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Edited Transcript of AMS.MC earnings conference call or presentation 31-Jul-19 11:00am GMT

Half Year 2019 Amadeus IT Group SA Earnings Call

Madrid Oct 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Amadeus It Group SA earnings conference call or presentation Wednesday, July 31, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ana de Pro Gonzalo

Amadeus IT Group, S.A. - CFO

* Luis Maroto Camino

Amadeus IT Group, S.A. - President, CEO & Executive Director

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Conference Call Participants

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* Adam Dennis Wood

Morgan Stanley, Research Division - European Technology Equity Analyst

* Alexander William Tout

Deutsche Bank AG, Research Division - Research Analyst

* David Mark Togut

Evercore ISI Institutional Equities, Research Division - Senior MD

* John Peter King

BofA Merrill Lynch, Research Division - Research Analyst

* Julian Alexander Serafini

Jefferies LLC, Research Division - Equity Analyst

* Michael Briest

UBS Investment Bank, Research Division - MD of Global Technology Research Group & Head of the European Technology Research

* Neil Steer

Redburn (Europe) Limited, Research Division - Partner of Software and IT Services Research

* Stacy Elizabeth Pollard

JP Morgan Chase & Co, Research Division - Head of Software and IT Equity Research

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Presentation

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Operator [1]

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Welcome to the first-half 2019 results presentation webcast. The management of Amadeus will run you through the presentation which will be followed by a question-and-answer session. (Operator Instructions)

 

I am now pleased to hand over to you, Mr. Luis Maroto, President and CEO of Amadeus. Please, sir, go ahead.

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Luis Maroto Camino, Amadeus IT Group, S.A. - President, CEO & Executive Director [2]

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Good afternoon, ladies and gentlemen. Thank you very much for joining us today, and welcome to our 2019 first-half results presentation. As always, Ana, our CFO, is here as well with me, and she will talk as usual through the details of our financial performance, and I will focus on our most relevant developments.

 

So if we'll move on to the next slide -- to the first slide, we are pleased to present our first half results. The market context in the second quarter was similar to the first one. We continued to see a less robust air travel industry, impacted by a number of factors, including the 737 MAX issue, some unplanned bankruptcies, the situation in India, Brexit, a negative history impact on the travel agency and booking industry, all against a continued tough quarter 2 and a first half 2018 comparable.

 

However, not without understanding the environment, we have delivered a good start to the year with our business demonstrating its resilience. We reiterate our confidence in the outlook we gave you at the beginning of the year.

 

Let me start with a review of our financial performance. Please note, the following evolutions exclude nonrecurring TravelClick acquisition-related cost and PPA adjustments.

 

In the first half of 2019, we had double-digit growth in revenue and EBITDA, expanding by 14.4% and 10.7%, respectively, with adjusted profit increasing 9.9%. This result was driven by the positive operating performance of our Distribution and IT Solutions segments, TravelClick's consolidation acquired on October 4, 2018, and positive foreign exchange effects.

 

Our free cash flow in the first 6 months of 2019 declined by 2%, although it grew by 9.4% before tax. At the end of the first half, our net debt stood at EUR 2.965 billion, representing 1.37x last 12 months EBITDA.

 

Regarding our performance by segments, in distribution, our volume growth was supported by steady market share gains across regions except for Asia-Pac, driven by the situation in India. Worldwide Amadeus distribution volumes increased by 0.9%, 3.3% excluding India, and our global competitive position expanded by 0.6 percentage points, by 1.4 excluding India.

 

North America was our fastest-growing region in the first half of the year. With our volumes there [in total] they are growing at a double-digit pace. In Western Europe, our bookings continued the positive growth trend started at the beginning of the year.

 

Distribution revenue grew 4.7% in the first 6 months of the year as a result of volume growth and average revenue per booking expansion. In IT solutions, revenue increased 31% in the first half of 2019. This solution was driven by growth in Airline IT Solutions, a continued expansion in our new businesses delivering double-digit revenue growth and the consolidation of TravelClick.

 

For the first time in Amadeus history, IT Solutions contribution surpassed that of distribution and represented 50.4% of total group contribution in the first 6 months of the year.

 

Amadeus' consistent and focused investment in technology over the years has been key to our success. In the first part of the year, R&D amounted to 16.8% of revenue, and it was dedicated to supporting our mid- to long-term growth through product evolution, portfolio expansion, new customer implementations, system performance optimization and our continued shift to next-generation technology and cloud architecture.

 

I will turn now to our most recent business developments. Please turn to Slide 5. In distribution, during the second quarter of the year, we continued to secure and expand content for our subscribers by renewing or signing content agreement with 5 carriers, reaching a total of 12 in the year-to-date.

 

(inaudible) Amadeus inventory can access over 115 low-cost and hybrid carriers content worldwide.

 

Our merchandising solutions continue to gain traction in the indirect channel. In the first half, 9 airlines signed up for Amadeus Fare Families and 4 contracted Amadeus Ancillary Services. Today, we have 89 of 156 Fare Families and Ancillary Services contracted customers, respectively.

 

At NDC, reflecting our ongoing commitment to drive NDC forward, in July, we launched Amadeus Travel API globally. Amadeus Travel API is an NDC-enabled solution providing travel agencies worldwide access to airline content on fares via NDC connectivity alongside content from traditional technologies such as EDIFACT and other APIs, allowing travel agencies to easily search for offers. We designed this solution with Travix who has got live NDC bookings in production since last year.

 

Travel agencies, including AERTiCKET, American Express, BCD, House of Travel and integrated tourism group, TUI are to become early adopters of this new API.

 

We are proud to be pioneering in this field, collaborating with leading travel players and deploying truly innovative, scalable and user-friendly solutions for all our customers to help them in delivering personalized offers and differentiated travel experiences.

 

And to Airline IT, our customer base continued to expand during the second quarter. Azerbaijan Airlines contracted for the full Altéa suite and for Amadeus Revenue Management solutions. Moldavian low-cost carrier, Flyone, signed for New Skies. Additionally, Bangkok Airways and Flybe have now implemented the Altéa suite and Sun Country migrated to New Skies.

 

Our selling efforts continue to yield positive results where LATAM Airlines Group signed to implement 2 components of the Amadeus Sky Suite by Optym. And Alaska Airlines selected Amadeus as its revenue management partner. In addition, to support its evolving digital transformation, Cathay Pacific is implementing Amadeus Altéa NDC.

 

As you know, Amadeus Altéa NDC is a full offer and order management solution based on end-to-end NDC shopping, booking and servicing flows. It allows airlines to effectively consistently distribute and service new content offers through an NDC connectivity across the direct and indirect channels, enhancing their retailing capabilities.

 

To recap, the Amadeus travel platform is evolving, so it can integrate and consume airline NDC content in a standard way across all Amadeus selling interfaces with a view to increasing airline NDC content reach as well as encouraging its adoption and conversion from travel sellers. Once the connectivity between Altéa NDC and Amadeus travel platform is finalized, Amadeus will be able to automatically roll out this feature to all Altéa NDC customers.

 

We continue to advance in our new business areas. In Airport IT, Greece's leading independent ground handler, Skyserv, implemented Altéa Departure Control System for Ground Handlers for its 37 airports.

 

In July, Heydar Aliyev International Airport in Baku, Azerbaijan became the world's first fully cloud-based airport, thanks to the implementation of ACUS, Amadeus' Airport Common Use Service, and Airport Operational Database.

 

We expanded our footprint in North America with several customers signing up for Amadeus Extended Airline System Environment, including Eagle County Airport in Colorado, Kelowna International Airport in Canada, South Bend International Airport, Indiana; Santa Barbara Airport and Daytona International Airport in Florida. We also completed the acquisition of ICM Airport Technics in June. As you know, ICM headquartered in Sydney, Australia specializes in the provision of passenger automation and self-service bag drop solutions for customers.

 

In payments, we launched Amadeus B2B Wallet Partner Pay in partnership with Elavon and MasterCard. This new solution is an extension of Amadeus B2B Wallet and is integrated into the travel agency booking flow. It allows agencies to pay using an airline-branded virtual card, reducing the cost of payment.

 

Please turn to Page 6 for a review of distribution. In the second quarter of the year, the travel agency air booking industry declined by 1.4%, impacted by a lower number of working days in the period, partly due to the Easter timing effect and the bankruptcy of a large Indian GDS carrier. Excluding India and the working days impact, the travel agency air booking industry grew modestly in the quarter.

 

By region, North America, one of the fastest-growing regions accelerated its growth versus the previous quarter. Western Europe and Asia-Pac were impacted by a number of factors, including [timing of] strikes, macroeconomic developments and geopolitical events and contracted further in the quarter. Middle East and Africa are also facing adverse geopolitical and macroeconomic situations deteriorated in the (inaudible) as well.

 

All of that -- all of this combined with the evolution of the first quarter results in a global industry negative growth of 0.7% in the first half of the year.

 

With regards to our own performance, Amadeus air bookings increased by 0.1 in the second quarter, leading to a 0.9% growth in the first 6 months of the year. Our growth outperformed the industry, supported by market satisfaction across all regions, except for Asia-Pac, where our performance was impacted by the situation in India.

 

As you know, and I mentioned, an Indian full-service carrier canceled its distribution agreement with Amadeus late last year. And another Indian full-service carrier has ceased operation impacted -- impacting our performance in the country, both in terms of industry growth and in terms of our volumes.

 

Excluding India, our global booking volume growth was 3.3% in the first part of the year, and our market share globally, excluding India, expanded by 1.4 percentage points.

 

Turning to IT solutions on Slide 7. In airline IT, our passengers boarded increased by 8.3% in the second quarter, driving first half passengers boarded growth to 6.6%. Our PB growth was driven by customer implementations, including S7 Airlines Maldivian, Cyprus and Aeromar in 2018, as well as Philippines and Flybe in 2019, and an organic growth of 6.6%. Passengers boarded growth in the first 6 months of 2019 was negatively impacted by the demigration of LATAM from our platform during the second quarter of 2018 and the ceasing of or suspension of operations for several airlines customers in 2019 such as Germania, bmi Regional, Avianca Brasil and Avianca Argentina.

 

We continue to make good progress across our newer businesses. Hospitality IT continued to grow steadily, supported by customer implementations and organic growth.

 

In payments, our customer base also continued to expand. We have over 1,100 customers with contracted services from our portfolio. The volume of payment transactions processed by us in the first half of the year delivered a double-digit growth rate.

 

In Airport IT, we have expanded our customer base by 2 new customers in the first half of the year.

 

Ana?

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Ana de Pro Gonzalo, Amadeus IT Group, S.A. - CFO [3]

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Okay. Thank you, Luis. Hello, everyone. I am now going to discuss our evolution, excluding TravelClick nonrecurring acquisition effects, as we state at the beginning of the presentation. As you may know, this includes acquisition-related costs amounting to EUR 3.7 million as well as the purchase price allocation effects, which reduced revenue and EBITDA by EUR 7 million and EUR 5.3 million, respectively. Please look section 3.1 of the first half 2019 management review for all of the details.

 

The group revenue grew by 14.4% in the first 6 months of the year, supported by the positive performances, both in Distribution and IT Solutions as well as the consolidation of TravelClick, and revenue was also positively impacted by the ForEx.

 

Distribution revenue grew by 4.7%, resulting, as Luis has mentioned, from the booking volume growth. Also the expansion of average revenue per booking driven by the positive booking mix impact from higher rate of global bookings as well as customer renegotiations, plus a contribution of other captions, such as payment revenues from our B2B Wallet business.

 

Revenue in IT Solutions increased by 31%, boosted by the TravelClick consolidation. And Airline IT continued performing positively on the back of higher volumes. The average unitary revenue expanded, supported by good performance of several revenue lines, including the increase in services, revenues from services provided to our airline customers, revenue management, passenger recovery, merchandising, which more than offset the dilution effect from the higher weight of low-cost and hybrid carriers in our customer base. New businesses grew strongly in the quarter as a result of underlying double-digit growth rate on the TravelClick consolidation.

 

To review contributions by segment. As you can see, we have experienced contribution growth in absolute terms both in distribution, growing 2.6%; and in IT solutions, with an increase of 18.4%. Foreign exchange effects had a positive impact on our segment contribution and a negative impact on net indirect cost.

 

In Distribution, we have experienced margin dilution, which resulted mainly from a unitary incentive cost expansion, consequent of the competitive pressure and the strong growth delivered by payment distribution, a lower-margin business.

 

In IT Solutions, margin dilution was impacted by the TravelClick consolidation and the strong new business unit expansion, faster than that of Airline IT. As we have discussed before, new business unit has a lower margin and so those services for airlines, which also grew nicely during the period, and a lower ratio of capitalization during the 6-month period due to the project mix.

 

Finally, net indirect costs increased by 7.7%, driven by the increased resources in our corporate support functions to support the business expansion, the addition of TravelClick's indirect cost and the negative foreign exchange effects that I have just mentioned.

 

To share some color on our fixed cost, personnel and other expenses together increased by 14.1%, highly impacted by the consolidation of TravelClick. Our workforce increased by 12% or 5% when excluding TravelClick. As you know, a large part of this is R&D as we've continued to invest significantly on our programs.

 

Our EBITDA in the first 6 months of 2019 grew 10.7%, up to EUR 1.193 billion, driven by the positive performances, both of Distribution and IT Solutions, including the TravelClick consolidation, partially offset by an increase in net indirect cost. EBITDA margin was 1.4 percentage points lower than the same period of previous year, impacted by the consolidation of TravelClick, which is a lower-margin business and a lower capitalization ratio which depends on the project mix.

 

Below the EBITDA line, depreciation and amortization increased by 12.9%, driven by a 13.5% increase in ordinary D&A, resulting from previous last year capitalized R&D costs, which has started to be amortized during the period and also the TravelClick consolidation. In the first half of the year, our net financial expense increased to EUR 45.9 million, mainly due to TravelClick acquisition, impacting both non-operating exchange losses and interest expense. Non-operating exchange losses amounted to EUR 21.7 million versus a EUR 2.3 million gain in 2018. And mostly responded to hedging results in relation to the U.S. dollar-denominated intercompany loan linked to TravelClick acquisition.

 

Interest expense increased by 16.2%, up to EUR 20.8 million as a consequence of the higher amount of average gross debt outstanding driven, of course, by the TravelClick acquisition and to a lesser extent a higher average cost of debt.

 

In the first half, our income taxes increased by 8.2%. The income tax rate for the first half of 2019 was 25.9%, broadly in line with the 26% reported in the first half of 2018 and higher than the 25.2% reported in full year 2018. The increase in income tax rate versus the full year 2018 was mainly driven by changes in tax regulations across different countries. The combination of growth in operating results plus the growth in financial expenses and taxes resulted in a 9.9% increase in adjusted profit for the period. Adjusted earnings per share for the period was EUR 1.55, 9.5% higher than in 2018.

 

We turn now to Page 12. In the first quarter of -- in the first half of 2019, our investment in R&D increased by 18% to EUR 473.6 million, impacted by TravelClick's consolidation effects. R&D investment represented 16.8% of revenues. Our R&D spend, as you know, is centered in 3 main categories. The largest is for evolution and portfolio expansion, which includes new businesses and represents more or less 50% of our R&D investment. During the first half of 2019, we continued investing in NDC, digital merchandising and personalization solutions on our hospitality platform amongst others and expanding the resources devoted to our new businesses.

 

The second category is customer implementations, which account for approximately 30% of our total R&D investment. And the third one is internal technological project, which amount to almost 20% of the total investment and focuses on system performance optimization and the continued enhancement of our overall infrastructure and processes as well as cloud-based architecture and the application of new technologies.

 

CapEx, as you know, is linked to R&D investment, more typically 70% to 75% is capitalized R&D. Our R&D is capitalized when there is a significant visibility as to future value generation. And other than capitalized R&D, 10% to 15% of CapEx generally relative to tangible assets, mainly in relation to our data center in Erding. And finally, we also invest in contractual relationships and payments to travel agencies in the form of signing bonuses which may be capitalized whenever there is feasibility to its recovery.

 

CapEx increased by 8% in the first half of 2019, up to almost EUR 370 million, which represents 13.1% of our revenues. The growth in CapEx was driven by the increase in capitalized R&D investments, the TravelClick consolidation effect and, to a lesser extent, higher signing bonuses paid, which are lumpy by nature. In turn, CapEx in property, plant and equipment declined in the period relatively to last year.

 

In the first half of 2019, we generated free cash flow of EUR 452 million, 2% lower than 2018, impacted by the increase in taxes paid in the first quarter of 2019. The pretax free cash flow grew by 9.4% as a result of EBITDA growth, partially offset by higher CapEx, working capital outflow and interest. In the second quarter of 2019, our group free cash flow increased by 8.3%, when we exclude the nonrecurring TravelClick acquisition cost.

 

The working capital outflow increased by EUR 35.6 (sic) [EUR 35.9 million] or 20.4% in the first half of the year versus the previous year. And this increase was mainly related to the timing differences in some payments and collections, partially related to the VAT reimbursements and advanced payments related to customer renegotiations.

 

Net debt amounted to EUR 2.965 billion at the end of June with leverage amounting to 1.37x net debt to EBITDA.

 

With this, I finish the presentation for our first half results, and we are now ready to take any questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Adam Wood from Morgan Stanley.

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Adam Dennis Wood, Morgan Stanley, Research Division - European Technology Equity Analyst [2]

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I've got 2, please. Maybe just first of all, on the distribution side of the business. There's a lot of moving parts here in terms of headwinds that you've got in the first half of the year, and Luis, you recently mentioned some of them. Could you maybe just help us understand a little bit how those roll off as we go through the second half of the year and into 2019? And some of the airline results have been weaker recently, how nervous you are around the broad retrofit growth as we look into the next kind of 6 to 9 months? And kind of link that back to your optimism that you can still be in the guidance range that you gave at the beginning of the year and how much FX is helping you to get there. That would be the question on the distribution side. And then just secondly, there's been an increasing discussion from one of the competitors around the ability to take some market share on the distribution side, particularly around Navitaire renewals. Could you maybe just talk a little bit about concerns there, the renewal pipeline? And maybe what you've seen on pricing on customers that have already been renewing over the last sort of 12 to 18 months?

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Luis Maroto Camino, Amadeus IT Group, S.A. - President, CEO & Executive Director [3]

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Okay. So let me start, but Ana, please feel free to join with additional comments if I don't cover everything. On the distribution front, I mean, there are many moving parts. As you know or you have seen via traffic, overall traffic has been a bit weaker, but it's still growing. I mean it's not exactly the same in that region, but IATA is talking about that. So part of that is what is impacting, of course, the distribution business too. Because at the end, of course, we see the traffic.

 

The India situation, I mean, started mainly in -- at the end of last year, okay? We started to see this impact but it has got an impact during the first half. So in principle, should continue in the second half. What is also true is that the comparison versus the second half of last year is better than the first half. The first half was pretty strong, both in traffic and in the growth of the GDS industry. So the comparison versus last year should be better. However, part of this impacts of the overall traffic growth and the India situation will continue in the second half, not of course the impact of Eastern. And I think that's it in terms of traffic and volume. Okay? I mean the India case will continue. Let's see how things evolve there. I mean at one point, I believe that the overall traffic in India will recover. I mean there has been some turmoil due to the changes that are happening there with the airlines. But this is a country that has been delivering double growth -- double-digit growth both in traffic and on the GDS. And the current situation, of course, is quite negative for the GDS industry. So at one point, I believe that this should start seeing an improvement. I think as I mentioned, we started to see that in December of last year, okay? This is about distribution. Ana, do you have any other comment?

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Ana de Pro Gonzalo, Amadeus IT Group, S.A. - CFO [4]

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In terms of ForEx you were asking, as we have mentioned several times, we expect the ForEx impact on year 2019 to be broadly neutral. But it's true that it has a positive impact on the first half, and we expect it not to be positive in the second half because of the average of the trend. But in all honesty, it's also quite difficult to foresee today the evolution of the different currencies because we have not only the dollar exposure we have in revenues, just dollars. But as you know, in our cost base, there's many other multiple currencies. Some of them related to the dollar, some of them are not correlated to the dollar. So we will see the overall impact of the ForEx at year-end. But it is true that we do not expect the second half of the year to be a tailwind, it would be more neutral.

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Adam Dennis Wood, Morgan Stanley, Research Division - European Technology Equity Analyst [5]

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Ana, [if I can just ask] on that one then, would you expect the GDS to be able to be in that low to mid single digit growth in the second half? And given you don't have the FX tailwind of H1, maybe I should have asked the question a different way.

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Ana de Pro Gonzalo, Amadeus IT Group, S.A. - CFO [6]

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Yes. I think the answer is yes, because as Luis was mentioning also, we have the Western Europe market share recovery, plus a recovery in the rest of the world. I think it's worth to mention that despite the Asia-Pac situation there in the country, in India, in the second quarter of the year, we've been winning market share even if you -- if -- only if you exclude the Indian market. So we've been winning market share all over the place and the base of comparison is also less tough in the second part of the year because we were already seeing a deceleration of the GDS industry. So I think that with the market share gains and the fact that the second half of 2018 was not as strong as the first half, I think that we should be perfectly well in the line of all of the outlook we gave you at the beginning of the year.

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Luis Maroto Camino, Amadeus IT Group, S.A. - President, CEO & Executive Director [7]

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With regards, Adam, to the second question. I mean of course there is competition, definitely. More than that is difficult to really be concrete. I mean overall, we have a very, very, very good renewal rate. Due to the amount of contracts that we have, there are always renewals going on. I mean some of them are bigger than others. For the time being, things are evolving very positively. But I mean of course our competitors will try to really get customers from us. You mentioned Navitaire. But for the time being, we are able to convince the customers to stay with us and discuss [it all] pretty well. Of course, I mean I cannot assure you that we will never ever lose a customer in Navitaire because it will depend on the specific customer situation and conditions. But for the time being, we have not seen any specific issue and specific pricing pressure that is becoming a concern, okay? So overall, the renewal rates are very positive, very good. And depending on the customers, of course you have some customers where you have an increase in pricing, some customers that you may have a decrease or not. I mean it depends on the overall scope of the services they are taking and the overall negotiation with the customer. So nothing really concerning to mention on this front.

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Ana de Pro Gonzalo, Amadeus IT Group, S.A. - CFO [8]

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I would say that it's a risk for the last 30 years?

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Luis Maroto Camino, Amadeus IT Group, S.A. - President, CEO & Executive Director [9]

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Well, I mean it's not a risk, at least India. But well, so far, I mean, things are evolving very well.

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Operator [10]

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The next question comes from Stacy Pollard from JP Morgan.

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Stacy Elizabeth Pollard, JP Morgan Chase & Co, Research Division - Head of Software and IT Equity Research [11]

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Two questions from me, please. First of all, you gave a lot of detail on acquisition costs and PP&A, can you also tell us what was the IT Solutions growth underlying? So excluding TravelClick? And then also, how is the growth in TravelClick? And the second question, any update on another hotel IT deal? Obviously, you're not going to say who and when, which is fair enough. But maybe can you discuss the interest level, the pipeline? And is it mostly in CRS only? Or do hotels really want that CRS, PMS combo? What's your sense?

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Luis Maroto Camino, Amadeus IT Group, S.A. - President, CEO & Executive Director [12]

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Let me start with the second one, talking about hotels. I mean look, we -- I mean the reason it's performing and evolving very well, even excluding TravelClick, I mean we are growing double-digit. So overall today, we have a big portfolio of solutions. So we talk about (inaudible) doing very well with a lot of interest. So the portfolio of solutions is bigger. We feel there is interest for both the CRS and the PMS. In the case of the CRS, of course, we have the TravelClick acquisition, and therefore there is a CRS that we may use for the lower end of the market. We continue talking to different chains about the possibility of doing the CRS for the high end. On the PMS that we continue integrating and developing and completing the solution, of course our objective is to sell for both CRSs that we have today and integrate with them. So the interest definitely is there. We always say that the hospitality industry in (inaudible) has a big potential. But again, as you mentioned at the beginning, it's extremely difficult to really talk about concrete matters first because they need to become a reality and there is always a risk. And second, because of course it's impossible to really talk about the negotiations of what we are debating. But overall, our goal is to continue growing this business as it is growing for the whole portfolio. And hopefully, at one point, we will have the opportunity to sign both CRS and PMS. I think the combination, the integration, the fact that we offer a complete solution, I mean makes a lot of sense. And in the conversations, very, very often, we talk about the combination but sometimes, of course, there are some customers interested in just taking pieces because they have other providers giving them the solution.

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Ana de Pro Gonzalo, Amadeus IT Group, S.A. - CFO [13]

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And in terms of IT, without disclosing the number, let me try to see if I can provide an overall view of the different pieces that are included there. So Airline IT is doing quite nicely. As you can see, revenues have been increasing, boosted by the passenger boarded growth, both organically and as a consequence of the migrations that have taken place in 2018 and also in 2019. There is an increase on contribution also from different captions. So services is growing very nicely there as well. The upselling of our different portfolio of solutions, the revenue management, merchandising, et cetera. And all of that has contributed very nicely to the growth of Airline IT with different pieces having different margins, et cetera. But overall, the margin on Airline IT has remained more broadly stable and growth has been in the guidance that we normally provide to you.

 

When we look at the new at hospitality, hospitality has been increasing double digit, of course, boosted by the acquisition of TravelClick. But even if you are to exclude the acquisition of TravelClick, Hospitality, the new businesses have been growing double digit. And the margin dilution there comes -- [under] overall IT solutions, the margin dilution comes from the fact that TravelClick is a lower-margin business activity, which I think we already explained that at the time of the acquisition last year. And also because the new businesses is still on a non-mature phase. Therefore, they have not benefited of years of operational leverage, and they are also having lower margins compared to that of Airline IT, and they're growing faster. So the combination of that -- the growth in Airline IT of services, which also have a lower margin, is what explains the overall dilution on the IT solutions margin. So I think we are quite pleased with the evolution of this. And I think that, as Luis has already mentioned, it's the first time where the contribution coming from the IT solutions part is larger than the contribution coming from solutions. So it's already above the 50%. I think if I remember properly, it's 15.4% of our contribution is coming from IT solutions, which comes to prove that the diversification strategy followed by the company, it's paying the results.

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Operator [14]

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The next question comes from Julian Serafini from Jefferies.

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Julian Alexander Serafini, Jefferies LLC, Research Division - Equity Analyst [15]

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So 2 questions from me. The first on the Airline IT business. So when you look forward at your current implementation pipeline for airlines that you will be implementing, can you share some information on what the attach rate of the module is beyond the core platform? How that's trending for those airlines versus today your install base? And then the second question, just on the distribution business, too. You mentioned an increase in incentive fees being paid to travel agents. Can you I guess share also what you're seeing in terms of competitive pressure on a going-forward basis? Do you think it gets worse? Do you think it abates or it stays the same? I'd just like to hear your outlook on that incentive pressure going forward.

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Luis Maroto Camino, Amadeus IT Group, S.A. - President, CEO & Executive Director [16]

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Okay. So I start on the second one, you cover the first one. I mean look, the pressure has been for the last 30 years. So it's difficult to really have an absolute answer. I mean our competitors, of course, try to get customers as we do, so there is not really nothing new. I mean look, yes, in some parts of the world, we see more competition than others. It changes a little bit. It depends on the strategy of our competitors. But as you can imagine, it's quite -- it's difficult or -- I mean I should not disclose how we see that in our markets. But overall, competition is a reality. It is where we continue because, of course, you compete. And as part of the competition dynamics, depending also of how the situation with airlines evolves, what are the deals we have with airlines. Of course, all these has an impact in the way incentives and competition is managed. But really, nothing different from what has happened in -- during many, many years.

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Ana de Pro Gonzalo, Amadeus IT Group, S.A. - CFO [17]

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And just in terms of -- I think you mentioned the payments, which I mentioned as well, that's about the B2B Wallet. It's the part of the business that we have from the distribution, which is the services, the technology we provide to Travel agencies so that they can pay the airlines or the travel providers using the different methods that we put at their disposal. So digital credit cards, debit cards, prepaid cards, et cetera. And that business is growing quite nicely and it has lower margins. So it has also contributed to the deterioration of the margin. So not all of the deterioration of the margin on the distribution side of the business comes from the incentive pressure that Luis has mentioned, but a significant part of it comes from this business that has -- is growing nicely and has a lower margin.

 

And in terms of the implementation, normally when we get new customers, we try to upsell the existing portfolio. So normally the customers that we are to implement take a larger scope of our solutions, while the customers that were implemented years ago, we need to upsell gradually as we go. So I think that the take-up of all of the new solutions is ramping up nicely. But still, of course, we don't have, not at all, all of the customers using both our solutions, New Skies or Altéa having been sold the total portfolio. So we have a lot of take-up to do, still to do on the [rent] merchandising or revenue management or the different solutions, which is what you see that is providing on a quarterly basis incremental unitary fee as the (inaudible) sales they expect on the new customers to be implemented, normally the range of portfolio rate take is broader.

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Operator [18]

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The next question comes from David Togut from Evercore ISI.

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David Mark Togut, Evercore ISI Institutional Equities, Research Division - Senior MD [19]

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Three questions, please. First, on the acceleration in air bookings in North America. To what extent was that driven by the OTA market versus TMCs? And on the TMC side, was any of that growth driven by the conversion of the Carlson Wagonlit contract? Second, if you have an updated time line for the introduction of attribute-based inventory in the hotel IT business, that would be helpful. And then finally, has the acquisition of Travelport had any impact on their level of investment in the U.S. or global GDS business? And has their acquisition influenced your market share position at all?

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Luis Maroto Camino, Amadeus IT Group, S.A. - President, CEO & Executive Director [20]

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Okay. Let me start again, starting with the last one. In the case of Travelport, I mean look, it's early to say. There has been an announcement that there will be a new CEO in the company. So it's early to know how the new owners and the new management may see the market. But our assumption, of course, is that they will compete in -- they will continue competing with us. But still in terms of strategy direction, we will need to see. I mean for the time being, of course, they continue doing what they were doing, which is competing in the market and trying to get customers.

 

In the case of the second question, the attribute-based. Well, this is an ongoing effort. So we are delivering continuously. Part of that, improving the current evolution of the version of our platform. So it's already happening as we speak, because we are working very closely with IAG, and we are delivering releases. So some of them are already available, some of them will come as we speak, but this is a reality that is already in the market, okay? And the first question...

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Ana de Pro Gonzalo, Amadeus IT Group, S.A. - CFO [21]

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In terms of North America growth, it's mostly related to online travel agencies where it's the segment -- it's the customer segment where we have the largest market share. We don't have a strong presence on the corporate travel management agencies in North America. So to your question, the largest comes from online. And Carlson Wagonlit is not precisely included there because it's a deal that is much more for the rest of the world. So it's basically the growth of the online segment.

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Operator [22]

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The next question comes from John King from Bank of America.

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John Peter King, BofA Merrill Lynch, Research Division - Research Analyst [23]

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Two, really. On the technology front, Sabre has been talking about migrating substantively a lot of their platforms to the public cloud over the next few years. I'm just wondering about your views on that and maybe an update on your plans for moving to the public cloud for the core TDS and PSS platforms? That's the first question. And the second one was a clarification. I may have got this wrong, but it seems like the growth in Asia Pacific distribution, even excluding India, looks a little bit weak to me, and maybe you could either correct me or let us know what's going on there.

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Luis Maroto Camino, Amadeus IT Group, S.A. - President, CEO & Executive Director [24]

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Okay. No, excluding India, we have an increase of market share in Asia-Pac. The only issue in India is that we have 2 effects. We have the decrease of the GDS due to the fact of the bankruptcy of one of the big full-service carriers, and then the fact that we lost also content from another one. So we lost share. So the industry was negative and our share was negative in India. If you exclude these 2 effects, our market share has been increasing overall, close to 1 percentage point. That's the reality, okay?

 

With regards to the cloud, we are already working for an important piece of our technology, which is shopping. So the shopping piece has already -- part of our shopping transactions are happening with the third-party cloud providers, and we will use intelligently our own private cloud and third-party providers. So this is already a reality. And of course, we will need to see how things evolve in the future. But in terms of the right balance for us today, so use our own data centers for pieces of our technology and part of that in a public cloud.

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Operator [25]

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(Operator Instructions) The next question comes from Alex Tout from Deutsche Bank.

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Alexander William Tout, Deutsche Bank AG, Research Division - Research Analyst [26]

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Yes. Three quick ones. So CapEx looks like it was tracking towards the low end of your guidance this year. Do you expect to be towards the low end at this point? Secondly, I saw that working capital was a large outflow in the half. Could you just talk about that a little bit? And whether you expect to be -- whether working capital will be an outflow overall in FY '19? And finally, just a bigger-picture question. To the extent that you have a read on business versus leisure travel on the distribution side, can you talk about the trends you might be seeing there right now?

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Ana de Pro Gonzalo, Amadeus IT Group, S.A. - CFO [27]

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Okay. Let me see if I can go through all of them. In CapEx, it's true that we are more on the low end part of the range, which I think I mentioned during the presentation. This year we had a lower capitalization ratio, which depends basically on the mix of projects, depending on where we are allocating our resources. So if we have projects which are more OpEx, well then we don't capitalize. If we have projects which are more, then we have a higher capitalization. And also another thing that impacts is the cloud use, depending if you are using your own data center and you need to deploy more servers. Normally, you have more property plant and equipment because you have to invest in the CapEx. If you use more outside providers, it's more OpEx as you pay the -- as per the use of the consumption of the external cloud provider. So the combination of all of those factors impact the average. And that's why normally, on the CapEx, we give you a range. So I would expect that this year, 2019, probably we will be more towards -- more skewed towards the lower part of the range rather than the higher part of the range. But you also need to bear in mind that the first half of the year tend to be in absolute terms, the largest and CapEx is more or less more constant throughout the year. So normally in the last quarter of the year, we have a higher CapEx on [revenues]. The fact that the last quarter of the year tends to be the one using absolute numbers, lower percentage of -- lower amount of revenues.

 

In terms of working capital, the outflows are basically related to the system. You have new 2 main drivers. One, which is the recognition of the deferred revenues, which comes from the -- basically the largest caption there is implementation fees that we collect from our customers during the time of implementation and we recognize the revenue as we put them into its flotation. So we have an amount of millions of euros in our balance sheet of revenues deferred in previous year, which the cash was collected in previous year that now we need to recognize. So that's one outflow of working capital, which is an accounting, if you want, reason. And then the second one normally is the seasonality of payments and collections, largely also impacted by VAT recoverability. And I -- to your concrete question, yes, I do believe that in 2019 full year, there will be an outflow of working capital.

 

And then...

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Luis Maroto Camino, Amadeus IT Group, S.A. - President, CEO & Executive Director [28]

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Yes, I can talk a bit more -- a little bit about the third. I mean we haven't seen a big difference between business travel and leisure travel overall. However, you need to consider the fact that usually this intermediation of the movement of bookings happens much more on the leisure piece. But due to the fact we have been increasing our share, a key part of that has been offset. But overall, I mean we observed more differences per country in the terms of the growth and the evolution of the market. And really, in terms of leisure versus business in our case.

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Operator [29]

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The next question comes from Neil Steer from Redburn.

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Neil Steer, Redburn (Europe) Limited, Research Division - Partner of Software and IT Services Research [30]

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Just got 2 very quick ones. Ana, can you remind us of when you start to process and recognize revenues for Air Canada? And sort of the subtext of that question is, I seem to remember that at the time of the release, they are taking a very comprehensive suite of Altéa functionality. From the get-go, do you recognize the full breadth of functionalities? Or is there a gradual build-up there?

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Ana de Pro Gonzalo, Amadeus IT Group, S.A. - CFO [31]

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We recognize revenues as we implement them, which is more or less in early 2020. And yes, as I was saying before, the newer customers tend to take a large part of our solutions. I can't remember right now by heart if they're kind of like taking all of it or if there are still some products which can be upsell. Most likely, there will be still solutions that we can upsell along the time. But they are taking quite a larger part of our portfolio, yes.

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Neil Steer, Redburn (Europe) Limited, Research Division - Partner of Software and IT Services Research [32]

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Okay. And then just following on from the previous question. Your preferred mix of working capital outflow this year, that seems like the first year in many, many years working capital outflow. Is that how we should think of the business going forward in terms of funding the growth? Or is that just a once-off dynamic in the working capital trend this year?

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Ana de Pro Gonzalo, Amadeus IT Group, S.A. - CFO [33]

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You have different impacts. The thing is that at the level of free cash flow, a small amount in absolute terms of millions of euros put it upside down in the percentage-wise. But the -- for sure, the revenue recognition will have a negative impact. And then the total amount will depend on the collection of -- collection and payment that we do. You also need to bear on mind what we tend to use intelligently our balance sheet because we have a strong balance sheet. And if we can sometimes become if you want a little bit of a [financier] of some travel agencies by advancing part of the payments, we also do that. So depending on some regions and some circumstances, we may use our balance sheet to favor our customers. And therefore, that's abuses on outflow and the working capital. So that's normally the case that impacts work other than the recoverability of taxes, which normally has been also quite lumpy this year. (inaudible) in terms both of the payments in the tax and in the VAT which goes on the working capital.

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Operator [34]

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The next question comes from Michael Briest from UBS.

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Michael Briest, UBS Investment Bank, Research Division - MD of Global Technology Research Group & Head of the European Technology Research [35]

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A couple from me as well. Just in terms of the guidance for the year. I think initially there was a low-end scenario. I'm just not quite clear, are you taking that off of the table today, the low-end scenario around India? Or is that still a possibility in the full year? And then secondly, Ana, just coming back to the working capital. I think you talked about customer contract renegotiations is driving an outflow. Is that related to the travel agencies, as you said, or something to do with the airlines? Can you maybe clarify that?

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Ana de Pro Gonzalo, Amadeus IT Group, S.A. - CFO [36]

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Okay. In terms of guidance, India and the scenario is the end of the table. I think that Luis has mentioned quite clearly how the India market is a negative ground for the -- both in traffic and GDS industry. And also we have lost market share because not having the content of one full-service carrier. So no, we are where we said we were going to be. What we have reiterated is that the overall guidance of the company which is, if I may remind you, it's a double-digit growth in revenue, and high to low double-digit growth in the EBITDA. We would be there. And we are quite confident that we can sustain that outlook that we gave at the beginning of the year.

 

And in terms of working capital, we don't talk about any specific customer negotiations. So I'm not going to clarify to whom we may or not advance payments, but it's true that we have always been using the strength of our balance sheet in order to do -- doing negotiations, deals, the best for us and, of course, also to support our customers.

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Michael Briest, UBS Investment Bank, Research Division - MD of Global Technology Research Group & Head of the European Technology Research [37]

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Okay. Is that unusual then because I don't think I've seen that in previous releases?

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Ana de Pro Gonzalo, Amadeus IT Group, S.A. - CFO [38]

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No. We have been doing that a lot. But now the fact that you have combined the difference of the recognition of the deferred revenue because we have less customer implementations, there has been years where we have had many Airline IT customers implementations and therefore we were collecting these implementation fees and there were not the revenues. So you have the opposite impact that offset or maybe didn't allow you to see as much the customer negotiations. Now because this is coming on the negative front, the [other point] fees becomes more visible. And also the VAT in there, we have had years. Especially I think we mentioned that a couple of years ago, and it's related to some countries where we are having VAT claims within the European Union and we need to advance the payment and we are claiming them back, but we are putting them only upfront. So those are main -- the 3 main captions that's impacting the working capital.

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Operator [39]

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Thank you. Ladies and gentlemen, there are no further questions in the conference call. I now give back the floor to Mr. Luis Maroto for final remarks.

 

Thank you.

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Luis Maroto Camino, Amadeus IT Group, S.A. - President, CEO & Executive Director [40]

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So thanks, again, for joining the call and for your interest in following us on our performance, and I wish you a nice summer for the ones who are taking now their holidays. And we will talk for the third quarter results.

 

Thank you.