Global Business Travel Group, Inc. Q2 FY2022 Earnings Call

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 S-1 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 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 from GAAP to 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.

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. 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. I am 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, 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, which 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. Throughout the quarter, we continued 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. 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. 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. The SME transaction recovery continues to be particularly strong, with 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 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 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 2022. 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 executed, and the continued cost discipline that we saw in Q2 is in line with the expectations required to deliver the increased guidance for 2022. As I mentioned, business travel certainly has strong momentum, with transaction recovery reaching 69% in the quarter and 76% in June. These trends continue to reflect what we previously discussed with 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 ensure 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, I know you've heard from the GDSs 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, which is 14 percentage points above air of 64%. As we saw in the first quarter, hotel transactions recovered 26 percentage points versus the 21 percentage points for air transactions. We continue to see hotel outperforming air. You'll also see that 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 that the international recovery has now largely caught up with domestic recovery for the first time since the onset of the pandemic. Finally, 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 in particular for us to the restrictions being removed in countries like Australia and Singapore. Moving on to the significant runway for growth that we have, 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 fragmented 1.4 trillion industry, and our value proposition continues to strengthen our leadership position. We believe that the service and the savings that we are delivering right now in this environment are even more valuable to our customers. 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. 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. 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. Our product and technology investments play a significant role in ensuring that we deliver this value and continued momentum across the business. Let me highlight some of the product and tech achievements from Q2. Preferred extras are the unique negotiated rates that we have on our platform that deliver significant savings to our customers. 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 ensure better, more consistent messaging for our travelers around the world. We've 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. Additionally, in the quarter, Egencia customers can now be serviced within the Slack channel. We made new gender-neutral non-binary choices available in Neo, our digital Travel and Expense platform. We also enhanced 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. All of these features are very important in helping us deliver an unrivaled experience to our travelers. Finally, we continue to improve the efficiency and 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. The one GBT platform, as the name suggests, creates one standard simplified travel counselor toolset that improves the efficiency and consistency of the service we deliver around the world, again, improving the customer experience. 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, the permanent cost savings, and of course, to review the Q2 financial results in more detail. Martine, over to you.

Thank you, Paul, and hello, everyone. The 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 is on the revenue side driven by revenue harmonization, and 34 million are on the cost side. I am 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's new win value is 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. 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 on the real estate side, which you might recall is driving about two-thirds of our overall cost of energy. 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. The remaining cost savings are related to efficiency that will be realized as volumes continue to recover. If we put it all together with our business momentum, expected Egencia synergies, and 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 compared to 2019. Let's move now to the quarterly results. As you just heard from Paul, we are very pleased to report that we reached an important milestone in the second quarter by delivering positive adjusted EBITDA of 47 million. As a reminder, we closed the Egencia acquisition on November 1, 2021. Therefore, our second quarter result was due to the Egencia acquisition for the fourth quarter. We closed the second quarter with an overall 69% transaction recovery compared to 2019 pro forma for Egencia. That is a 22 percentage point quarter-over-quarter improvement versus the first quarter of 2022. In June specifically, transaction recovery reached 76% of 2019 pro forma level, which is 14 percentage points above March 2022. The easing of travel restrictions combined with the return to the office really has 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. Year-over-year transaction growth was 346% in the quarter, and total transaction value (TTV) increased by 438% to a total of 6.5 billion. Average transaction value increased 20%, and that's 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, 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 as COVID-19 restrictions relaxed, and demand for meetings and events found a very strong profile. The growth in management fees is more limited compared to 2021 because the revenue component is relatively less impacted by the reduction in demand from COVID-19 in both 2020 and 2021. 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. This is due to the increase in transaction recovery, as hotel and air recovered at a faster rate than air transactions; you tend to earn more revenue per transaction in air as we do for hotel and rail. Although we expect this trend to normalize as the recovery in air continues, the 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, was 7.5% compared to 11% in the second quarter of 2021 and flat with 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 TTV drives total transaction value at a faster rate than revenue growth. Higher ATP is positive overall on revenue but negative on 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. 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 compared to a 217% increase in revenue, resulting in a stronger adjusted EBITDA fall-through, which is defined as incremental adjusted EBITDA over incremental revenue. In the second quarter, adjusted EBITDA fall-through on a pro forma basis was 63%, demonstrating our operating leverage. Free cash flow, which is defined as cash from operations less CapEx, decreased 45 million to a total of negative 176 million. This was 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 being partially offset by the reduction in operating loss in the quarter. Looking at pro forma financial results, and comparing our second quarter results with the second quarter of 2021 pro forma Egencia acquisitions, we also see 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%, a very impressive 45 percentage point improvement year-over-year versus the prior period. 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, driven by a component of our revenue which we've discussed in the past: the faster recovery in hotel and rail transactions as compared to air; and a higher rate of cancellations and exchanges. We expect this trend to normalize as the recovery in air transactions continues and travel disruptions abate. Revenue recovery was also impacted by the strengthening of the dollar. While a stronger dollar has a positive impact on EBITDA, it has a negative impact on our revenue. Finally, adjusted EBITDA on a pro forma basis improved by 189 million, which compares to a 299 million improvement in revenue, representing a fall-through margin of 63% versus 2021 pro forma. Regarding cash flow, we have confidence in our liquidity position and expect to turn cash flow positive in 2023 as demand continues to recover and working capital builds normalize. 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. The sharp increase in business travel recovery drove significant cash consumption in the second quarter due to the rebuild of working capital, which totaled 167 million in the second quarter. We do expect this cash consumption to moderate over the back half of the year and we will talk about 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 have in place an effective registration statement covering the resale by holders of certain of our securities. This includes approximately 32 million shares of Class A common stock, which were issued in connection with the PIPE and 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 are eligible for sale in the fourth quarter of 2022, when the contractual lockup on the shares expires. To extend the hold is true to resell the securities; we expect that this would improve public float and the efficiency of trading in our stock. Let me turn to our 2022 guidance. As you've heard from Paul, we have again raised our guidance. Our strong second quarter performance and the current recovery trends give us confidence to increase our full year guidance again. We have raised 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 balanced year, transaction recovery of approximately 74%. You may recall that the recovery in the second quarter was 69%. Recovery in June, if you adjust for the workdays, was 70%. We are 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 a 5% adjusted EBITDA margin on a quarterly basis. This guidance incorporates additional staffing in the third quarter in anticipation of higher volumes in September and October, which tend to be our busiest months 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. 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 expected portfolio for 2022 financial results. I would like to thank all of our team members for their hard work and dedication that produced those results and completed our listing as a public company. We 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 the 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 pace to 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. However, you may recall that in the first quarter, Omicron impacted us. We feel that improvement in the balance of the year is a steady improvement. There are industry expectations for improvement in recovery in the balance of the year when you look at business publications, particularly from airlines. However, there are some economic headwinds, and we want to ensure that we strike a balance across various elements that could impact demand recovery in the second half. Again, we are confident that recovery will continue to improve. On the cost side, the 235 million is indeed the result of the actions that we completed in 2020 and 2021. Before the impact of inflation, we've shared with you in the past that we have a partial hedge against inflation, coming from two sides. One is part of our revenues on the management fee basis. Hence, we have a direct path to address any merit-related increases we need on the cost side. If you believe that inflation will impact ticket prices, whether hotel or airline, that will also result in additional revenue costs. On a net basis, we have about a 50% hedge, and the way to think about it is that for every point of merit inflation, we experience 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 some of the economic headwinds that are top of mind for everyone. So given that, is it fair to kind of assume that your guidance incorporates some degree of conservatism around how larger enterprises will 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. There are some headwinds and also some tailwinds, and we're trying to find the right balance here. Some of the headwinds have been operational challenges in the second quarter, particularly airports and airlines, and some supply constraints. Also, macroeconomic conditions in the major markets we operate in have certainly become more challenging. At the same time, we believe there’s strong tailwinds. We believe that recovery is going to continue; there's momentum certainly in key markets and key segments. For instance, China is just one example—a market that represented 5% of our total sales in 2019 is not yet fully open for international travel. The market is still essentially at zero today, as it was previously under a 14-days quarantine—now it's seven. When China opens up, there is a five percent recovery potential there, for example. There's definitely room for the recovery in certain markets and segments. We also believe tailwinds will come from supplies beginning to improve and operational issues starting to stabilize. We’re trying to find the right balance of recognizing the headwinds and tailwinds. That’s essentially what's driven our guidance to this level. Hopefully that helps. There's still 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. We have no further questions for today, so I will hand back to Paul Abbott for any further remarks.

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

Thank you for joining today's call, and we may now disconnect your lines.