GBTG - NYSE

Good morning. And welcome to the American Express Global Business Travel Third Quarter 2023 Earnings Conference Call. As a reminder, please note today's call is being recorded. I will now turn the call over to the Vice President of Investor Relations, Barry Sievert. Please go ahead.

Hello. And good morning everyone. Thank you for joining us for our third quarter earnings conference call. This morning we issued an earnings press release, which is available on SEC.gov and on our website at investors.mxglobalbusinesstravel.com. A 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, our expectations about future events, including industry and macroeconomic 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 and in 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, free cash flow and net debt. All references during today's call to 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 for non-GAAP measures are available in the supplemental materials of this presentation and in the earnings release. Participating with me today are Paul Abbott, our Chief Executive Officer; and Karen Williams, our Chief Financial Officer. Also joining for the Q&A session today, is Eric Bock, our Chief Legal Officer and Head of Global M&A. With that I will now turn the call over to Paul. Paul?

Thank you, Barry. And welcome and thank you all for joining our third quarter earnings call. In the third quarter, we once again delivered outstanding financial results, driven by our focus on margin expansion, cost savings, Egencia synergies and continued share gains. Our results are ahead of guidance with revenue and adjusted EBITDA growth of 17% and 135% respectively. Importantly, we generated very strong free cash flow in the quarter that was ahead of expectations. I'm pleased to report, we are now free cash flow positive on a year-to-date basis. This is an important milestone for the company and an inflection point that demonstrates our continued momentum. Based on this, we have the confidence to reiterate our full-year 2023 revenue and adjusted EBITDA guidance, and we are increasing our expectations for free cash flow for the full-year. Strong demand for our leading software and services in the quarter resulted in continued share gains. We reported new wins value of $3.3 billion over the last 12 months. We also have continued momentum in our product and our technology leadership, with 77% of transactions now coming through digital channels, further contributing to our cost savings. SME customers represent the largest growth opportunity, with the fastest growth and the highest margins in the industry. And our results continue to be very encouraging. We reported double-digit SME transaction growth and strong SME new win value of $2.2 billion over the last 12-months, including a significant contribution from previously unmanaged customers. Finally, our focus on delivering significant margin expansion is clearly evidenced in our third quarter results. Adjusted operating expenses increased to 7%, compared to 17% revenue growth. And our adjusted EBITDA margin was up 9 percentage points year-over-year and 2 percentage points over the third quarter of 2019. Adjusted operating expenses decreased quarter-over-quarter and we expect this momentum to continue into the fourth quarter. Turning to transaction growth, the industry is transitioning to more normalized growth rates, but our third quarter transaction and TTV growth remains strong. Third quarter transactions increased 7%, driven by demand for business travel and our ongoing share gains. The reported growth rate in the quarter was negatively impacted by approximately one less workday in the third quarter of 2023. So on a workday adjusted basis, transactions actually increased 9% in the quarter versus 2022. TTV grew 8% or 10% on a workday adjusted basis. Looking at our trends in more detail. We're going to focus here on the workday adjusted growth rates. We continue to see relatively faster growth from SME customers. Our strategy and our focus on SME growth is clearly paying off. And SME transactions were up 10% in the quarter. Global multinational transactions were up 7% in the quarter. Growth in hotel transactions outpaced air by 5 percentage points up 11% and 6% respectively. This is driven by a continuation of the trends that we've seen over the last several quarters, as well as our focus on increasing the volume of hotel bookings as we continue to strengthen our hotel content and our hotel display. International Air transactions continued to outperform, domestic up 7%. Finally, here on a regional basis, growth in the Americas and EMEA, were up 8%, 9% respectively. Asia-Pacific continued to outperform, but starting to show year-over-year signs of normalization with growth of 12%. So, turning to the commercial highlights for the quarter, we continue to gain share, with a reported 3.3 billion of total new wins. And importantly we maintained our strong customer retention rate of 95%. Our biggest opportunity remains in the SME segment, and this represents a total opportunity of approximately 950 billion of travel spend. Within the SME segment we are already the number one player in managed travel, but 70% of this SME opportunity is not currently in a managed travel program and with our leading software and services that are proven at scale globally. We are very well positioned to capture the significant opportunity. And our results continue to prove this out. SME new wins value over the last 12-months, totaled 2.2 billion, of this approximately 30% has come from previously unmanaged customers. Customers who are looking for the service, and the savings and the control that our solutions provide. In addition to the strong SME new wins, we continue to gain share across sectors in global and multinational. I'm very pleased to report our recent global multinational new wins include Blackstone, the world's largest alternative asset manager, Fortescue, one of the world's leading mining companies, Warner Brothers Discovery, of course one of the leading media and entertainment companies in the world. And finally, one of the world's largest global financial services firms. Our growth algorithm is driven by organic growth and net new wins and share gains. Although we can't control the macro environment, we can control the share gains, and net new wins, and we are very confident in the strength of our future sales pipeline and expect our strong new sales momentum to continue. As we head into 2024 even if macro events do result in a lower growth environment, we expect new wins alone to provide a baseline of 4 to 5 percentage points of volume growth in 2024. And finally, here we were recently awarded EcoVadis Platinum, for the second year in a row. This places us in the top 1% of independently assessed companies across the world and demonstrates our commitment to the highest standards of sustainability. Moving onto our product and technology highlights. We have the leading software platforms across all segments of business travel, in Egencia and Neo. These solutions are proven at scale on a global basis and they bring together the best people and the best technology in the industry. Owning our own software platforms enable us to improve the end to end customer experience, to increase automation and to reduce our operating costs. 77% of our transactions now come through digital channels, but over the last four years, we've seen an increase of approximately 12 percentage points in our share of digital transactions. Transactions on Neo, and Egencia increased 13% in the third quarter, which is well above our overall transaction growth of 7%, highlighting more and more share moving to our own software platforms. As a direct result of customer demand that we're seeing for our proprietary software solutions. Over 60% of our digital transactions now come through our own proprietary platforms, Egencia and Neo. We are constantly working on new and innovative ways to meet and exceed customer needs. Recently, we expanded our live chat services to Microsoft Teams, and we now have six different chat channels, so that customers can efficiently manage their travel in the enterprise solutions that they use every day. This increases customer satisfaction, it promotes more bookings through our marketplace. Year-to-date our Amex GBT mobile app user growth has nearly doubled, mobile interactions grew by more than 140% and chat volumes are up almost 50%. And this is important because it also unlocks a significant opportunity for us through AI powered solutions, for both improving the productivity of our people and improving the customer experience. 40% of our costs, are people serving customers in the voice channel. Using AI and automation to drive efficiency is something we've been doing consistently for several years, including our acquisition of 30SecondsToFly, a company that specializes in travel artificial intelligence. But looking ahead, we have an even bigger opportunity. With generative AI and large language models, we have the opportunity to drive further efficiency at an accelerated pace. Finally, we continue to ensure that our customers have access to the most comprehensive and the most competitive content in our marketplace including NDC content. In the third quarter, we continued our expansion of NDC and are now working with 10 airlines on NDC initiatives. So to sum up our third quarter performance. We again delivered outstanding financial results, with strong revenue growth and positive year-to-date free cash flow. We remain highly focused on driving margin expansion, through cost savings and delivering on the Egencia synergies. This combined with our strong new wins and a growing momentum we have in the SME segment, gives us the confidence to reiterate our full-year 2023 revenue and adjusted EBITDA guidance and increase our expectation for full-year 2023 free cash flow. So that completes my review of the Q3 highlights. I would like to hand it over to Karen, to discuss the financial results in more detail, before moving on to our balance of year outlook.

Thank you, Paul. And hello everyone. So before I get into the details, let me give you the highlights. As you will recall, my three key priorities when it comes to managing our financial performance are: First, achieving outstanding financial results by growing revenue, growing adjusted EBITDA and increasing free cash flow. Second, driving continued margin improvement. And third, creating capacity to invest and drive long-term sustained growth. As you've heard from Paul, we delivered strong results in the third quarter, continuing to drive momentum and strong performance year-to-date. In the quarter, we grew revenue by 17% year-over-year. We increased our adjusted EBITDA margins 9 percentage points above prior year, reported positive free cash flow, totaling $107 million in the quarter and importantly are now free cash flow positive for the year. We are putting incremental investments in the quarter. And so, year-to-date, we have triggered just under $30 million of OpEx and CapEx investment on an annualized basis, focused on pricing our sales and marketing engine, investing in our own software platforms and AI. Looking at the third quarter results in more detail. Revenue of $571 million, increased 17%. This was ahead of our guidance. We have solid transaction growth of 9% on a workday adjusted basis and we saw continued outperformance on our yields. As a reminder, our revenue model is driven by volumes, sales, and recurring revenue. And so, as I have said, our outperformance was primarily driven by our yield, which is measured as revenue over TTV, have reached 8% in Q3. The strong revenue yield in the quarter was driven by our continued focus on revenue optimization and by the recovery momentum we have seen in 2023 particularly as a result of the stronger year-over-year international mix. Additionally, as we look at the demand coming from meetings and events, we continue to see strong performance with double-digit growth. Now before we talk about adjusted EBITDA, let's discuss expenses, which is a key area of focus for us. Our adjusted operating expenses increased 7% in the quarter, while revenues grew 17%, while as transaction growth drove increased cost of revenue and investments in the business results in higher sales and marketing spend, our drive to improve margins realized the Egencia synergies of which we are on track to exceed our $60 million of expectations this year and our cost saving initiatives resulted in a net $9 million reduction quarter-over-quarter. And so this performance translates into delivering $95 million of adjusted EBITDA and significant margin expansion in the third quarter. Adjusted EBITDA margin reached 17%, up 9 percentage points year-over-year. And notably, the strong margin performance was also 2 percentage points ahead of third quarter 2019 pro forma adjusted EBITDA margin. As I've said in my opening comments, we achieved free cash flow generation of $107 million in the third quarter. This was driven primarily by net working capital actions. We have provided more details on free cash flow in the appendix of our earnings presentation, which I'm not going to walk through on this call, but encourage you to review to provide more context. On our last two calls, I’ve discussed the Egencia working capital initiatives. Once again on the things within our control, we are delivering. On this critical initiative we are realizing the benefits earlier than expected. Approximately $60 million of the positive free cash flow generation came from these initiatives and I expect to see a similar level of benefit in Q4. Additionally, it is important to remember the seasonality of our business, where cash usage decreases in H2, versus H1. And this is certainly reflected in our third quarter performance. And so importantly, we are now free cash flow positive on a year-to-date basis. This is another pivotal moment for the company. Our leverage ratio, or net debt divided by last 12 months adjusted EBITDA, is now 2.7 times as of September 30th. Our net debt is now $927 million. This in a very significant step down for us as a company and a critical proof point in terms of the momentum and focus on the balance sheet. We are now in our target range of 2 times to 3 times net leverage. This reduction in our leverage ratio will drive 75 basis points of interest rate reduction on our outstanding term loan, beginning later in the fourth quarter. And just as an additional point to note, we expect a further step down in our net leverage during Q1 2024, which will drive a further 75 basis points of interest rate reduction. And so let's discuss guidance. Turning to the fourth quarter in more detail, we are maintaining Q4 guidance, with revenue expectations of $535 million to $550 million. As a reminder, revenue growth in Q4 is lower due to the outperformance of supplier yield in the fourth quarter of 2022. We saw a different phasing through last year with the majority of performance payments paid in the fourth quarter, resulting in revenue yield of 8.9% in Q4, versus 7.4% in the prior two quarters of 2022. As already discussed, we are very focused on margin expansion and cost reduction. We expect operating expenses to continue to trend down sequentially in the fourth quarter. This is driven by the changes we announced in January relating to our reorganization. Egencia synergies increased digital adoption and our overall focus on productivity. This results in fourth quarter expectations for $75 million to $85 million of adjusted EBITDA, with an adjusted EBITDA margin of 14% to 15%, representing year-over-year adjusted EBITDA margin expansion of 6 to 7 percentage points. Turning to the full-year, given our outperformance particularly on revenue yield in the third quarter, we expect to be at the higher end of our revenue guidance range. This would represent 23% of revenue growth year-over-year. But given the investments I previously mentioned, we expect to be closer to the midpoint of our adjusted EBITDA guidance range. This represents an adjusted EBITDA margin of 16% to 17% with productivity gain and high operating leverage, delivering 10 to 11 points of year-over-year margin expansion. Looking beyond the end of this year, we are currently working through our 2024 planning process, We obviously recognize that the economic and political environment has become more uncertain and it is difficult to predict the impact this may have on business travel demand in 2024. And while we aren't ready to establish 2024 guidance at this point, I want to provide some insight into how we are thinking about next year. Our top line growth is driven by organic growth and net new wins. As we shared before, business travel demand has grown at or above GDP for decades. So it is logical to assume organic growth will track at or above GDP next year. And there are couple of data points externally, that I want to draw your attention too. Our clients and GBTA polling are supportive of continued growth in business travel. This is seen in our most recent customer survey, which shows that 88% of our top 100 customers expect their travel spend to be flat or up in 2024 versus 2023. And GBTA in his most recent poll results shows that 72% of buyers expect travel budgets to increase or hold steady in 2024. But let's turn to what is in our control and quite frankly we are delivering outstanding results. On top of organic growth, you've heard us talk about our share gains and we expect our net new wins to contribute 4 to 5 percentage points of volume growth in 2024. This is a strong baseline going into next year. Finally, we expect our continued focus on productivity and cost savings to drive further margin expansion in 2024. We will continue to benefit from our Egencia synergies and cost saving initiatives and expect continued momentum in margin expansion. So in summary, we delivered strong third quarter revenue growth, significant adjusted EBITDA margin expansion, positive year-to-date free cash flow, reduced our net leverage ratio and creating capacity to invest for the longer-term growth. We are delivering strong results, we feel confident in our full-year 2023 guidance and we are well positioned heading into 2024 and beyond. So we can move into Q&A. Paul, and I joined by Eric Bock, who is our Chief Legal Officer, Global Head of M&A and Compliance & Corporate Secretary. Operator, please go ahead and open the line.

Thank you. [Operator Instructions] Our first question for today comes from Duane Pfennigwerth from Evercore. Your line is now open, please go ahead.

Good morning. This is [Jake] (ph) on for Duane. Were there any surprises by region or customer type this quarter, if we were to segment contribution from new wins from recovery of existing customers that were in the baseline in 2019? What industries are you seeing recovery on same-store sales basis?

Yes. Thanks, Jake. Nice to speak to you again. No, I wouldn't say any real surprises. I mean, mostly it's a continuation of the same trends as you heard from me in the presentation. SME continues to outpace, global multinational hotels facing Air, Asia Pacific is that from a recovery standpoint, still a little bit ahead of EMEA, which is a little bit ahead of the Americas, and those things have been consistent now for a year. So I'd say those trends, but real no surprises at all. But what we have seen in terms of change, the actual technology sector showed some actual improvement in Q3. And that was I think a sector that I've referenced before, where we -- from a global multinational segment perspective, that industry has the lowest recovery rate, and so I think we were encouraged to see some improvement in that sector, specifically in Q3. But that is the only thing I would call out that is different from prior quarters.

Okay, that's helpful and then just if I can get a follow-up here. Could you explain the change in share count and how we should think about that going forward.

Sure. Eric do you want to take that one.

Sure. You may be referring to we did B for A exchange in summer, so that took the Class A is up from about $74 million shares to about 465 million shares, as we consolidated into one class of stock. So really when you look through the Bs and As, we remain at 465 million shares, we're up a little bit about 467 million shares at some RSUs investing in September, but the stock count really is pretty consistent. But you're probably seek the more Class A outstanding due to the exchange offer that we completed.

Great. That makes sense. Thank you.

Thank you. Our next question comes from Lee Horowitz of Deutsche Bank. Your line is now open. Please go ahead.

Great, thanks so much for the time. Can we talk a bit more about sort of the state of the macro environment. How the most recent trends in your business and point, how you may be thinking about industry growth rates next year. And is there any detail you may be able to share with us as it relates to sort of monthly trends, to help us better understand the current state of the industry?

Yes, well. Thanks, Lee. Well, as it relates to Q3 initially, also workday adjusted growth rate was 9% that was pretty much in line with what we expected and what we put in our guidance. As you look out to Q4, you heard from me earlier in the call that we are confident, both coming in high end of our revenue guidance. So, that is the sort of most immediate outlook for us. You know, 2024 specifically, as you mentioned it, we're not kind of ready to establish guidance for ‘24. But I've given some sort of insights and how to think about ‘24 previous conversations and two basic elements to 2024. The first one is what we directly control, which is what we're going to deliver in terms of continued share gains. And, you know the second one and the one that is more difficult to predict is, what is the overall broader industry growth going to be in 2024? What fuel is left in the tank on recovery and what kind of macroeconomic GDP environment are we going to be in 2024? So those are the sort of the variables as such. The one we directly control the share gains and we see 4 to 5 points of growth in 2024 from our new wins as a baseline, and then you're going to have to make a judgment about what you think is going to come in terms of additional recovery and what you think will come from the broader macro-economic environment. And that is challenging, I think there's probably more uncertainty now than when we did this, call 90-days ago, macro political and economic conditions are pretty uncertain. And so I do think, as you look out 2024, it's not clear yet, you know, how those headwinds and tailwinds going to influence the overall market growth in 2024. What we're doing, Lee, is making sure that we are prepared for different growth scenarios in 2024, and making sure that we have the flexibility in our model to adapt, if we are in a higher or lower growth scenario. And I think we've proven in terms of the cost savings, the synergies, the margin expansion that they will serve us very well, if we do find ourselves in a lower growth environment in 2024. But obviously, I think we need a little bit more time to see exactly how the year ahead is going to play out.

Helpful. Thanks. And maybe just one follow-up sort of you know, present in time you may be talking more about the promise of generative AI technologies. Obviously, you guys have a big head count organization, so presumably, there's a lot of benefits that it can have across the P&L. I guess how quickly do you think some of the cost savings that can be gained via digital agents and the like can be realized across the P&L. It seems like the technology move very quickly and perhaps this could be a margin driver next year Just any help there would be great? Thanks so much.

Yes, sure. 40% of our costs are people costs that are in the voice channel serving customers, and so that does present an opportunity for us to drive productivity gains and improve efficiency and also at the same time improve the customer experience. Driving productivity gains with automation and AI is not new to us, but we do that today with Egencia, with Neo, we analyze the demand that comes in to the voice channel and we look at what's driving that demand and we build those features into our own software platforms. That's why our digital adoption rate is now 77% of transactions coming through digital channels. And so when you asked about the timeline associated with these things, some of it is already happening today. I think what is very interesting, is the power of generative AI and large language models, it just open up new possibilities for us to do some of these things at much, much greater scale. And we are focused in three areas, right? One is the area I just mentioned, which is our travel council and productivity environment. The second area is our finance function and looking at ways that we can use AI to automate more of our finance processing. And the third actually is product and tech using AI to actually do more of our basic programing and engineering work. Those three areas for us are all interesting areas of focus that can deliver savings over the medium to long term, and we have a cost savings plan that rolls out over multiple years and we have savings against AI driven automation in '24 and '25 and '26. So I hope that gives you a flavor for where it's headed.

Helpful. Thanks so much.

Thank you. [Operator Instructions] Our next question comes from Toni Kaplan of Morgan Stanley. Your line is now open. Please go ahead.

Hey, Paul, this is Hilary on for Toni. Just wanted to ask on transaction volume, I know you guys want to kind of move on beyond the 2019 benchmarks. But just based on our estimates, it looks like transaction volumes has kind of stayed around this mid to high 70's of 2019 pro forma levels the past three quarters? So just wondering if you have any color on why the volume recovery may be slowing down a bit or like how do you see that going forward. I know you expect a baseline of 4% to 5% growth for next year, but just wondering anything else that you can add to that?

Yes, look, I think we said earlier in the year that we probably see a couple of points additional recovery per quarter. And that's pretty much what we've seen. I think the latest stats for kind of for Q3 is volume recovery on transaction and sales is around 77%, 78%. Our revenue recovery is just up around roughly 80% level and we have been seeing some sequential improvement quarter-over-quarter. You do have to normalize for some workday adjustments in order to get that for you, but that's basically the patent the patent is actually very consistent with what we guided to at the beginning of the year. I just want to come back to the 4%, 5% points to make sure it's clear. I wasn't guiding to 4%, 5% growth in total next year, I was guiding to 4%, 5% as a baseline of what we control, which is the impact of the net new wins in the share gains. So, what we'll have to do over time is make adjustment about what level of market growth is going to come in addition to that, right? And that's what I was saying to Lee earlier, that is a more difficult judgment to make in this environment, because that clearly is a greater amount of economic and political uncertainty. So, I just want to make sure that point was clear.

Okay. I appreciate that. Great color. And just wanted to touch on margins, if I could. I know, we kind of have a limited history here, but I was just wondering if you could tell us like how we should kind of expect the cadence on margins going forward like, should we expect kind of a step up from Q1 to Q2 and then subsequent step down in Q3 and Q4 going forward or still kind of too early to tell?

Hi, Hilary. It's Karen here. And we have talked in the past about just the seasonality of our business. And so with the higher volumes in the first-half, you would expect higher volumes, it's best to look at this on a, on an annual basis where we've guided around 16%, 17% on a full-year basis. We have also talked about over time the expectation around our margins of being between low-'20s and mid-'20s. And so an expectation that we will see productivity and efficiency gains going forward and so, approximately a one point improvement. But, the reason why we guide to that range is because we will -- one of our priorities is around investments. And so if there are investments that will drive the long-term growth of this business, then we will make those investments. As you will see that we have done this year. So hopefully that gives you a bit more color in terms of how we're thinking about it, but you should absolutely think about the seasonality as well. That's my first point.

Great, thank you.

Thank you. At this time, We currently have no further questions, so I'll hand back to Paul Abbott for any further remarks.

Well, thank you to everyone for joining the call. Appreciate the questions and your interest in the company and we look forward to speaking to all of you again soon. Thank you very much.