Earnings Call Transcript - SABR Q4 2021

Operator, Operator

Good morning, and welcome to the Sabre Fourth Quarter and Full Year 2021 Earnings Conference Call. My name is Victor, and I'll be your operator. 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, Kevin Crissey. Please go ahead.

Kevin Crissey, Vice President of Investor Relations

Thanks, Victor. Good morning, everyone. Thank you for joining us for our full year and fourth quarter 2021 earnings call. This morning, we issued an earnings press release which is available on our website at investors.sabre.com. A slide presentation, which accompanies today's prepared remarks is also available during this call on the Sabre Investor Relations webpage. A replay of today's call will be available on our website later this morning. 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 and recovery trends, benefits from commercial and strategic arrangements, expected revenue, costs and expenses, cost savings, margins and liquidity, 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 risks and uncertainties is contained in our earnings release issued this morning and our SEC filings, including our third quarter 2021 10-Q and 2020 Form 10-K. Throughout today's call, we will also be presenting certain non-GAAP financial measures. References during today's call to Adjusted Operating Loss, Adjusted Net Loss from continuing operations, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EPS, Free Cash Flow and Net Debt to LTM Adjusted EBITDA have been adjusted to exclude certain items. The most directly comparable GAAP measures and reconciliations for non-GAAP measures are available in the earnings release and other documents posted on our website at investors.sabre.com. Participating with me are Sean Menke, our Chief Executive Officer; Kurt Ekert, our President; and Doug Barnett, our Chief Financial Officer. Scott Wilson, our President of Hospitality Solutions, will be available for Q&A after the prepared remarks. With that, I will turn the call over to Sean.

Sean Menke, CEO

Thanks, Kevin. Good morning, everyone, and thank you for joining us. As we know, the past two years have been extraordinarily disruptive. Like others, we have had to deal with numerous, unpredictable headwinds. Despite these challenges, we have never lost sight nor abandoned our focus on future opportunities. Some needed to be reprioritized; others, specifically the technology transformation, continued notwithstanding the challenging environment. During our earnings call in February of 2020, we articulated the importance and expected benefits of our technology transformation. Despite these headwinds, we, along with our partners, continued to execute. 2022 is the midpoint of these efforts and we are intent on accomplishing our goals for the technology transformation. We are confident that we will achieve these goals by the end of 2024, and we believe our advanced agile global technology footprint and efficient cost structure will be superior to our competitors. In 2025, we believe our full year run-rate efficiencies and accrued technology benefits will drive superior financial results under multiple scenarios compared to 2019. The global travel recovery was slow at the beginning of the year, but that has changed significantly. February month-to-date global GDS bookings were on pace to reach a similar level of recovery compared to the same period in 2019 as November 2021, which was the best month since the onset of COVID-19. For these reasons, we believe 2022 is shaping up to be a year of recovery and progress. Turning to Slide 4, let me now provide an overview of the topics we will cover on today's call. I'll begin by discussing the considerable opportunity we see for Sabre and our investors as recovery takes hold and we reach the other side of COVID. Next, I'll provide an update regarding the ongoing travel recovery, including specific booking, passengers boarded, and hospitality CRS transaction trends, and how Omicron has temporarily affected the recovery. Then, I'll detail our expected strong financial performance under specific recovery scenarios in 2025 and the investments we are making in our technology transformation to achieve these results. Finally, I'll turn the call over to Doug to walk you through the results of the quarter and the financial outlook for 2022. But before I start, I do want to take a moment and thank my Sabre teammates around the world. 2021 was another challenging year for the travel industry and for Sabre. I believe my team members are aware, but it is important for me to emphasize how much I appreciate their extraordinary efforts, serving our customers, looking out for one another, and at the same time executing our transformation to help enable a new marketplace for personalized travel. I'd also like to welcome Kurt Ekert to his first earnings call with Sabre. Kurt joined us in January and is quickly learning the organization. Kurt's background and skills make him a perfect choice as President. He has an exceptional understanding of the travel marketplace, global air and hotel distribution, consumer e-commerce, and corporate travel. I look forward to working with him in the years to come. His arrival will allow me to continue to focus on our long-term strategy and goals for 2025, as well as to spend more time externally with our customers, investors, and other important constituents, something that I'm eager to do. I won't ask Kurt to present our results just yet, but I thought it would be good for him to say a few words of introduction. Kurt?

Kurt Ekert, President

Thank you, Sean. I appreciate the welcome. This is an exciting time to have joined Sabre. Having worked as an executive at one of Sabre's competitors and more recently, at a top customer with CWT, I knew Sabre well from the outside. After just over a month, I'm gaining a better appreciation for Sabre's many strengths firsthand. Dynamic changes are coming in the travel sector, and I believe that Sabre's people, compelling product offerings, and strong client relationships uniquely position us to capitalize on these changes. I am excited to partner with Sean and our global team to drive world-class innovation and financial performance. I also look forward to meeting our investors and analysts in the near future. Sean, back to you.

Sean Menke, CEO

Great. Thanks a lot, Kurt. Now I'd like to turn us to Slide 5. I’d like to start today's call with what I consider some of the most important aspects of the investment case for Sabre. As we've seen in our booking data over time, the demand for travel remains very strong but has been curtailed by global travel restrictions designed to counteract the COVID-19 pandemic. As COVID case counts fall, we once again see travel restrictions lifted, and know our revenues and earnings improve. We believe Sabre is a travel recovery investment opportunity in the near-term based on these points. But Sabre offers much more as an investment than just travel recovery momentum. As we look ahead, we are investing to drive EBITDA, EBITDA margin, operating income, and free cash flow higher than 2019 levels. As mentioned, I will provide an illustration of what our 2025 financials look like under different recovery scenarios. Despite the challenges caused by the pandemic, our expectations for 2025 are in line with or better than our pre-pandemic guidance provided in February of 2020. Our ambitions are higher and illustrate the positive financial impact our technology transformation is expected to have on future earnings. We believe that as we achieve these goals, value not currently recognized in the market will be unlocked. Turning to Slide 6, our volume metrics, namely distribution gross air bookings, IT solutions passengers boarded, and hospitality gross CRS transactions have broadly tracked the inverse of COVID-19 cases over time. We saw a slowdown in travel bookings beginning in mid-June 2021 associated with increased Delta variant cases, followed by a sharp recovery from September to the end of November. The Omicron variant hurt our booking trends in December and into January, but similar to past trends, we are seeing a quick acceleration in booking recovery, with hospitality leading, followed by air as COVID case counts and restrictions abate. Please note that we've changed our travel recovery slides to display a percentage recovery of 2019, instead of a percentage decline versus 2019. Hotel CRS transactions continue to lead and have recovered 77% in January, versus the same period in 2019. IT Solutions Passengers Boarded have recovered 68% in January versus the same period in 2019. Finally, distribution gross bookings recovery was 31% in January versus the same period in 2019. During the month, booking recovery did accelerate, with the final week reaching 37% of 2019 levels. Turning to Slide 7, where we present GDS industry data regionally. The global travel recovery was gaining momentum through most of Q4 but slowed again in December and January due to the Omicron variant. After this pause, month-to-date February global GDS recovery is tracking over 50% versus 2019, similar to last November, the best month of recovery since the onset of COVID. We are encouraged by both the strength of the recovery and the better global mix versus the previous heavily weighted U.S.-centric recovery with lower margin bookings. Based on historical pre-COVID booking curves, and the absence of a future travel-restricted COVID insurgence, we are optimistic that the current momentum in corporate, international, as well as leisure demand will accelerate into the strong seasonal travel months ahead. We continue to be bullish on the return of corporate travel and recently expanded our commercial relationship in the more profitable corporate travel segment with American Express Global Business Travel. This long-term strategic partnership includes incremental bookings for us and a multi-million dollar annual investment in joint technology by GBT.

Doug Barnett, CFO

Great. Thanks, Sean and good morning, everyone. Turning to Slide 12. As expected, the COVID-19 pandemic continued to weigh heavily on our results in Q4. However, the fourth quarter showed significant financial improvement versus Q4 of 2020 and sequentially from Q3 2021. Total revenue was $501 million, a significant improvement versus revenue of $314 million in Q4 last year due to the continued recovery in global air, hotel, and other travel bookings. Distribution revenue totaled $286 million, an improvement versus revenue of $131 million in Q4 2020. Our distribution bookings totaled 58 million in the quarter. Compared to 2019, net air bookings recovered at 44%, 51%, and 39% in October, November, and December, and 45% in the quarter as a whole. Our average booking fee in the fourth quarter was $4.96 versus $3.90, $3.84, and $4.59 in the first, second, and third quarters of the year. Our IT Solutions revenue totaled $165 million in the quarter, an improvement versus revenue of $145 million last year. Passengers boarded totaled 129 million, representing a 69% recovery versus the fourth quarter of 2019. Hospitality Solutions revenue totaled $54 million, an improvement versus revenue of $41 million in Q4 2020. Central reservation system transactions were at 90% of 2019 levels and totaled 23 million in the quarter. EBITDA showed meaningful year-over-year improvement but remained slightly negative in the quarter, reflecting the continued impact of the COVID-19 pandemic. The significant year-over-year improvement in revenue in the quarter was partially offset by increased Travel Solutions incentives expense and Hospitality Solutions transaction fees due to higher volumes. As expected, our technology costs and selling, general, and administrative expenses increased due to volume recovery trends and increased labor and professional service expenses. Operating income, net income, and EPS also showed improvement versus the prior year. Free cash flow was negative $30 million in the quarter, aided by working capital seasonality. As a reminder, AirCentre assets are being treated as held for sale on our balance sheet, while their operating results remain in our P&L. When the sale to CAE closes, which we still expect to occur in the first quarter of 2022, Sabre will no longer recognize revenue and earnings associated with AirCentre products. Although our reported passengers boarded will not be impacted, our revenue per passenger boarded for IT Solutions will be lower as a result of excluding AirCentre related revenue.

Sean Menke, CEO

Additionally, post-close, AirCentre employees will transition to CAE and a Transition Services Agreement will go into effect. We will be compensated by CAE for the costs related to the Transition Services Agreement activities. We ended the quarter with a cash balance of $1 billion and have no significant near-term uses of cash. The sale of AirCentre is expected to further strengthen our liquidity position. We expect cash proceeds of $393 million from the sale of AirCentre upon closing. We feel confident in our current liquidity position, anticipate free cash flow turning positive during the second half of 2022, and continue to examine refinancing opportunities in the credit markets. We maintain our medium to long-term leverage target of 2.5 times to 3.5 times. Now turning to Slide 13. The near-term outlook for travel remains very difficult to forecast due to the evolving COVID-19 backdrop. The 2022 financial outlook we present here is not intended to suggest we know the bookings recovery we will experience in 2022. Rather, it is designed to provide a frame of reference for you to understand how our financials could look this year at different levels of Sabre net air bookings recovery. We presented the scenarios with and without AirCentre for ease of comparison to help ensure its expected sale is taken into account, including its impact on revenue, earnings, and revenue per passenger boarded. As mentioned before, in 2019, AirCentre generated about $150 million in revenue and $55 million in EBITDA.

Doug Barnett, CFO

As I mentioned before, the sale is expected to close this quarter. As Sean discussed, in 2022, we expect to invest an incremental $45 million versus 2021 in our tech transformation. We are also investing in global business systems, such as our billing system, cybersecurity, and increased compensation to attract and retain our highly sought-after talent. These incremental investments are expected to total $40 million and to improve processes and increase workflow efficiency while also helping reduce risks. Investments in our internal business systems will also allow us to better support our customers as modern retailing strategies advance and new commercial models emerge. Additional detail on the breakdown of these investments is listed on the slide. Of the incremental investments, we anticipate that only cybersecurity insurance and increased compensation should be viewed as ongoing expenses. The balance of the spend is bubble-related to activities underway, and we expect that they will revert once work is completed.

Sean Menke, CEO

As I mentioned earlier, in Q4, net air bookings recovered at a 45% pace. With the impact that we have seen from Omicron and even with the pick-up in bookings in February, we do not expect the recovery in Q1 to reach Q4's level. Please keep in mind that cash settlement occurs after bookings, so the cash flow impact of Omicron is expected to largely affect Q1 rather than Q4. However, we do expect continued quarter-over-quarter bookings recovery resulting in strong momentum as we exit 2022. Therefore, from a revenue, earnings, and cash flow standpoint, we expect a similar pattern to what we experienced in 2021, with the back half of the year being stronger than the front. Even without AirCentre's financial contributions and including the incremental investments we outlined, assuming a Sabre bookings full-year recovery of just 50%, we'd expect free cash flow to turn positive during the second half of 2022 and continue trending positive thereafter.

Doug Barnett, CFO

Now turning to Slide 14. I'll end where Sean started, with the investment thesis we see in Sabre over the next few years. We expect our revenue, profitability, and free cash flow to grow as the travel limitations caused by the pandemic continue to subside. The investments we are making in technology are expected to create the opportunity for unit cost savings and higher margins than pre-pandemic levels by 2025, even if travel volumes do not return fully to 2019 levels. We strongly believe this opportunity is not fully reflected in the market today.

Operator, Operator

Our first question will come from the line of Mark Moerdler from Bernstein Research. You may begin.

Mark Moerdler, Analyst

Thank you very much, and thanks for all the additional details on both the 2025 and then the IT change. I'd like to drill in a little bit on the IT side. Understanding that you're exceeded your technology target for 2021, how does this impact the timeline to completion? Are you going to plan to finish a little ahead? Is that why the additional payments and spending you're going to have is to pull that forward? Are you seeing any benefits in customer retention or in closing new deals? Any color on that would be appreciated and then I got a follow-up.

Sean Menke, CEO

Yeah. So, Mark, this is Sean and I'll let Doug jump in as well. And I think I'm going to take you back to February 2022 what we stated and walk you through a couple of things to try to address your questions. First, I'm going to focus on the global business system. If you go back to 2020, we really tried to illustrate what we were seeing at that point in time, relative to the savings and what it does for us relative to the benefits. And in doing that, Mark, this is the one thing that we've been able to sort of leverage through the pandemic is the relationship we have with our partners, specifically Google, on how do we think about the spending curve of this taking place because we talk about essentially, they're providing some level of support in this happening. So as you look at what we have been able to progress through the pandemic, we've actually been able to stay on course. If you look at what we're doing going forward, it's really completing what we outlined to do. What we talk about, Mark, is really the exit run rate of 2024. I would tell you, I think we're on track for it, what's happening. As it relates to the global business systems, this is one thing that we did push back a little bit on the reprioritization of spending. So when we announced that we were cutting back expenses after the pandemic, this is one that we paused for a period of time. We actually were spending some money, but we have to complete this because it does really get into the capabilities when we think about how the model is changing, but some of the contracts are out there. We look at just leakage and being able to make sure that we're recapturing that; these are all focused on what we have been talking about exiting 2024, and really giving you an insight into 2025. So hopefully that helps you, Mark, in how we walked through all of this.

Mark Moerdler, Analyst

That makes sense. And then maybe a follow-up in there. In the prepared remarks, you talked about savings based on 80% of 2019 revenue. How should we think about IT spending now scaling or scaling once this is done if you beat those revenue targets? Is it going to scale in line or slower? And how does that compare to the way in which cost scale pre the conversion, the tech conversion? Thanks.

Sean Menke, CEO

Yeah. I think the way that I would answer that, Mark, is as we've looked at essentially what we have provided you for an outlook of 2025, a big part of that is really just recovery taking place. If you think about the core technology of just the infrastructure, that essentially will continue to come down. Now you'll see that with volumes going up under the Google Cloud agreement. But that's a good thing because we're driving more volume, which would see a revenue increase. I think the other way of looking at it is what is happening with R&D. When I think about the R&D side of the equation, and I'm sort of looking at Kurt across the table, it is one versus the ability to, what are we investing in that’s going to drive more revenue? The important thing is, as we look at this, there are definitely margin improvements that will occur with what's taking place as we go through this transition market.

Doug Barnett, CFO

Yeah. I think the other thing, Mark, obviously, the big benefits of this tech transformation is the unit cost has been much lower than if we hadn't gone through it because before we also had the DXC contract and AWS was our cloud provider. We have much better economics now than we had before.

Mark Moerdler, Analyst

That's exactly what I was looking for. So you figure that unit economics will scale in line or maybe the unit cost will scale a little slower than the revenue scales?

Sean Menke, CEO

Yeah. That is true.

Matthew Broome, Analyst

Thank you very much. I would like to ask about the near-term revenue implications related to the impact of Omicron on bookings and cash flows at the beginning of the year. Specifically, is there any already recognized revenue linked to flights that were subsequently canceled, and might that revenue need to be adjusted, particularly in Q1? Would that be accurate?

Sean Menke, CEO

No. The way to look at it is, when we gave you the monthly trends. We had in October, November, and December, what we were alluding to there is obviously we had really good strong bookings momentum coming in October, November, and so almost a 12 percentage point decline coming into December. Obviously, that cash is not going to spillover and be collected in January. Same thing, we got to a slow start in January. You saw that we’re only at 31% recovery. Obviously, we now expect that to pick back up. So you're going to have too slow months of collections because of low bookings that took place in December and January in the first quarter, that's what we're alluding to.

Matthew Broome, Analyst

Okay. Fair enough. And then, I guess in terms of your new agreement with American Express Global Business Travel. What are your expectations there in terms of how that could affect bookings growth and over what kind of timeframe?

Sean Menke, CEO

If you examine our agreement, we are recognized as the primary GDS, and we anticipate an increase in future bookings. When considering AMEX GBT, their efforts span both large corporate clients and small to medium enterprises, which is significant. Our discussions with other major travel management companies also emphasize the importance of technology and our ability to drive growth in this area. We believe there's potential for additional bookings not only through AMEX GBT but also by empowering other TMCs. There's considerable conversation about the state of corporate travel recovery. The latest figures indicate that following the COVID recovery, the first two weeks of November marked a notable improvement, with corporate travel just 50% below pre-pandemic levels. However, factors like Omicron caused a decline, with global bookings now down by about 60% to 67% at the start of January. Currently, we are seeing a resurgence, bringing us back to around 50% down globally, with North America at the forefront of this recovery. We're confident in the future of corporate travel. Our relationship with AMEX GBT focuses heavily on technology, particularly in enhancing corporate booking tools, merchandising, and ensuring they can adequately meet their clients' needs.

Matthew Broome, Analyst

All right. Thanks very much, Sean and Doug. Appreciate it.

Josh Baer, Analyst

Great. Thanks for the question. Just wondering in the '22 and '25 scenarios and assumptions, what is embedded for the assumption around bookings mix versus pre-COVID levels?

Doug Barnett, CFO

Okay. In discussing 2022 and then moving to 2025, the guidance we are providing is based on the booking mix we experienced coming out of 2021, which isn't ideal for us. Sean mentioned a slight pickup in corporate bookings, but it's still not at the level we aim for; we prefer a balance of 50% domestic and international and 50% leisure and corporate. Currently, we're seeing more of a 70-30 or 65-35 ratio. Therefore, our outlook for 2022 is conservative. For 2025, we anticipate a good recovery towards normal levels for international and domestic travel but expect only a 90% recovery for corporate travel. Our guidance does not account for corporate travel returning to 100% by 2025.

Josh Baer, Analyst

Okay. That's really helpful. Thank you. And just to confirm, in those frameworks for recovery, when you're talking about percentage of bookings, is that just looking at 2019 your reported bookings numbers and taking the percentage off of that or are there any adjustments for the lost Expedia business or any other changes versus 2019?

Doug Barnett, CFO

That's literally just off of the 2019 fully reported bookings number.

Neil Steer, Analyst

Hi. Thanks very much for the opportunity to ask questions. Just following on from the last question actually, could you quantify what was the Expedia shift to share impact that we saw on the booking volumes in the fourth quarter? Could you just give us some sort of flavor on that please?

Sean Menke, CEO

Yeah, Neil. I'll go back to what we talked about because I think it's really more focused on 2022 that it’s $15 million to $20 million in EBITDA impact. We're sort of immaterial relative to what happened in the fourth quarter relative to where they settled and what we're seeing in the first quarter.

Neil Steer, Analyst

Okay. Thanks very much. And Sean, just on the AMEX GBT partnership, you've talked a great deal obviously about the technology investments you're making and how there are some joint investments being made there and the broader opportunity amongst other TMCs. Do you have the opportunity to take the platform and the solutions that you're developing in partnership with AMEX GBT and sell those to other TMCs or is there a large part of that joint co-development work that remains proprietary to AMEX GBT?

Sean Menke, CEO

No. What the way that we have enter these discussions, they would be available to the ecosystem in total.

Neil Steer, Analyst

Okay. Thanks very much. And could you just also give a little bit of flavor on the airline IT pipe, obviously, there was a little bit of sort of trading of carriers that we saw over the course of ’21, what’s the pipeline for airline IT renewals and new business opportunities?

Sean Menke, CEO

Yeah. It's actually probably going on the low-cost carrier side. This is an area that we are focusing on quite a bit. There has been a lot of action there, Neil. If you look at where we entered or where we were in 2019 as it related to total PPE, I think we're in the 780 million, 800 million PBs and I always sort of referenced back to that. If you look at where we are now referring to what you're talking about, we are net up as it relates to PPE and what's taking place. So, I feel good about where we weren't 2019. This assumes that we're going to get back to 2019 levels that's going to ease that as the base. If we look into the future, I would say there is more activity definitely on the low-cost carrier side as we look at full-service carriers. It's typically what we've seen historically. There's renewals that are taking place that we worked through. There are other opportunities that we try to advance on, but it's somewhat similar to what we've seen historically, Neil.

Jed Kelly, Analyst

Hey, great. Thanks for taking my questions. Just going back to the technology investments in the roadmap you're laying out for the Google Cloud. Can you discuss how these investments are going to improve your win rate or what we should expect for new business opportunities as you start to scale these technology costs?

Sean Menke, CEO

Yeah, Jed. I'm happy to answer that question. It's really important what we're doing. When you think about our first and foremost, it goes back to just what it's going to do with the underlying cost structure and the information that we provided to give you a lot of detail on that decision side, but it really does get into some of the things that Doug had highlighted and I’ve highlighted is really if you look at it from the faster time to market, we think that we can do. If you look at it again on the utility side, but I look at the development side and what we need to do and what ends up taking place and things are happening. Can I tell you specifically the Louvre win on the hospitality side was the ability to have landing zones in Europe and as we continue to think about this, this becomes very important across the board, not only in hospitality and airlines, but also on the OTAs side because they are so focused on speed and what's happening. The other reason, I think it differentiates us and we don't get asked this question a lot, but we do believe we’re ahead and you look at technology transformation and organizations like ourselves that are going through it we've embarked upon this early beginning in 2019. We've had recent announcements by two of our competitors that they're going down the same path. Well, they're really going to do it, what we're doing, that’s what they're going to ask of investors as well, and we think that we're well ahead in what's taking place, and the capabilities that they provide. We think we're setting this organization up for what's outlined in 2025, so I'm really pleased with where we are. We've kept our head at the grindstone as it relates to just continuing to manage through this as we've gone through the pandemic.

Jed Kelly, Analyst

Thank you. And just following up, you said in your 2025, you have business travel getting back to 90% of 2019 levels. Just in those assumptions, whereas leisure travel relative to 2019 and that's going through the GDS versus brand.com?

Sean Menke, CEO

Yeah. I'd say, if business travel doesn't come back, then the balance will flow over to leisure.

Operator, Operator

And this will conclude today's conference call. Thank you for participating. You may now disconnect. Everybody, have a great day.