Global Business Travel Group, Inc. Q3 FY2023 Earnings Call

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.

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. 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. 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 focusing 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. 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, while domestic transactions were 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. Importantly, we maintained our strong customer retention rate of 95%. Our biggest opportunity remains in the SME segment, which 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. With our leading software and services that are proven at scale globally, we are very well positioned to capture the significant opportunity. Our results continue to prove this out. SME new wins value over the last 12 months totaled $2.2 billion, of which approximately 30% has come from previously unmanaged customers. Customers who are looking for the services, savings, and 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, 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, 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. We expect our strong new sales momentum to continue as we head into 2024. Even if macro events 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. Finally, 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 enables 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 software platforms as a direct result of customer demand. Over 60% of our digital transactions now come through our 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, allowing customers to efficiently manage their travel in the enterprise solutions they use every day. This increases customer satisfaction and 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%. 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 enhancing the customer experience. 40% of our costs are associated with 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. However, looking ahead, we have an even bigger opportunity. With generative AI and large language models, we have the chance to drive further efficiency at an accelerated pace. Finally, we continue to ensure that our customers have access to the most comprehensive and 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 the 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. 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 the 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 into the quarter. 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 and 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. As I have said, our outperformance was primarily driven by our yield, which is measured as revenue over TTV, and 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%. As transaction growth drove increased cost of revenue and investments in the business resulted in higher sales and marketing spend, our drive to improve margins realized the Egencia synergies, of which we are on track to exceed our expectations of $60 million this year, while our cost-saving initiatives resulted in a net $9 million reduction quarter-over-quarter. 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. Notably, the strong margin performance was also 2 percentage points ahead of the 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. This is certainly reflected in our third quarter performance. 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 is a 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 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. An additional point to note is that 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. 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 related 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 a 23% year-over-year revenue growth. However, given the investments I previously mentioned, we expect to be closer to the midpoint of our adjusted EBITDA guidance range, which represents an adjusted EBITDA margin of 16% to 17%, with productivity gains 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 recognize that the economic and political environment has become more uncertain, making it difficult to predict the impact this may have on business travel demand in 2024. While we're not ready to establish 2024 guidance at this point, I want to provide some insight into our perspective for next year. Our top-line growth is driven by organic growth and net new wins. Business travel demand has historically grown at or above GDP for decades, so it's logical to assume organic growth will track at or above GDP next year. A couple of external data points are worth mentioning: Our clients and GBTA polling show support for continued growth in business travel. This is evident 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, while 72% of buyers in GBTA's recent polling expect travel budgets to increase or hold steady in 2024. Let's turn to what is in our control. Frankly, we are delivering outstanding results. On top of organic growth, you've heard us discuss our share gains, and we expect our net new wins to contribute 4 to 5 percentage points of volume growth in 2024. This provides a strong baseline heading 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, expecting continued momentum in margin expansion. To summarize, 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 created capacity to invest for long-term growth. We are delivering strong results, feel confident in our full-year 2023 guidance, and are well-positioned heading into 2024 and beyond. We can move into Q&A. Paul, Eric, and I will be available for questions.

Sure. You may be referring to the B-for-A exchange we did in the summer. That took the Class A shares up from about 74 million to approximately 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, with a small increase to about 467 million shares due to some RSUs vesting in September. But the stock count really is pretty consistent; you’re probably seeing more Class A outstanding due to the exchange offer we completed.

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.

Great, thanks so much for the time. Can we talk a bit more about the state of the macro environment, how the most recent trends in your business point to how you may be thinking about industry growth rates next year? 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, our workday-adjusted growth rate was 9%, which was in line with our expectations and guidance. As you look out to Q4, I’ve stated we are confident, coming in at the high end of our revenue guidance. Regarding 2024 specifically, we are not ready to establish guidance at this moment, but I've given some insights into how to think about 2024 in prior conversations. There are two basic elements to consider: the first is what we control, which is our continued share gains. The second one, which is more challenging to predict, is the broader industry growth in 2024. As you observe, there is considerable uncertainty surrounding economic and political conditions, making it harder to project market growth. We are preparing for different growth scenarios in 2024, ensuring our model has flexibility for either higher or lower growth. We've proven through cost savings, synergies, and margin expansion that we can navigate a lower growth environment effectively. However, we still need more time to determine how next year will play out.

Hey, Paul, this is Hilary on for Toni. I wanted to inquire about transaction volume. I know you want to move beyond the 2019 benchmarks, but our estimates suggest transaction volumes have stayed around mid to high 70% of 2019 pro forma levels for the past three quarters. Can you provide any insights as to why volume recovery may be slowing down and how you see that evolving?

Yes, look, I think we said earlier this year that we would see a recovery of a couple of points per quarter. That’s consistent with what we've experienced. Current stats for Q3 indicate volume recovery on transaction and sales is around 77-78%. Revenue recovery is just above 80%. We’re witnessing some sequential improvement quarter-over-quarter. Keep in mind, we need to normalize for workday adjustments. However, this pattern is consistent with what we guided at the beginning of the year. I just want to clarify that the 4-5 percentage points I mentioned were not an overall growth guidance for next year, but rather a baseline of what we control, considering net new wins and share gains. Ultimately, we need to assess what the overall market growth will be as well, which is where it becomes more challenging given the economic and political uncertainties.

Hi, Hilary. It’s Karen here. We’ve discussed our business's seasonality in the past. Given the higher volumes in the first half, you would expect those volumes to be more elevated. It’s best to look at this on an annual basis, where we’ve guided revenue margins around 16% to 17% for the full year. Specifically, we’ve noted that over time, our margins are expected to be in the low to mid-20s range. We expect productivity and efficiency gains to continue driving this, with approximately a one-point improvement over time. However, we will prioritize investments that drive the long-term growth of this business; as you’ve seen us do this year. I hope this gives you clarity on our forecasts, but bear in mind the seasonality factor.

Well, thank you to everyone for joining the call. I 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.

Thank you for joining today's call. You may now disconnect your lines.