GBTG - NYSE

Good morning and welcome to the American Express Global Business Travel Second Quarter 2022 Earnings Conference Call. As a reminder, please note today's call is being recorded. I will now turn the call over to Vice President of Investor Relations, Barry Sievert. Please go ahead, sir.

Hello, and good morning, everyone. Thank you for joining us for our second quarter earnings conference call. This morning we issued an earnings release which is available on our website at investors.amexglobalbusinesstravel.com. The slide presentation which accompanies today's prepared remarks is also available on the Amex GBT Investor Relations webpage. We would like to advise you that our comments contain forward-looking statements that represent our beliefs or expectations about future events, including the duration and effects of COVID-19 industry trends, cost savings and acquisition synergies, among others. All forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the statements made on today's conference call. More information on these and other risks and uncertainties is contained in our earnings release issued this morning a registration statement on Form S1 and the related prospectus filed on July 19, 2022 and our other SEC filings. Throughout today's call, we will also be presenting certain non-GAAP financial measures such as EBITDA, adjusted EBITDA, adjusted EBITDA margin, adjusted operating expenses and free cash flow. All references during today's call such non-GAAP financial measures have been adjusted to exclude certain items, definitions of these terms and the most directly comparable GAAP measures and reconciliations from GAAP – non-GAAP measures are available in the supplemental materials of this presentation and in the earnings release. Participating with me on the call today are Paul Abbott, our Chief Executive Officer, Martine Gerow, our Chief Financial Officer and also joining us for the Q&A session today is Eric Bach, our Chief Legal Officer and Head of Global M&A. With that, I'll now turn the call over to Paul. Paul?

Well, thank you very much, Barry, and welcome to everyone. Thank you all for joining us today for our first live earnings call as a public company. I'm going to start my section with the second quarter 2022 highlights. And of course, listing as a public company in the second quarter was a significant milestone for the company and really marked the beginning of the next chapter of growth for American Express GBT. I'm pleased to say business travel transactions continue to recover in the quarter reaching 76% of 2019 pro forma levels in June. And also pleased to say we reported positive adjusted EBITDA of 47 million in the quarter. New sales momentum continues to be very strong. Over the past 12 months, we've signed 4.2 billion of new wins, and equally important maintained very high levels of customer retention. Overall, a strong first half performance in 2022 and the continued share gains that we see give us the confidence to raise our full year 2022 guidance once again. So we reported strong second quarter revenue and earnings, revenue totaled 486 million up 217% over Q2 2021. Our positive adjusted EBITDA result was driven primarily by the strong recovery of business travel and of course continued cost discipline across the business. The transaction recovery for the second quarter reached 69% of 2019 pro forma levels and the revenue recovery reached 65%. As I mentioned, and which we're going to discuss in more detail the continued strength in the recovery of business travel and our share gains give us the confidence to raise our full year 2022 revenue guidance to a range of between 1.8 billion to 1.85 billion and raise our full year adjusted EBITDA guidance to a range of between 90 million and 100 million. Following the impact of the Omicron wave in the first quarter, the business travel recovery has demonstrated very strong momentum and we continued to see the benefit from our share gains. Second quarter transaction recovery was 69% of 2019 that was an impressive 22 percentage point improvement over the first quarter of the year. And from March to June of this year transaction recovery improved 14 percentage points to reach 76% in the month of June. And we continue throughout the quarter to see strong demand for business travel, despite some of the supply constraints and more challenging macro-economic conditions. We believe very strongly that Amex GBT has a significant runway for growth. And what we are currently seeing in this environment is that the value we deliver to customers only increases. It increases in an environment where there's greater travel complexity and rising prices. Our commitment to industry leading service and savings continues to set us apart from the competition. And our new wins performance, I think really demonstrates the strength of our differentiated value proposition. Our new wins performance over the last 12 months through the end of July increased to $4.2 billion of new wins representing 11% of 2019 pro forma TTV. SME transaction recovery continues to be particularly strong, the recovery in the month of June for SME customers reaching 84% driven by a stronger recovery in the SME segment and new wins momentum in the SME segment across GBT and Egencia and Ovation. Some of our recent major new wins contributing to this 4.2 billion of new wins includes a top five global financial services company. I'm pleased to say that it's JP Morgan Chase. And I am delighted to say that we'll have the privilege of serving JP Morgan from the third quarter of this year. Equally important, of course, customer retention, and that has been very stable over the last 12 months through the end of July at 95%. So moving on to the margin expansion levers that we have. We've discussed before, we have two very important levers for margin expansion, and we are on track to deliver both the 109 million of synergies from Egencia and the 235 million of permanent cost savings. We remain on track to exceed the 25 million of Egencia synergies that we expected in 22. Based on the actions that we've already completed to-date, we have achieved 65% of the full 109 million of synergies on a run rate basis. Turning to the 235 million of permanent cost savings as we've discussed before, these actions have already been fully taken. And the continued cost discipline that we saw in Q2 is in line with the expectations required to deliver the increased guidance for 2022. So as I mentioned, business travel certainly has strong momentum, transaction recovery reaching to 69% in the quarter, 76% in June. And these trends continue to reflect what we previously discussed companies returning to travel and the easing of COVID-related travel restrictions around the world, as well as our continued share gains. That sharp rise that we saw in the second quarter in terms of the return of business travel certainly drove an acceleration of our recruitment efforts to ensure that we are best positioned to deliver on our customer expectations, particularly looking forward as we prepare for what we believe will be a busy period for business travel from September. So we're continuing to invest in expanding our digital channels and our voice services to make sure that we're providing the powerful backing of Amex GBT to our customers through what is a period of greater travel demand and increased travel complexity. Overall, as you've just heard from us, as I know you've heard from the GDS' and the major U.S. airlines, I think the second quarter proved that the demand for business travel is very strong. So let's take a look at the recovery trends compared to 2019 pro forma in a little bit more detail. There are clearly some segments that are outperforming. SME customers continue to lead the recovery and hotel transactions are recovering at a faster pace than air. In the second quarter, SME transactions reached a strong recovery rate of 77% for the quarter, which is 15 percentage points above the global multinational customer recovery of 62. Hotel transactions reached 78% recovery for the second quarter and that's 14 percentage points above air of 64. So as we saw in the first quarter hotel transactions, recovered 26 percentage points versus the 21 percentage points for air transactions. So we continue to see hotel outperforming air. You'll also see on the page here, the dynamic in domestic and international travel has shifted in the last few months, as restrictions in many areas around the world have been relaxed or removed completely, you'll see now the international recovery has now largely caught up with domestic recovery for the first time since the onset of the pandemic. And then, finally here on a regional basis, EMEA volumes have dramatically improved since January of this year and are currently leading the recovery. Our Asia Pacific recovery has also continued to outperform. And that's due to, in particular for us restrictions being removed in countries like Australia and Singapore. So moving on to the significant runway for growth that we have. And I mentioned, of course, our new wins earlier in today's presentation and our customer retention rates. We are the leader in a very large and very fragmented 1.4 trillion industry. And our value proposition continues to strengthen our leadership position. And we believe that the service and the savings that we are delivering right now in this environment is even more valuable to our customers. And we see it in the sales pipeline, it's more than 100% recovered versus 2019 pro forma, we're seeing very high levels of new wins worldwide, and in many regions record levels of new wins. So our new wins value, the win loss ratio, and the momentum in SME and the very stable high levels of customer retention, I think really underscore the strength of the value proposition that we're delivering to customers. Now a very important part of that value proposition are the investments we're making to strengthen our product and technology solutions. So let's move on to talk about our product and tech innovation in the quarter. Delivering unrivaled value, choice and experiences to customers, supported by the powerful backing of Amex GBT is what differentiates us in the market. And our product and technology investments play a significant role in ensuring that we deliver this value and deliver continued momentum across the business. So let me highlight some of the products and tech achievements from Q2. Preferred extras is the unique negotiated rates that we have on our platform that deliver significant savings to our customers. And we continue to extend all of the preferred extras content to the Egencia platform delivering unrivaled value to Egencia customers. We continue to invest in bringing our customers unrivaled choice in the quarter we expanded our expert auditor pre trip approval solution. This allows us to accommodate more types of content, improve the reporting, and also make sure that there's better more consistent messaging our travelers around the world. We discussed this area before it's very important to us we continue to invest in serving customers in their channel of choice. We've extended our servicing capabilities, our AI chat capabilities, to include WhatsApp, Google Chat, and Apple business chat. And in addition, in the quarter Egencia customers can now be serviced within the Slack channel. We make new gender neutral non-binary choices available in Neo, our digital Travel and Expense platform. We also enhance the Amex GBT mobile app experience with single sign-on capabilities and the continued rollout of our AI chat automation, including the introduction of the virtual assistant to our clients in the UK. So all of these features are very important in helping us to deliver an unrivaled experience to our travelers. Finally, here, we continue to improve the efficiency and the agility of our platforms. Recent highlights include the completion of the migration of all Amex GBT applications to the public cloud, which allows us to deliver faster deployment of new capabilities and improve the efficiency of our overall technology performance. We also completed the deployment of the one GBT platform to our primary markets. Now the one GBT platform, as the name suggests, creates one standard simplified travel counselor toolset that improves the efficiency and the consistency of the service we deliver around the world, again, improving the customer experience. So that completes my review of the second quarter highlights, I'd like to hand it over to Martine to review how we're accelerating earnings power through the Egencia synergies and the permanent cost savings and of course, to review the Q2 financial results in more detail. So, Martine, over to you.

Thank you, Paul, and hello, everyone. The only industry recovery and the new business wins that you just heard from Paul were very much on track to add almost 350 million as adjusted EBITDA as compared to the 2019 baseline and this will be done through really two key levers. As you know, the first of those levers is Egencia synergies. This strategic acquisition significantly enhances our capability to accelerate growth in the very important SME space and consistent with our M&A track record. We do expect this acquisition to generate significant synergies of 109 million in total, of which 75 million on the revenue side driven by revenue harmonization and 34 million are on the cost side. So I'm pleased to report that the integration of Egencia is proceeding well. On the commercial front Egencia maintains a strong win loss ratio and customer retention rates and Egencia new win value tracking ahead of target. On the financial side, we are on track to exceed our synergy targets which was 25 million for 2022. We're tracking to exceed our revenue harmonization targets. And we've reached agreements for the majority of our key supplier contracts. We have launched Amex GBT preferred extra fares and integrated new hotel inventory into the Egencia platform. On the cost side, we have exited or combined 27 office locations, which results in 10 million of cost savings in 2022 in the real estate side, which you might recall driving about two thirds of our overall cost of energy. And our technology migration remains on track, we have exited the Amsterdam data center and we've migrated five products making tools already. Based on actions completed to-date and on a run rate basis, we've already achieved 65% of the synergies which we expect at full volume recovery. The second lever in driving margin expansion is the permanent cost savings program for 235 million. Now, these cost savings initiatives were fully executed in 2020 and 2021. As you may recall, we have completed 100% of the action, and we've already regularized over 80% of the benefits coming from those actions. And the remaining of the cost savings are related to efficiency that will be realized as volumes continue to recover. And so if we put it all together with our business momentum, our expected Egencia synergies in the permanent structural cost savings, we believe we have the opportunity to increase our adjusted EBITDA margin by up to 10 points at 100% industry recovery as compared to 2019. Let's move now to the quarterly results. As you just heard from Paul, very pleased to report that we reached an important milestone in the second quarter by delivering positive adjusted EBITDA of 47 million. Now as a reminder, we closed the Egencia acquisition on November 1, 2021. So our second quarter result doing to the Egencia for the fourth quarter. We closed the second quarter with an overall 69% transaction recovery as compared to 2019 pro forma for Egencia. That is a 22 percentage point quarter-over-quarter improvement versus the first quarter of 2021. In June specifically, transaction recovery reached 76% of 2019 pro forma level, which is 14 percentage points above March 2022. And the easing of travel restrictions, combined with the return to the office really have been the primary drivers behind the return of demand and we've continued of course, to benefit from our share gains as again, you heard from Paul. Now year-over-year the transaction growth was 346% in the quarter and total transaction value or TTV increased by 438% to a total of 6.5 billion. Average transaction value, increased 20% and that's really driven by the recovery in international bookings as well as increased fares. Our second quarter revenue increased 217% to a total of 486 million, travel revenue was up 387% in the quarter and that's largely driven by transaction growth of 346%. Product and professional services revenue increased 33% in the quarter and as we've shared with you in the first quarter meeting and events, revenue drove most of the increase, actually 64% of the 24 million increase in product and professional services came from them and as COVID-19 restrictions relaxed in demand for meeting and events we found very it strong. The growth in management fees is more limited as compared to 2021 because the revenue component is relatively less impacted by the reduction in demand from COVID 2019 in both 2020 and 21. Looking at quarter-over-quarter revenue improved 136 million versus the first quarter of 2022 and the revenue recovery of 65% in the second quarter is a 15 percentage point improvement versus Q1. Now this is due to the increase in transaction recovery, as hotel and air recovered at a faster rate than air transactions and you tend to earn more revenue per transaction in air as we do for hotel and rail. Although we do expect this trend to normalize, as the recovery in air continues now revenue recovery was also impacted by the strengthening of the dollar in the second quarter in particular. Our revenue yield or total revenue over TTV with 7.5% as compared to 11% in the second quarter of 2021 and flat 2019 pro forma agency acquisition. Revenue yield in the quarter was impacted by higher average transaction prices and as we've discussed and as you may recall, only a portion of our revenue is sensitive to price until higher drive TTV total transaction value at a faster rate than revenue growth. Higher ATP is positive overall on a revenue but it is negative on the yield TTV. We have strong momentum in adjusted EBITDA due to the strength in recovery trends and continued cost discipline. We delivered 47 million of positive adjusted EBITDA that is an improvement of 121 million year-over-year and 75 million quarter-over-quarter from the first quarter of this year. Now this led to an adjusted EBITDA margin in the quarter of 10%, which is 18 points above the first quarter. Turning to expenses, adjusted operating expenses increased 92% in the quarter as compared to 217% increase in revenue and this has resulted in a stronger adjusted EBITDA fall through which is defined as incremental adjusted EBITDA over incremental revenue and in the second quarter adjusted EBITDA fall through on pro forma basis was 63% which demonstrates our operating leverage. And free cash flow, which is defined as cash from operations like CapEx, free cash flow decreased 45 million to a total of negative 176 million. And this is very largely driven by 167 million of cash utilized in building working capital backup as the business travel recovery continued, we had a little higher CapEx in the quarter partially offset by the combination of higher CapEx and working capital build was partially offset by the reduction in operating loss in the quarter. So if we now look to pro forma financial results, and first let's look at our second quarter versus second quarter 2021 pro forma Egencia acquisitions, we also have very strong revenues and earnings trend. On a pro forma basis transaction volume increased by 194% and TTV improved by 294% as compared to the second quarter of 2021 on a pro forma basis, transaction recovery was 69% up to 19 in the quarter, which is a very impressive 45 percentage point improvement year-over-year versus . Revenue was up 169% on a pro forma basis with a revenue recovery of 65% of 2019 level, which is a 40% percentage point improvement year-over-year versus Q1 2021 again on a pro forma basis. Revenue growth was somewhat below transaction growth and that was totally driven by component of our revenue which we have discussed with you in the past, the faster recovery in hotel and rail transaction as compared to air and higher rate of cancellation and exchanges. We expect this trend to normalize as the recovery in air transaction continues, and travel disruptions abate. And as I previously mentioned, revenue recovery was also impacted by the strengthening of the dollar. Whilst a stronger dollar has a positive impact on the EBITDA, it has a negative impact on our revenue. And finally adjusted EBITDA on a pro forma basis improved by 189 million, which compares to a 299 million improvement in revenue. And this represents a fall through margin versus 2021 pro forma of 63%. Turning to cash flow, we have confidence in our liquidity position, and expect to turn cashflow positive in 2023 as demand continues to recover and working capital build normalizes. We continue to expect a long-term free cash flow conversion rate of approximately 45% where free cash flow is defined as cash from operations, less CapEx. Now the sharp increase in the business travel recovery drove significant cash consumption in the second quarter due to the rebuild of working capital, which as I indicated, totaled 167 million in the second quarter. Now we do expect this cash consumption to moderate over the back half of the year. And we expect and we will talk to that when we cover our guidance a more moderate improvement in business travel demand recovery. As of June 30, we have nearly $500 million in total available liquidity. As a reminder, the business combination closed at the end of May and we are now trading on the New York Stock Exchange under the new ticker symbol GBTG. The business combination resulted in 365 million in net proceeds from cash and trust and our size and oversubscribed PIPE and we redeemed 168 million of preferred equity in the second quarter. As of June 30, our net debt is 775 million as we have shared with you in the past our long-term net leverage target remains 2x adjusted EBITDA with additional flexibility to temporarily increase up to 3x should we need to finance M&A activity. Finally, we now have in place an effective registration statement covering the resale by holders of certain of our security. This includes approximately 32 million shares of Class A common stock, which were issued in connection with the PIPE and that are currently eligible for sale on the registration statement, as well as approximately 394 million shares of Class A common stock issuable upon the exchange of Class B shares, which are held by our legacy shareholders and that are eligible for sale in the fourth quarter of 2022, when the contractual lockup on the shares expires. And to be extend this hold is true to resell the securities, we expect that this would improve public float and the efficiency of trading in our stock. Now, let me turn to our 2022 guidance which as you've heard from Paul, we have again raised. Our strong second quarter performance and the current recovery trends give us confidence to again increase our full year 2022 guidance. We have increased our full year revenue guidance to 1.8 billion to 1.85 billion and our adjusted EBITDA is now 90 million to 100 million in our full year guidance. Our updated revenue guidance reflects a full year revenue recovery between 64% and 65% of 2019 pro forma revenue. Our revised guidance is based on expectations for a balance of year transaction recovery of approximately 74%. Now you may recall recovery in the second quarter was 69%. Recovery in June if you adjust for the workdays was 70%. So we're essentially assuming a steady but modest continued recovery in the second half. Our adjusted EBITDA guidance is 15 million higher than our previous expectations and reflects an adjusted EBITDA margin of approximately 5% on quarterly basis. Our guidance reflects additional staffing in the third quarter in anticipation of higher volumes in September and October which tend to be our busiest month of the year. Please note that our 2022 guidance and expectations for positive free cash flow in 2023 do not include the impact of a potential recession. So to sum it up, we delivered a very strong second quarter supported by the continued long-term recovery of business travel, share gains and execution. Again, those are Egencia synergy and permanent cost savings. And this gives us confidence in increasing our expectation portfolio 2022 financial results. And I would like to thank all of our team members for their hard work and dedication produced those results and complete our listing as a public company. And we very much look forward to continuing to share our progress with you as GBTG. Thank you very much for your interest. And we'll now open for questions. I will now turn to operator.

Thank you. Our first question for today comes from Lee Horowitz from Deutsche Bank. Lee, your line is now open.

Great. Thanks for taking the questions. Two, if I could. So as it relates to the full year guidance you'd mentioned in terms of the transaction recovery, you're looking for a steady but modest pace in the back half of the year. I guess with the front half being anything but modest, why should we be looking for this recovery based too slow as you are looking down to the year? And then maybe one on costs. So you had talked about achieving 100% of the $235 million in permanent cost savings. At this point, can you help us understand better if wage inflation has offset that in any capacity this year? And how we should be thinking about how that flows through into next year? Thank you so much.

Hi. This is Martine. Thank you for the question. So on the recovery, we've certainly seen a very steep improvement in the second quarter. But you may recall that in the first quarter Omicron impacted us. We feel that a improvement in the balance of year is a steady improvement. There is industry expectations, expect also an improvement in recovery in the balance of year, when you look at business publications, particularly from airlines. But there are some economic headwinds, and we just want to make sure that we strike a balance across various elements that could impact demand recovery in the second half. But again, confident that recovery will continue to improve. On the cost side and so the 235 million is indeed the result of the actions that we completed in 2020 and 2021. And before the impact of inflation, I think we've shared with you in the past that we have a partial hedged against inflation, which is really coming from two sides. One is part of our revenues on the management fee basis. And therefore, we have a direct path to have any merit-related information that we need on the cost side. And the second is, if you believe that inflation would have an impact on ticket prices, whether a hotel or airline, that will result in additional revenue costs. On a net basis, we have about 50% hedge and the way to think about it is, for every point of merit inflation, we would have about a 6 million impact on adjusted EBITDA.

Thanks. Maybe one follow-up there just on the guidance point, if I could. So you had just mentioned, obviously, some of the economic headwinds that are top of mind for everyone. So I guess with that in mind, is it fair to kind of assume that your guidance incorporates some degree of conservatism around the way larger enterprises are going to be allocating costs in the back half of the year given the macro environment.

Maybe Martine, I'd just add a perspective here. I think, there's a balance to be struck for the rest of this year. I think there are some headwinds and there are also some tailwinds. And we're trying to find the right balance here. I think some of the headwinds have been the operational challenges in the second quarter, particularly airports and airlines, some of the supply constraints. And also macro economic conditions in the major markets that we operate certainly become more challenging. But at the same time, we also believe there's strong tailwind. We believe that recovery is going to continue. There's momentum, certainly in key markets, key segments. China is just one example, the other market that represented 5% of our total sales in 2019 that's not domestic China, but that's international travel to and from China. So U.S. to China, Europe to China within Asia. That market is still essentially at zero today. Because it was 14 days quarantine, now it's seven days quarantine. But when China opens up, this five points of recovery there, for example, and there's still definitely room for the recovery in certain markets and certain segments. So I think that's a continued tailwind. I also think the tailwind will come from supplies starting to improve, and the operational issues starting to stabilize. And so, we're trying to find the right balance of recognizing, the headwinds and tailwinds. And that's essentially, what's driven guidance to the level that it's at. So hopefully that helps. I mean, there's still obviously a fair amount of uncertainty in terms of how some of those headwinds will play out. But I think we're striking the right balance.

Very helpful. Thank you both.

Thank you. . Okay. We have no further questions for today. So I'll hand back to Paul Abbott for any further remarks.

Okay. Well, thank you very much for attending. And we appreciate your continued interest in the company. I do want to close by just thanking our team across Amex GBT for their dedication to our customers and the strong results that they've delivered in the first half of the year. Thank you very much, and we look forward to updating you again soon.