported: 26 pence per share). The market value of own shares Exercisable options as at held as at 31 December 2010 was £3.5 million (2009: £1.9 million). None of the 31 December 2009 2,580.4 – – – 2,580.4 shares held at the period end are under option to employees, nor have they been Outstanding options as at conditionally gifted to them. The Avis Europe Employee Share Trust has not waived its 1 January 2010 2,580.4 1,055.7 – 54,426.7 58,062.8 right to any dividends on these shares. Granted in the year – – – 7,920.3 7,920.3 Lapsed in the year (670.1) – – (5,590.2) (6,260.4) 31 Share and share option schemes Exercised in the year – (351.3) – – (351.3) Details of the nature of all share and share option schemes can be found on pages 35 Adjustment – Rights Issue2 677.7 247.6 – 19,977.2 20,902.6 to 37 of the Remuneration Report. Adjustment – share consolidation2 (2,329.2) (856.8) – (69,060.6) (72,246.6) Outstanding options as at At the year end, options outstanding under all schemes were as follows: 31 December 2010 258.8 95.2 – 7,673.4 8,027.4 Exercisable options as at At 31 December 2010 31 December 2010 258.8 – – – 258.8 No of options Exercise price range Exercise period Date of grant (’000) From To From To 1 Comparative data has not been restated for the combined effect of the Rights Issue and share Approved and Unapproved consolidation (see Note 29). Share Option Schemes 2 Represents the effect of grant adjustments arising upon the Rights Issue and the share 2001 80.4 912.5p 1021.9p 2004 2011 consolidation (see Note 29). 2002 141.1 626.3p 1305.1p 2005 2012 2003 37.3 567.1p 650.3p 2006 2013 All movements in the number of outstanding share options and conditional share 258.8 awards under the Share Retention Plan, Performance Share Plan and the Long-Term Incentive Plans during both the current and prior year had zero weighted average Share Retention Plan exercise prices. Share options exercised in the year were exercised pre the Rights Issue 2009 95.2 – – 2010 2012 and share consolidation. The weighted average share price at the date of exercise was Long-Term Incentive Plan 26 pence. There were no share options exercised in the prior year. Exercisable options 2008 3,396.1 – – 2010 2011 comprise outstanding options where the vesting period has completed, irrespective as 2009 3,264.9 – – 2011 2012 to whether the option exercise price is above or below the current share price. 2010 1,012.4 – – 2012 2013 7,673.4 Movements in the weighted average exercise prices of the Approved and Unapproved Share Schemes during the year are as follows: Total 8,027.4 Approved and Unapproved At 31 December 2009 Weighted average exercise price (pence)1 Share Schemes No of options1 Exercise price range1 Exercise period Date of grant (’000) From To From To Outstanding options as at 1 January 2009 127.6 Approved and Unapproved Lapsed in the year 122.8 Share Option Schemes Outstanding options as at 31 December 2009 128.2 2000 371.0 166.6p 166.8p 2003 2010 Exercisable options as at 31 December 2009 128.2 2001 717.5 121.8p 136.4p 2004 2011 2002 1,177.5 83.6p 174.2p 2005 2012 Outstanding options as at 1 January 2010 950.4 2003 314.4 75.7p 86.8p 2006 2013 Lapsed in the year 1,077.5 2,508.4 Outstanding options as at 31 December 2010 845.1
Share Rentention Plan Exercisable options as at 31 December 2010 845.1 2009 1,055.7 – – 2010 2012 1 Comparative data has not been restated for the combined effect of the Rights Issue and share Long-Term Incentive Plan consolidation (see Note 29). 2007 3,133.1 – – 2010 2011 Approved 2008 25,526.7 – – 2011 2012 Weighted average and Long-Term Long-Term Long-Term remaining contract Unapproved Share Incentive Incentive Incentive 2009 25,766.9 – – 2012 2013 Share Retention Plan Plan Plan 54,426.7 lives (years): Schemes Plan 2008 2009 2010 At 31 December 2010 1.1 0.3 0.7 1.3 2.3 Total 58,062.8 At 31 December 2009 2.1 1.3 1.7 2.3 n/a
1 Comparative data has not been restated for the combined effect of the Rights Issue and share consolidation (see Note 29). avis-europe.com Annual Report 2010 75
31 Share and share option schemes continued b) Reconciliation of net increase in cash and cash equivalents to movement in net debt IFRS 2, Share-Based Payment, requires that the fair value of all share options and 2010 2009 €m €m conditional share awards issued after 7 November 2002 is charged to the Income Movement in net debt resulting from cash flows 287.6 365.0 Statement. Certain options from the approved and unapproved schemes were issued Net new finance leases (63.2) 11.4 before 7 November 2002 and therefore the fair values of these granted options are not Re-measurement adjustments on borrowings and recognised. For options issued after 7 November 2002, the fair value of the option derivative debt instruments 7.4 4.3 must be assessed on the date of each issue. The Group uses a stochastic valuation
Exchange movements (2.3) (5.4) Financial statements model at each issue date, re-assessing the input assumptions on each occasion. The Total movement in net debt 229.5 375.3 weighted average of the assumptions used in each valuation and the resulting weighted Net debt at 1 January (757.9) (1,133.2) average fair value per option, for options issued in the year, were as follows: Net debt at 31 December (528.4) (757.9)
Long-Term Incentive Plan Analysed as: Weighted average 2010 2009 Current net debt (82.4) (208.5) Option exercise price (pence) – – Non-current net debt (446.0) (549.4) Vesting period (years) 3.0 3.0 (528.4) (757.9) Option life (years) 3.0 3.5 Expected volatility (%) 91.2% 84.5% 33 Acquisition Risk free rate of return (%) 2.3% 3.0% Share price (pence) – pre Rights Issue and share consolidation 34.8 5.1 During the year, as part of the Rights Issue (see Note 29), the Group acquired 100% Share price (pence) – post Rights Issue and share consolidation 257.0 37.7 of the ordinary and redeemable preference share capital of Cirrus Capital (Jersey) Fair value per option (pence) – pre Rights Issue and One Limited and Cirrus Capital (Jersey) Two Limited (both companies incorporated share consolidation 34.8 5.1 in Jersey). Fair value per option (pence) – post Rights Issue and share consolidation 257.0 37.7 The acquisition has been accounted for using the acquisition method of accounting and resulted in the recognition of a merger reserve (see Note 29). The results and cash Expected volatility was determined by reference to the volatility in the share price flows arising subsequent to the acquisitions are not considered material and are using rolling one year periods for the five years immediately preceding the grant date. accordingly not disclosed separately. The details of the net assets acquired, goodwill The risk free rate of return is based upon UK gilt rates with an equivalent term to the and consideration for the acquisition are set out below. There was no difference options granted. between the book value of net assets acquired and the provisional fair value.
Book value For options issued prior to July 2003, an expected dividend yield of 6.4% was applied, €m based on historic dividend yield performance. For options issued after July 2003, future Amounts due from original shareholders 180.6 dividend assumptions were aligned to the dividend expectations publicly announced by Net assets acquired 180.6 the Group. Goodwill arising on acquisition – Consideration 180.6 32 Notes to the consolidated cash flow statement a) Analysis of changes in net debt Consideration satisfied by: At 1 At 31 Issue of share capital January Cash Non-cash Exchange December 2010 flow movements movements 2010 – called-up share capital (see Note 29) 12.5 €m €m €m €m €m – share premium recognised in merger reserve (see Note 29) 168.1 Cash and short-term deposits 60.6 170.6 – 0.5 231.7 180.6 Bank overdrafts (8.8) (3.0) – – (11.8) Cash and cash equivalents 51.8 167.6 – 0.5 219.9 In the prior year, the Group further invested in its Indian associate undertaking, Mercury Current assets – held for trading 2.7 (2.7) – – – Car Rentals Limited, for cash consideration of €0.4 million. No goodwill arose upon this Obligations under finance leases (167.9) 46.7 (63.2) – (184.4) investment. The Group’s share of net assets were unchanged at 33%. Borrowings (excluding overdrafts) (see Note 26) (574.7) 46.9 (6.1) (2.8) (536.7) Derivative debt instruments (see Note 27) (69.8) 29.1 13.5 – (27.2) Net debt (757.9) 287.6 (55.8) (2.3) (528.4)
Non-cash movements on obligations under finance leases represent the net effect of the inception and cessation of capital element of finance leases during the period. Other non-cash movements reflect changes in the fair value of derivatives and hedged items, which include inherently in their valuation certain spot and forward foreign exchange adjustments. 76 avis-europe.com Annual Report 2010 Financial statements Notes to the Consolidated Financial Statements continued for the year ended 31 December
34 Contingent liabilities 37 Related party transactions 2010 2009 The Company and certain subsidiaries have provided unsecured guarantees to certain €m €m third parties within the normal course of business, the majority of which were in Sales to joint ventures 1.7 1.4 favour of certain lenders in respect of some of the Group’s loan notes and borrowing Net current amounts owing from joint ventures 0.6 2.4 facilities, together with guarantees provided to certain vehicle suppliers and property Purchases from majority shareholder 45.3 20.8 lessors. As at 31 December 2010, these guarantees totalled €789.9 million Sales to majority shareholder 56.6 49.0 (2009: €852.0 million) of which €613.6 million (2009: €693.5 million) related Sales to a subsidiary of a majority shareholder 0.1 – to the Group’s financing facilities and €67.2 million (2009: €56.3 million) related to Purchases from a subsidiary of majority shareholder 2.6 2.2 insurance. Interest payable to a subsidiary of majority shareholder 0.2 0.2 Current amounts owing to majority shareholder 12.6 12.6 Certain Group companies are defendants in a number of claims and legal proceedings Current amounts owing from majority shareholder 22.8 13.0 incidental to their operations. The Directors do not expect that any of these Current amounts owing to a subsidiary of majority shareholder 0.4 – contingencies will have a material negative impact on the results or financial position of the Group. The remuneration of the Directors, and other key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24, Related Save as disclosed herein and excluding intra-group indebtedness and guarantees, Party Disclosures. Salaries and short-term employee benefits include wages, salaries no member of the Group had at the close of business on 31 December 2010 any and social security costs. outstanding loan capital (including loan capital created but unissued), term loans or any other borrowings or indebtedness in the nature of borrowings, including bank Further information about the remuneration of individual Directors is provided in the overdrafts, liabilities under acceptances (other than normal trade bills) or acceptance audited part of the Remuneration Report on pages 39 to 41. credits, hire purchase commitments, obligations under finance leases, guarantees or other contingent liabilities. 2010 2009 Key Key Directors management Total Directors management Total 35 Financial commitments €m €m €m €m €m €m Salaries and short-term At 31 December, the Group had the following minimum lease payment commitments employee benefits 2.6 4.4 7.0 2.4 4.3 6.7 under non-cancellable operating leases: Post-employment benefits – 0.1 0.1 – 0.1 0.1 Termination amount – 0.2 0.2 – – – 2010 2009 Land and Land and Share-based payments 0.8 1.3 2.1 0.1 0.3 0.4 Buildings Vehicles Other Buildings Vehicles Other 3.4 6.0 9.4 2.5 4.7 7.2 €m €m €m €m €m €m Expiring: 38 Exchange rates Within one year 50.1 24.9 0.6 49.2 13.6 0.1 Later than one year and Monthly income statements and other period statements of overseas operations are less than five years 98.3 4.4 1.5 100.3 3.4 0.1 translated at the relevant rate of exchange for that month. Except for the Balance Sheet After five years 21.6 – – 36.2 – – which is translated at the closing rate, each line item in these condensed Consolidated Total 170.0 29.3 2.1 185.7 17.0 0.2 Financial Statements represents a weighted average rate.
At each year end the Group also had prepaid various other operating lease commitments Exchange rates are provided below for the two principal currencies which impact the in relation to manufacturer repurchase agreements, as detailed in Note 19. Group’s consolidation, with the presentation currency being Euro.
Euro to Sterling Sterling to Euro 36 Majority shareholder Year ended Year ended 31 December 31 December The Company’s ultimate majority shareholder is s.a. D’Ieteren n.v. which is incorporated 2010 2009 2010 2009 in Belgium. The ultimate controlling party of s.a. D’Ieteren n.v. is the D’Ieteren family. Weighted average reported rate Avis Europe plc is the smallest company that consolidates the results of the Company for rental income 1.166 1.125 0.858 0.889 and its subsidiaries. Weighted average reported rate for operating profit 1.185 1.161 0.844 0.861 s.a. D’Ieteren n.v. is the largest company that consolidates the results of the Company Year end rate 1.178 1.118 0.849 0.894 and its subsidiaries. Copies of s.a. D’Ieteren n.v.’s financial statements are available from: The Investor Relations Department, Avis Europe plc, Avis House, Park Road, Bracknell, Berkshire RG12 2EW. avis-europe.com Annual Report 2010 77
39 Principal subsidiaries A list of the principal subsidiaries including the name, country of incorporation, and proportion of ownership is detailed below: 2010 2009 % of % of indirect indirect ownership ownership Name of company Country of incorporation interest interest Avis Europe Holdings Limited England and Wales 100 100 Financial statements Avis Finance Company plc England and Wales 100 100 Avis Management Services Limited England and Wales 100 100 Avis Location de Voitures SAS France 100 100 Avis Autovermietung GmbH & Co KG Germany 100 100 Avis Autonoleggio SpA Italy 100 100 Avis Alquile un Coche SA Spain 100 100 Avis Rent A Car Limited England and Wales 100 100 Avis Europe International Reinsurance Limited Isle of Man 100 100
In addition, the assets and liabilities of Europe Leisure Holdings NV and its subsidiary are consolidated in these Consolidated Financial Statements in accordance with SIC 12, Consolidation – Special Purpose Entities.
A complete list of all Group subsidiaries is available from: The Investor Relations Department, Avis Europe plc, Avis House, Park Road, Bracknell, Berkshire RG12 2EW. 78 avis-europe.com Annual Report 2010 Financial statements Independent Auditors’ Report to the Members of Avis Europe plc
We have audited the Parent Company Financial Statements of Avis Europe plc Opinion on other matters prescribed by the Companies Act 2006 for the year ended 31 December 2010 which comprise the Parent Company In our opinion: Balance Sheet, the Parent Company Cash Flow Statement, the Significant • the part of the Directors’ Remuneration Report to be audited has been Accounting Policies and the related notes. The financial reporting framework properly prepared in accordance with the Companies Act 2006; and that has been applied in their preparation is applicable law and United • the information given in the Directors’ Report for the financial year for Kingdom Accounting Standards (United Kingdom Generally Accepted which the Parent Company Financial Statements are prepared is consistent Accounting Practice). with the Parent Company Financial Statements.
Respective responsibilities of Directors and auditors Matters on which we are required to report by exception As explained more fully in the Directors’ Responsibilities Statement set out We have nothing to report in respect of the following matters where the on page 34, the Directors are responsible for the preparation of the Parent Companies Act 2006 requires us to report to you if, in our opinion: Company Financial Statements and for being satisfied that they give a true • adequate accounting records have not been kept by the Parent Company, and fair view. Our responsibility is to audit and express an opinion on the or returns adequate for our audit have not been received from branches Parent Company Financial Statements in accordance with applicable law and not visited by us; or International Standards on Auditing (UK and Ireland). Those standards require • the Parent Company Financial Statements and the part of the Directors’ us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Remuneration Report to be audited are not in agreement with the accounting records and returns; or This report, including the opinions, has been prepared for and only for the • certain disclosures of Directors’ remuneration specified by law are not Company’s members as a body in accordance with Chapter 3 of Part 16 of made; or the Companies Act 2006 and for no other purpose. We do not, in giving these • we have not received all the information and explanations we require for opinions, accept or assume responsibility for any other purpose or to any other our audit. person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Other matter We have reported separately on the Group Financial Statements of Avis Scope of the audit of the Financial Statements Europe plc for the year ended 31 December 2010. An audit involves obtaining evidence about the amounts and disclosures in the Financial Statements sufficient to give reasonable assurance that the Financial Stephen Wootten (Senior Statutory Auditor) Statements are free from material misstatement, whether caused by fraud or for and on behalf of PricewaterhouseCoopers LLP error. This includes an assessment of: whether the accounting policies are Chartered Accountants and Statutory Auditors appropriate to the Parent Company’s circumstances and have been Reading consistently applied and adequately disclosed; the reasonableness of 25 February 2011 significant accounting estimates made by the Directors; and the overall presentation of the Financial Statements. Notes: a) The maintenance and integrity of the Avis Europe plc website is the responsibility of Opinion on Financial Statements the Directors; the work carried out by the auditors does not involve consideration of In our opinion the Parent Company Financial Statements: these matters and, accordingly, the auditors accept no responsibility for any changes • give a true and fair view of the state of the Company’s affairs as at that may have occurred to the Financial Statements since they were initially 31 December 2010; presented on the website. • have been properly prepared in accordance with United Kingdom Generally b) Legislation in the United Kingdom governing the preparation and dissemination of Financial Statements may differ from legislation in other jurisdictions. Accepted Accounting Practice; and • have been prepared in accordance with the requirements of the Companies Act 2006. avis-europe.com Annual Report 2010 79 Financial statements Parent Company Balance Sheet As at 31 December
2010 2009 Notes £m £m Fixed assets Investments 1 202.2 202.0 Current assets Cash at bank and in hand 0.1 –
Debtors 2 274.1 115.9 Financial statements 274.2 115.9 Creditors: amounts falling due within one year Creditors 3 4.5 6.0 Other financial liabilities – financial guarantees 0.1 – Current liabilities 4.6 6.0 Net current assets 269.6 109.9 Total assets less current liabilities 471.8 311.9 Capital and reserves Called-up share capital 5 19.6 9.2 Share premium 6 294.8 294.8 Reserves 7 157.4 7.9 Total shareholders’ funds – equity 8 471.8 311.9
The accompanying Notes form an integral part of these Parent Company Financial Statements.
The Parent Company Financial Statements, including the accompanying Notes, were approved by the Board on 25 February 2011 and were signed on its behalf by:
Pascal Bazin Martyn Smith Chief Executive Group Finance Director Avis Europe plc Registered No. 3311438 80 avis-europe.com Annual Report 2010 Financial statements Parent Company Cash Flow Statement for the year ended 31 December
2010 2009 £m £m Operating profit/(loss) 1.7 (8.4) (Increase)/decrease in debtors (0.5) 2.3 Decrease in creditors (0.8) (1.2) Purchase of fixed asset investment (0.2) – Increase in financial guarantee contracts 0.1 – Net cash generated from/(used in) operating activities 0.3 (7.3) Financing activities Net proceeds of Rights Issue 150.2 – Finance revenue received 8.6 7.2 (Increase)/decrease in loans receivable from Group subsidiaries (157.8) 1.9 Purchase of own shares (1.2) (1.8) Net cash (used in)/generated from financing activities (0.2) 7.3 Net movement in cash and cash equivalents 0.1 – Cash and cash equivalents at 1 January – – Cash and cash equivalents at 31 December 0.1 –
The accompanying Notes form an integral part of these Parent Company Financial Statements. avis-europe.com Annual Report 2010 81 Financial statements Significant Accounting Policies Applicable to the Parent Company Financial Statements for the year ended 31 December 2010
Basis of preparation Creditors The Company’s functional currency is sterling, and the Balance Sheet, Cash Creditors are initially measured at fair value and subsequently measured at Flow Statement and related notes are presented in sterling. amortised cost using the effective interest method.
The Parent Company Financial Statements set out on pages 79 to 83 have Deferred taxation been prepared under the historical cost convention, as modified (as described Deferred tax is recognised, without discounting, in respect of all timing
below) by the recognition in the Profit and Loss Account of the fair value of differences between the treatment of certain items for taxation and accounting Financial statements share-based payments, and in accordance with applicable UK accounting purposes which have arisen but not reversed by the balance sheet date, except standards and the Companies Act 2006. A summary of the principal as otherwise required by FRS19, Deferred tax. A deferred tax asset is only accounting policies is set out below, which are consistent with those followed recognised when there are expected to be suitable future taxable profits within in the preparation of the Company’s Financial Statements for the year ended the tax group against which to reverse the underlying timing differences. 31 December 2009. Foreign currency Fixed asset investments Foreign currency assets and liabilities are translated at the rates of exchange Fixed asset investments are shown at cost less provision for any impairment ruling at the year end. Transactions during the year are recorded at rates of where the recoverable amount is less than cost. Fixed asset investments are exchange in effect when the transaction occurs. initially stated at cost, being their purchase cost together with any incidental expenses of acquisitions. The carrying values of fixed asset investments are Share-based payments reviewed at each year end and if events or changes in circumstances indicate The cost of options granted to employees is measured by reference to the fair the carrying value may not be recoverable. Any impairment of fixed asset value at the date at which they are granted. This cost is recognised in the investments is charged to the Profit and Loss Account in the year in which Income Statement over the period from grant to vesting date, being the date on it arises. which the relevant employees become fully entitled to the award, with a corresponding increase in equity. The cumulative expense recognised at each Debtors reporting date, reflects the extent to which the period to vesting has expired and Debtors are recognised initially at fair value and subsequently measured at the Directors’ best estimate of the number of options that will ultimately vest. amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade debtors is established when The proceeds received net of any directly attributable transaction costs are there is objective evidence that the Company will not be able to collect all credited to share capital and share premium when the options are exercised. amounts due according to the original terms of the debt. The amount of the provision is the difference between the asset’s carrying amount and the Financial guarantees present value of estimated future cash flows. The carrying amount is reduced Financial guarantees, other than those previously asserted by the entity to be through the use of an allowance account, and the amount is recognised in the insurance contracts, are initially recognised at their fair value and subsequently Profit and Loss Account. When a trade debt is uncollectible, it is written off measured at the higher of: (a) the unamortised balance of the related fees against the allowance account for trade debtors. Subsequent recoveries of received and deferred; and (b) the expenditure required to settle the amounts previously written off are credited in the Profit and Loss Account. commitment at the balance sheet date. 82 avis-europe.com Annual Report 2010 Financial statements Notes to the Parent Company Financial Statements for the year ended 31 December
1 Fixed asset investments 2 Debtors 2010 2009 2010 2009 Investment in subsidiaries £m £m £m £m Cost Amounts owed by Group subsidiaries 273.6 115.7 At 1 January 711.6 711.6 Other prepayments 0.5 – Additions 0.2 – Deferred tax – 0.2 At 31 December 711.8 711.6 274.1 115.9
Provision for impairment Included within “Amounts owed by Group subsidiaries” are both current account and At 1 January and 31 December 509.6 509.6 intercompany loan balances. Current account balances are repayable on demand, have no security, and do not carry any interest. Certain intercompany loan balances are Net book amount repayable on demand, have no security and carry an interest rate of 6.8% (2009: 6.3%). At 1 January and 31 December 202.2 202.0 3 Creditors Details of the Company’s principal subsidiaries are provided in Note 39 of the 2010 2009 Consolidated Financial Statements. £m £m Amounts falling due within one year Amounts due to Group subsidiaries 4.5 5.2 The Directors review at each year end the carrying value of the fixed asset investments in Other creditors – 0.8 the principal subsidiaries by undertaking a value in use calculation. In determining the 4.5 6.0 value in use, the Directors calculated the present value of the estimated future cash flows expected to arise based on management’s latest five-year plans, with extrapolation Included within “Amounts due to Group subsidiaries” are both current account and thereafter. The resultant value in use calculation at 31 December 2010 resulted in a value intercompany loan balances. Current account balances are repayable on demand, have in use in excess of the carrying value of the fixed asset investment. No further impairment no security, and do not carry any interest. Intercompany loan balances are repayable on is therefore recognised at 31 December 2010. Furthermore, no reversal of the provision demand, have no security and carry an interest rate of 6.8% (2009: 6.3%). for impairment is performed at 31 December 2010 given the sensitivity of the calculations to a number of key assumptions, and continued macro-economic uncertainties. 4 Other financial liabilities The sensitivity of the calculations to key assumptions are discussed in turn below. 2010 2009 These potential changes in key assumptions fall well within historic variations experienced £m £m by the business and are therefore considered reasonably possible: Financial guarantee contracts 0.1 –
EBIT margin – The long-term EBIT margin is fixed by reference to management’s The fair values of financial guarantee contracts are calculated by discounted cash flow estimated EBIT margin as at 2015 (2009: 2015). An increase/(decrease) in the long- analysis based upon the probability of default of the underlying subsidiary undertaking term EBIT margin by 50 basis points in 2015 and beyond would result in an increase/ and the expected loss to the Company arising upon default. (decrease) in the value in use of £56 million/£(56) million and would have no impact on the impairment provision. 5 Called-up share capital 2010 2009 Discount rate – Future cash flows are discounted using a pre-tax discount rate of Number £m Number £m 7.9%. An increase/(decrease) in the discount rate of 50 basis points would result in Issued and fully paid a (decrease)/increase in the value in use of £(99) million/£108 million and would have share capital – ordinary no impact on the impairment provision. shares of 10 pence (2009: 1 pence) each Long-term growth rate – Cash flows beyond an initial five-year period are extrapolated At 1 January 920,524,047 9.2 920,524,047 9.2 using a long-term average nominal growth rate of 4.0% (2009: 4.0%) comprising a Issued during the year1 1,035,583,564 10.4 – – real growth rate of 2.0% and inflationary rate of 2.0%. An increase/(decrease) in the Share consolidation1 (1,760,496,850) – – – nominal growth rate of 1.0%/(1.0%) to 5.0%/3.0% would result in an increase/ At 31 December 195,610,761 19.6 920,524,047 9.2 (decrease) in the value in use of £65 million/£(58) million and would have no impact on the impairment provision. 1 Details of the movements in called-up share capital and share options schemes are provided respectively in Notes 29 and 31 of the Consolidated Financial Statements. Exchange rate – The value in use calculation is performed in euros in line with the majority of the cash flows of the Company’s subsidiaries. The resultant euro valuation 6 Share premium is translated into sterling at the closing exchange rate. The main forecasted non-euro 2010 2009 £m £m cash flows are denominated in sterling and are converted to euro based on a long-term At 1 January and 31 December 294.8 294.8 euro/sterling exchange rate expected to be in place at the time of the forecast transaction. Most sterling cash flows are forecast to be converted into euro at a forecast exchange rate of £1 : €1.18. An increase/(decrease) in the euro/sterling exchange rate by one euro cent would result in a (decrease)/increase in the value in use of £(11) million/£11 million arising upon the translation of sterling cash flows and would have no impact on the impairment provision. This analysis excludes any trading impacts which may arise from changes in exchange rates. avis-europe.com Annual Report 2010 83 Financial statements Notes to the Parent Company Financial Statements continued for the year ended 31 December
7 Reserves 9 Auditor’s remuneration Own Retained Merger shares held earnings reserve Total Auditor’s remuneration is borne by Avis Management Services Limited, an indirect £m £m £m £m subsidiary undertaking. At 1 January 2009 (0.4) 11.0 – 10.6 Retained loss for the year – (1.4) – (1.4) 10 Directors’ remuneration Increase in equity reserve arising from charge to income for share options in the year – 0.5 – 0.5 Details of Directors’ remuneration for the year are provided in Note 37 of the Purchase of own shares (1.8) – – (1.8) Consolidated Financial Statements and the audited part of the Remuneration Report Financial statements At 31 December 2009 (2.2) 10.1 – 7.9 on pages 39 to 41.
At 1 January 2010 (2.2) 10.1 – 7.9 11 Majority shareholder Retained profit for the year – 9.3 – 9.3 Details of the majority shareholder are provided in Note 36 of the Consolidated Financial Increase in equity reserve arising from charge Statements. to income for share options in the year – 1.5 – 1.5 Own shares released on vesting of share awards 0.1 – – 0.1 12 Related party transactions Premium arising on share issue1 – – 139.8 139.8 Transfer1 – 139.8 (139.8) – The Company has taken advantage of the exemption within FRS 8, Related Party Own shares purchased upon Rights Issue1 (1.2) – – (1.2) Disclosures, not to disclose transactions with other entities within the same group. At 31 December 2010 (3.3) 160.7 – 157.4 Details of related party transactions involving Group undertakings are provided in Note 37 of the Consolidated Financial Statements. 1 Details of the movements are provided in Note 29 of the Consolidated Financial Statements. 13 Contingent liabilities As permitted under section 408 of the Companies Act 2006, no Profit and Loss Account The Company and certain subsidiaries have provided unsecured guarantees to certain is presented in respect of the Company. The profit of the Company for the year was third parties within the normal course of business, the majority of which were in favour £9.3 million (2009: loss of £1.4 million). of certain lenders in respect of some of the Group’s loan notes and borrowing facilities, together with guarantees provided to vehicle suppliers and property lessors. As at As detailed in Note 29 of the Consolidated Financial Statements, the merger reserve was 31 December 2010, these guarantees in relation to drawn balances totalled recognised as part of the Rights Issue process, with amounts recognised transferred to £355.9 million (2009: £396.7 million). the merger reserve upon realisation. As at the year-end the amounts transferred from the merger reserve are treated as non-distributable, but will become distributable in due Certain Group companies are defendants in a number of claims and legal proceedings course upon the receipt of qualifying consideration upon the settlement of amounts owed incidental to their operations. The Directors do not expect that any of these contingencies by Group subsidiaries. will have a material impact on the results or financial position of the Company. In accordance with FRS 20, for share options that were issued after 7 November 2002, and which had not vested at 1 January 2005, the fair value of the employee service received in exchange for the grant of the option is recognised in the Profit and Loss Account over the related performance period. The Company recharges these expenses to the relevant Group company in which the individual is employed.
8 Reconciliation of movements in shareholders’ equity 2010 2009 £m £m Retained profit/(loss) for the year 9.3 (1.4) Increase in equity reserve arising from charge to income for share options in the year 1.5 0.5 Own shares released on vesting of share awards 0.1 – Purchase of own shares (1.2) (1.8) Net proceeds of Rights Issue 150.2 – Net increase/(decrease) in shareholders’ equity 159.9 (2.7)
At 1 January 311.9 314.6 At 31 December 471.8 311.9
Details of the net proceeds of Rights Issue are provided in Note 29 of the Consolidated Financial Statements. 84 avis-europe.com Annual Report 2010 Financial statements Five year summary
Basis of preparation – continuing operations 2006 2007 2008 2009 2010 Rental income €m 1,256 1,327 1,314 1,162 1,200 Underlying profit before taxation €m 30 38 38 35 51 Net exceptional costs before taxation €m 29 7 29 30 1 Basic earnings per share: Total – as reported € cents (0.2) 1.6 (1.2) – 18.4 – adjusted for 2010 Rights Issue and share consolidation € cents (1.0) 12.0 (9.0) 0.2 18.4 Underlying – as reported € cents 2.3 2.9 2.4 2.7 17.8 – adjusted for 2010 Rights Issue and share consolidation € cents 17.0 21.0 18.0 20.0 17.8 Net debt €m 1,008 981 1,133 758 528 Shareholders’ funds €m 85 97 70 62 292 avis-europe.com Annual Report 2010 85 Overview Avis Europe at a glance Shareholder information
Registered office and head office What we do Avis House, Park Road, Bracknell, Berkshire, RG12 2EW Tel: +44 (0) 1344 426644 We are a leading vehicle rental company operating two of the Fax: +44 (0) 1344 485616 main global brands, Avis and Budget, in Europe, Africa, the Registered number: 3311438 Middle East and Asia. Website The Avis Europe website, www.avis-europe.com, includes an Investor Centre Avis Europe operates the Avis and Budget brands in its territories under long-term licences from and is continuously updated with announcements and Avis news. Avis Budget Group, Inc. (ABG), which operates the brands in the rest of the world. Although under separate ownership, Avis Europe and ABG have close commercial ties, joint marketing initiatives and Registrar technology to provide a global service to customers. Shareholders with queries relating to shareholdings, change of address, lost share certificates or dividend payments should contact the Company’s registrar, Equiniti, on 0871 384 2278 or write to Equiniti, Aspect House, Spencer Road, Lancing, West Sussex, BN99 6DA.
The registrar provides a wide range of shareholder information online. Shareholders can check their holding and find practical help on transferring shares or updating their details at www.shareview.co.uk
Founders Club Founders Club members and holders of other shareholder privileges should use the following dedicated phone line for all reservations and enquiries including queries about discounts – 0844 581 0173.
Since 1 January 2005 Avis Europe plc no longer offers discounts for new shareholders.
ShareGift Market overview Shareholders with a small number of shares, the value of which makes it uneconomic to sell them, may wish to consider donating them to charity We operate in 13 countries on a corporately-owned basis through ShareGift, a registered charity administered by The Orr Mackintosh Foundation. The share transfer form needed to make a donation may be and have licensee operations across a further 102 countries. obtained from the Company’s registrar, Equiniti. Further information about Together with the ABG network, we have over 7,600 locations ShareGift is available at www.sharegift.org or by telephone: 020 7930 3737 across our worldwide network.
Customer overview Our customers can be characterised into three main groups: Individual, Corporate and Insurance/Replacement. The analysis of customers by customer type, location and country for our corporately-owned segment is as follows:
Rental revenue Rental revenue Rental revenue by customer by location by country
Insur/Rep. Other 12% 14% France 24% Spain Non-airport Airport Corporate Individual 13% 34% 54% 47% 53% Germany UK 17% 15% Italy 17%
Designed by Tor Pettersen & Partners. Typesetting by Orb Solutions Printed by Park Communications on FSC certified paper. Park is an EMAS certified CarbonNeutral® Company and its Environmental Management System is certified to ISO14001:2004. 100% of the inks used are vegetable oil based, 95% of press chemicals are recycled for further use and on average 99% of any waste associated with this production will be recycled. This document is printed on Revive 50:50 Silk, a paper containing 50% recovered waste and 50% virgin fibre sourced from well managed, sustainable, FSC certified forests. The pulp used in this product is bleached using a Totally Chlorine Free (TCF) process. Avis Europe plc Avis Annual Report 2010
Avis Europe plc Annual Report 2010
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Avis Avis Europe plc, Avis House, Park Road, 2EWBracknell, Berkshire RG12 +44 Telephone 426644(0)1344 +44Facsimile 485616(0)1344 www.avis-europe.com World Travel Awards, World Travel Awards, British Travel best car holiday hire company 2010 Africa’s leading business leading Africa’s car rental company 2010 Grand Travel Award Grand Travel for Norway’s best car rental provider 2010 Grand Travel Award Grand Travel for Norway’s best car rental provider 2011 Award winning Award