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Edited Transcript of WEB.AX earnings conference call or presentation 21-Aug-19 11:30pm GMT

Full Year 2019 Webjet Ltd Earnings Call

Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Webjet Ltd earnings conference call or presentation Wednesday, August 21, 2019 at 11:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Guscic

Webjet Limited - MD & Executive Director

* Tony Ristevski

Webjet Limited - CFO

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Conference Call Participants

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* John O'Shea

Ord Minnett Limited, Research Division - Senior Research Analyst

* Quinn McComas Pierson

Crédit Suisse AG, Research Division - Co-head of the Small Cap Research

* Tim Plumbe

UBS Investment Bank, Research Division - Director and Research Analyst

* Timothy Piper

RBC Capital Markets, LLC, Research Division - Analyst

* Wei-Weng Chen

JP Morgan Chase & Co, Research Division - Research Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Webjet Limited FY '19 Results Briefing Conference Call. (Operator Instructions).

I would now like to hand the conference over to Mr. John Guscic, Managing Director. Please go ahead.

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John Guscic, Webjet Limited - MD & Executive Director [2]

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Thank you, operator. Good morning, everyone. My name is John Guscic, and with me today is Tony Ristevski, our Chief Financial Officer. We are delighted to present you with the FY '19 results, which deliver another record performance for our business.

Let's move to Slide 2. FY '19 was an exceptional year of profitable growth for Webjet and is a testament to the team's ability to execute on our strategy and their passion for success. In the year where there are a number of unique macro events that have the potential to derail us from achieving our objectives, such as the uncertainty around Brexit, a record hot 2018 European summer, a difficult trading environment in the Middle East or the tough domestic market in Australia leading into the election, we have delivered a record performance across all of our key metrics. We have had margin expansion, that is revenue to TTV margin, in every business unit, that's all of our 3 geographic regions of our B2B businesses and our 2 B2C businesses, which is unprecedented.

Unlike the Webjet of 6 years ago that was highly focused on the AU domestic market, the expansion of our business into the B2B world globally means that we're not reliant on any 1 customer, market or supplier segment. This has helped us successfully navigate the challenges of the year. We have built a global wholesale business. This global wholesale business is scaling beautifully and is the key contributor to our EBITDA outperformance for FY '19. It was a phenomenal year, where our continued focus on convenience and choice for our customers and consumers, and investing ahead of the curve in the B2B division, has allowed us to deliver a result that sees profitable global growth across both our B2B and B2C divisions.

As to the Olympic rings that you can see in front of you, it was a Herculean record effort that delivered the following record results. TTV up 27% to $3.8 billion; revenue up 26% to $366 million; EBITDA up to $124.6 million, up 43%; NPAT before AA $81.3 million, up 46%; and our adjusted cash conversion is at 98%.

We have delivered a significant improvement in our profit delivery this year and most importantly, we have the potential to significantly improve our profits in the years ahead.

Let's go into little bit more detail on Slide 3. WebBeds is now the largest and fastest-growing business. In 6 years since start-up, where initially we delivered in February of 2013, $13,000 of sales, we've grown this business to deliver $2.2 billion of TTV and $67.3 million of EBITDA. We are the clear #2 global B2B player. We are the fastest-growing B2B player. And the vast majority of our growth is through organic EBITDA, which is up 30%.

We are focused on delivering profitable growth, where our TTV margins are up to 8.6%, and if we exclude Thomas Cook, 9.4%. EBITDA margins improved significantly during the year up to 36.4%.

During the year to continue the buildout of our global B2B business, we made the -- we've successfully acquired Destinations of the World and more importantly, we've successfully integrated DOTW into our geographic regional structure. Cost synergies have been delivered ahead of plan and revenue synergies are tracking to plan. This is the second significant acquisition

(technical difficulty)

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Operator [3]

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Pardon me, we have a temporary lost connection with the speaker. Please continue to hold and we will recommence shortly.

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John Guscic, Webjet Limited - MD & Executive Director [4]

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We are, the operator is...

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Operator [5]

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Pardon me, I do have the speaker back in the conference. We will now recommence. Please go ahead, Mr. Guscic.

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John Guscic, Webjet Limited - MD & Executive Director [6]

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Thank you again, operator.

I think it was Sir Laurence Olivier who said you don't want to work with animals, children and dodgy telephone lines. My apologies. We seem to have been disconnected. I believe it was just as I was talking about DOTW. For those who have patiently been waiting, we are on Page 3, 2nd major point. So during the year, we acquired DOTW and most importantly, we've been successful in the integration of DOTW into our business. The definition of that success is that the cost synergies that we had identified in our due diligence phase we've been able to achieve ahead of plan. The revenue synergies are tracking to plan. The framework of now having gone through 2 significant acquisitions over the course of the last 2 years has enabled us to identify a process to extract acquisitions from businesses that contribute to our improved scale, and we believe that framework will enable us to make future acquisitions to successfully bolster the B2B business and continue to drive our scaled and improved EBITDA growth, contributing to our objective of getting to a 50% EBITDA margin, which we'll talk about in some detail in a few minutes.

On the home front, the Webjet OTA delivered improved margin in what was undoubtedly the toughest domestic market in the last 10 years. In particular, in the second half of FY '19, we've been able to deliver profitable growth and improve our margin over that period. We have continued to gain share and we now account for more than 50% of the OTA flights market, more than 5% of the domestic flight market and 4% of the international flight market. All in all, the summary is that we achieved a record $124.6 million EBITDA, notwithstanding that during the year, we've continued to invest in our business, in particular the organic start-up of Umrah Holidays International, primarily through a partnership arrangement and the investment that we have made across multiple geographies to enable that to happen. And we'll talk about that in a second. And there was an unfortunate impact of the Christchurch incident on our Online Republic business and I'll cover that off as well.

Moving on to Slide 4. WebBeds is now the largest business by EBITDA, and as you can see, the progression of that business has been significant to contribute to our EBITDA more than doubling over the course of the last 2 years

Moving on to Slide 5, and in many ways, this is the best slide in the pack. It talks about and highlights the great work that the business has done to increase our EBITDA margins and deliver a much more globally diverse, sustainable and defendable business as that B2B contribution of improved margins has flowed through to overall improvement of the margins of the entire group.

Moving on to Slide 6. We will start to talk about B2B hotels and the divisional provisioning of hotel rooms. Clearly, a standout result with bookings increasing by 51%; TTV, 59%; revenue up 62% and EBITDA up 148%. The reason that we've been able to deliver the results that -- in particular, the bottom line result for our B2B business, is a consequence of having more direct contracts and selling a higher percentage of our direct contracts, which are a higher-margin product which drove the TTV revenue margins and subsequently improved EBITDA margin. The second contributing factor to our significant EBITDA outperformance is that our growth of costs as a percentage of TTV continues to decline against our overall cost base. DOTW cost synergies are tracking ahead of plan. We have our blockchain solution, Rezchain, continuing to help reduce costs. And as our business scales, we continue to see that for every dollar of TTV, we're not adding the same amount of costs as we have historically. On a constant currency basis, we delivered $65.1 million. Our result is also after expensing the $1.4 million in the launch of Umrah International Holidays. And as we saw in the first half versus second half, our organic EBITDA grew from 24% in the first half to 34%, assisted by the synergies we've spoken about through the acquisition of the DOTW business.

Now the last point on the slide is one that I will talk about in each of the geographic areas because it goes to the veracity of our belief that we can deliver superior EBITDA margins as a consequence of building out a global B2B business. So efficiencies are already coming through in our business, where for every incremental $100 million (sic) [$100] of TTV, we deliver $5 of EBITDA. So to put that into context for the entire B2B business, we delivered an incremental $800 million of TTV and on the back of that incremental $800 million of TTV, we delivered incrementally $40 million of EBITDA, a 5% return. And we'll talk about that across all of our geographies to show the progress that we've made by geography to deliver these numbers. And again, we'll talk about it as well when we get to the 8/4/4 scenario and the implications for our business over the next few years.

If we then move to Slide 8, we're talking about our European B2B business. So throughout the year, I would have had numerous people call me, numerous investors call me to discuss the difficulties of the European market such as the hot summer of 2018, the uncertainty surrounding Brexit, the chance that Germany is going to fall into recession and as most of you on the call will know, Germany is the largest European travel market. So how did we go in light of those headwinds? Well, our U.K. business is up 72% and our German business is up 78%, and it goes to the earlier commentary I made about not be reliant on one customer and one supplier, but it also goes to the driver of our business is our ability to outperform the market by winning share. And we've spoken about that continuously over the years, about the virtuous circle of getting better inventory, more direct contracts, making them more relevant to our customers. Our customers see that we have great inventory, purchase from us, gives us supplier power to go back and negotiate better deals next summer. That has contributed to the 100% EBITDA outperformance of our European business. It's the directly contracted inventory that is the key to our business. And in Europe in particular, we were the beneficiary of our European directly contracted inventory as well as the contracts that we novated across from Thomas Cook. And that drove the increased margin for our business. What has also happened over the last few years as we have bolstered our direct contracting efforts is that we are no longer a sun-and-beach destination. We actually have significant inventory in the key major European cities, to the extent that more than 70% of our sales are directly -- are direct contracts from the key cities of Amsterdam, Barcelona, Berlin, London, Milan, Paris, Rome and Venice. During the year -- we will always see this and there will be substitution effects that occur across the market. Where people used to go to Western Mediterranean, they shift to the Eastern Mediterranean, and that particularly happened this year. So we saw some of our destinations of Turkey, Egypt and Tunisia all see TTV growth of 100%.

So overall, we've seen a scaled, solid, growing business that's able to deliver, notwithstanding the difficult trading environment that the European market has experienced.

On an operational side, we've successfully retired one of the IT platforms that we acquired through the Jac acquisition and have been able to migrate those 4,500 contracts to our other systems. This again contributes to the slowing of our cost growth as our business scales. And as I've called out earlier, our efficiencies are coming through, and in the European market, we had $350 million of incremental TTV driving an $18 million incremental improvement in EBITDA, which is a 5% EBITDA rate on every incremental dollar of TTV that we sold during the year.

Now we move on to Slide 9, Thomas Cook. So Thomas Cook, we had bookings up 50%, TTV up 70%. Both of those numbers are below our expectations and were below what we thought we were going to deliver at the start of financial year '19. There are always 2 elements to think about in relation to our agreement with Thomas Cook. The first is what Thomas Cook was able to deliver us as we acquired the 3,000 direct contracts. And they have delivered in full, and it's a significant contributor to our outperformance, in particular for our European B2B business. Those 3,000 contracts that were from Thomas Cook that are now our WebBeds contracts have been sold at full margin to a broad range of customers across our European markets. We have successfully connected with all the Thomas Cook platforms and all the geographies are connected.

As of the 1st of June 2019, we now earn revenue on sales made to Thomas Cook. As we have called out previously, this TTV revenue margin is significantly lower than the rest of our business.

So in FY '20, we would expect Thomas Cook to deliver somewhere between $150 million to $200 million of TTV, which is a significant revision down from the $300 million to $450 million that we spoke about only 6 months ago. Thomas Cook has had some well-publicized potential change of ownership, and we believe that under the potential change of ownership within Thomas Cook that our proposal -- sorry, our new proposed ownership will deliver the same expected outcomes that I put in writing here today.

So where does Thomas Cook fit as part of our overall business? Well, as I've already highlighted, it's done a great job in facilitating our margin expansion for our existing business. In light of where we were 3-plus years ago when we did the deal with Thomas Cook, it's not going to fulfill all of those TTV expectations. So Thomas Cook in FY '19 was approximately 5% of our total TTV of our entire Webjet business, and our expectation for 2020 is that Thomas Cook will be less than 4% of our TTV in that financial year.

Moving on to AMEA. Bookings up 67%, TTV up 62% EBITDA up 123%. It was a phenomenal performance by our AMEA market, and we have been able to extend our lead as the #1 player in the Middle East and Africa. That extension of our lead was driven by both the acquisition of DOTW and our organic growth. As you can see in the AMEA results, and it's the only results that we will talk where the average booking value is down by approximately 5% during the course of the year, and yet our EBITDA is up 123%. That's driven by the same thematic that existed in -- when we were describing our European business, which is a combination of more direct contracts at higher margins; scaling our business and increasing our rate of cost at a lower rate than the rate of revenue; and our ability to deliver now substantial EBITDA out of our Americas division, where we've seen a number of large customers connect to us and delivering high booking -- or significant booking volumes for us; and in Latin America, where we're at the early stages of penetrating that market and we're now operating in 17 markets across that continent, and we have got significant growth opportunities ahead of us. We will continue to invest in the Americas business. But as I've called out, the efficiencies continue to come through, and AMEA was the standout performance with $240 million of incremental TTV driving $14 million of incremental EBITDA. So a -- for every $100 of incremental TTV delivered during the year, $6 fell to the EBITDA line.

Let's move to Slide 11, and we're talking about the Asia Pacific business. Clearly a standout improvement half on half in Asia-Pacific. The investments that we have made over the last 2 years have contributed to a significant turnaround in Asia-Pacific as well as the integration of the DOTW business. To put that into context, first half, we made a loss of $600,000, and the second half, we delivered $6.4 million of EBITDA. Asia-Pacific is going to be the growth engine, the geographic growth engine of our business for the foreseeable future. Whilst we now have improved our position in the market to the #2 player, it's the fastest-growing region and there is significant opportunity for us to expand on the tremendous results we have been able to deliver in FY '19. And we'll talk about that in the next slide.

In the Asia-Pacific business, what we have been able to deliver is an incremental $215 million of TTV driving incremental $8 million of EBITDA, which is the difference between the $2.1 million loss in FY '18 and the $5.8 million profit of FY '19. We are a long way from scale in the Asian business. Every $100 of TTV delivers $3 of EBITDA. Over the ensuing years of 2020 and beyond, we believe our growth rates will continue to be extremely strong in Asia-Pacific and our EBITDA margin will continue to improve as it has quite dramatically in this last 6-month period.

Moving on to our newest division, Umrah Holidays International. For those who are hearing about this for the first time, in February, we announced that we were entering into a joint venture with a business -- with a series of partners who have deep experience in the provisioning of religious pilgrimage tourism in Saudi Arabia. And what we have is a business in which we have a unique offering that's going to be significant for our future growth. And that unique offering is that in conjunction with providing a range of travel packages to pilgrims going to Saudi Arabia, we have the ability to integrate and automate the visa approval processing. That is -- we are the first people in market to have that capability. We believe it's truly disruptive, and we believe that as the Kingdom of Saudi Arabia looks to substantially increase the number of religious visitors over the course of the next 11 years to roughly 30 million, up from 6 million today, that

we are in a strong position to take a part of that market. The business -- the market opportunity we're talking about is substantial. We believe it to be a $10 billion U.S. market opportunity. And we believe that our investment into Umrah will take on the characteristics of our Middle East B2B business, where 6 years ago, we launched and did 13,000 in the first month of operation and you saw the meaningful contribution that, that had for our overall results.

And over the next 2 to 3 years, we believe Umrah Holidays International can make a meaningful impact to the overall results for the Webjet group.

Moving on to Slide 13. Destinations of the World was acquired during the year and successfully integrated into the Webjet regional structure. Within 6 weeks after the deal was completed on the 21st of November, the business was integrated into our regional management structure. And we've been successful in taking cost synergies ahead of our anticipated $4 million run rate for FY '20, and some of that benefit fell through in this current financial year. Our revenue synergies and cross-sell opportunities are in line with our JacTravel experience, and we are on track to deliver the anticipated revenue synergies of $10 million in FY '20.

Our focus in the second half with DOTW has been on embedding the business and optimizing the effectiveness of the acquired direct contracts, ensuring that the key management are integrated into the Webjet structure and enable us to continue to look at how we can grow our combined businesses across our geographies. One of the things that we have is a faster degree of integration of DOTW than we did with Jac, and we believe we have developed a framework that continues to extract synergies, which can be useful for any future acquisitions that we may make.

Moving on to Slide 14. WebBeds is a fast-growing business. Now Slide 14 is not an attempt to capture the entire growth profile of our WebBeds business unit. Rather, it's an attempt to capture the singular unique characteristics of growth outside of our organic growth that we expect to deliver in FY '20. So in FY '20, we expect to deliver on the following 3 items: between $27 million to $33 million of additional EBITDA, revised down from at least $40 million, which we spoke about in the first half. And that is the full contribution of the 5 months of DOTW where we didn't own it, which is the July to November period. We expect the incremental revenue to flow from Thomas Cook of $150 million to $200 million of TTV sales, which is down from $300 million to $450 million. And the significant growth opportunities in the 3 Asia-Pacific markets of China, India and Japan, which we're saying total $75 million to $125 million in FY '20, down from $100 million to $150 million, primarily as a consequence that we delivered that in the results earlier than expected in FY '19.

So our number is down compared to the half primarily because of the reduced TTV expected from Thomas Cook for the reasons that I have already articulated. And the second is that we've been better and faster than expected in delivering the cost synergies and some of the Asia-Pacific growth opportunities which are embedded in FY '19 results. But for clarity, the $27 million to $33 million of additional EBITDA is outside of the organic growth that we expect in our B2B business.

So let's move to Slide 15, and 8/4/4 is our profitability target for FY '22. So what does it mean? It basically means 8% revenue to TTV margins driving 4% costs will deliver an output of 4% EBITDA to TTV, equating to a 50% EBITDA margin. As you can see, we're incrementally so far -- or incrementally in FY '19 delivered 5% EBITDA margins. So the blending of that run rate with our existing business gets us to 8/4/4 by financial year '22. And the reason we have a high degree of confidence that we can deliver 8/4/4 is as follows. If I take them in order, our IT platforms are continually being refined to enable us to provide maximum customer connectivity whilst reducing operating cost. We have successfully retired one IT platform in the second half of '19, and we are continuing to standardize our offering across our other IT platforms. In FY '19, we have a new tech connection called WebConnect to enable some of our supplier partners to connect once through this WebConnect and distribute through all of our IT platforms, and that will continue to be rolled out in FY '20. Our expectation is that our IT operating costs will grow at a lower rate than revenue, enhancing our underlying EBITDA performance over the next 2 to 3 years.

The second element of limiting the amount of cost required to scale our business is a unique blockchain solution called Rezchain. WebBeds is the first travel company in the world to deliver a blockchain solution to facilitate the reduction in operating costs and improve customer experience within our businesses. We've now implemented it across all of our platforms and all our geographies, with DOTW being connected in April of 2019. We will commercialize the Rezchain product during the course of financial year '20. We will connect to Thomas Cook in the -- in calendar year 2019, and we will launch in the latter part of calendar 2019 the commercialization of our Rezchain product to make it available to a broader range of customers in calendar 2020. The Rezchain blockchain solution has been a key contributor to our FY '19 results, and we expect it to play a key role in delivering our 8/4/4 target.

As we've already said, in FY '20 -- FY '19, we were able to deliver 5% EBITDA for every 100 -- or $5 of EBITDA for every incremental $100 of TTV. That blending of that 5% run rate with our existing business will enable us to get to an 8/4/4 scenario by FY '22.

Moving on to our B2C division, and starting with webjet.com.au, our OTA business. Solid EBITDA performance, notwithstanding what has been a tough domestic market, in particular in the second half. Second half travel market has been impacted by the lead up to the federal election, the federal election and the slower-than-expected post-election rebound. As most of the you -- or if any of you followed our business over the last 20 years, every federal election has seen a slowing down of travel activity. This year has been exacerbated quite significantly, and we're seeing many leading indicators demonstrate the softness of travel over the course of the last 6 months with many of the airports reporting negative comps for the last 6 months as well as some of our airline partners. Overall, our business, we were up 1% at a bookings level, 2% at TTV. Average booking value increase of 1% driving 4% EBITDA improvement during the year, with margin expansion driving the better result than our underlying bookings performance. And that's a consequence of, in this case, both higher margins of both our flights product and our ancillaries and strong cost control over the course of the year.

So the start of calendar -- or sorry, the start of FY '19 was strong, and we saw a weakening continuously throughout financial year '19. We're seeing a significant uplift in our underlying performance since the start of the new financial year, where for year-to-date, first 6 weeks, our B2C -- our OTA business is up 9% at a TTV level, which is the best 6-week performance since the first 6 weeks of financial year '19. So it's a significant turnaround that's occurred in the last 6 weeks, and whilst we never draw any conclusions from a short data set, which 6 weeks is, it is encouraging and gives us a high degree of optimism about FY '20's performance for our OTA business.

Moving on to Slide 18. We outperformed the market by roughly 2x where domestic growth was exactly double the underlying market growth. International bookings were a much healthier 6.8% than the anemic 0.8% for our domestic business. I'll touch on the double -- the underlying market. We are 5% of the domestic flight market, 4% of the international flight market. And as you can see by those numbers, we still have substantial headroom for growth, and we are planning to outperform the market over the course of financial year '20.

So the key driver of what was a tough market is the brand strength in Webjet, and that's enabled the Webjet brand to deliver high TTV margin across the product range. During the course of the year, there's been a substantial number of initiatives that we've undertaken, and those initiatives have delivered in a tough environment and we believe the initiatives that we're talking about, particularly in the box in the right hand side of Page 19, will enable us to continue to outperform the market in FY '20.

Moving on to Online Republic. Disappointing second half for Online Republic, impacted unfortunately by a singular event that's had an outside -- an outsized impact on our business in Christchurch. We were traveling okay at the half against our stated position, which is to drive more profitable growth and lower the cost to serve and customer acquisition. The second half saw that continue for our car business. Unfortunately, the Christchurch impact had an impact on our Motorhomes division and resulted in the underperformance that you can see where bookings were down 1%, TTV down 4%, revenue was roughly flat and EBITDA was down 6% for the period. During the year, we appointed a new CEO in Lindsay Cowley, who joined us in June, and we have a new General Manager of our Cruise business to address some of the challenges we had there.

So moving to Slide 22. Since acquisition of the Online Republic business, the Motorhomes division has been a standout performer. That continued through the first half of '19. Second half, our bookings fell significantly for the reasons that I described previously. We have seen a nice pickup in demand for the Motorhomes division since July. A lot of work is being done to continue to make that a market-leading offering across a broader range of geographies with increased additional foreign language sites delivered. We've expanded our offering into a further 10 countries with 50 additional locations. During the year, we built out a multilingual call center capability in Romania, and we integrated peer2peer inventory. And the Motorhomes division, as I said, has picked up nicely in FY '20.

Car hire, the car business did well. Significant improvement in the yield, in line with our stated objectives of improving margin. They delivered that. We weren't chasing bookings. We were chasing revenue. They did a great job in delivering that. And we continue to expand into new markets, and that has continued into FY '20 as well.

The never-ending downward cycle of our Cruise business seems to continue in FY '19 and it hasn't significantly improved yet in FY '20. We've made some changes to the way we operate that Cruise business with new management. And we believe with new focus on our tech platform that we can turn that around, and I look forward to producing more substantive, positive results from Cruise at our next update.

So with that, I'll hand across to my colleague, Tony Ristevski, who will talk about corporate and balance sheet and a few other items, including our dividends. Tony?

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Tony Ristevski, Webjet Limited - CFO [7]

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Thank you, John, and good morning, everyone. So if I can turn your attention to Slide 24. At a high level, our corporate costs came in at probably a bit higher of what we guided to at the half. At the half, we talked about circa $15 million as the expectation for the year. They came in at $15.9 million, up 36% on last year. Otherwise, it's slightly a higher expense as it relates to the option scheme that was implemented during the year, coupled with probably our insurance premium in the last quarter that came in higher than expected.

The positive to note is that the FX program that we rolled out, albeit revised at the start of the first half, has continued to improve and mitigate the result of FX losses into the second half, whereby they came down from $1.8 million in the first half down to about $400,000 in the second half. We've managed to roll out that program through the newly acquired DOTW platform in July of this year. That being said, there is going to be some legacy positions that will unwind in the first half of the new financial year.

Moving forward and thinking about corporate cost in the context of FY '20, we anticipate the cost will increase between 5% and 10% in the position there as we start to think about our business growing beyond the $4 billion in TTV and the necessary investment at a corporate level to oversee that. To give the audience some context, back in 2015, our TTV was just under $1.3 billion. So it's been a phenomenal growth over that 4-year journey, and it's the investment and the step change [in the steering] at the corporate level to oversee that.

Now turning over to the financial highlights slide. I'll go to Page -- Slide 26. The key things to call out here is the increase in our EPS before AA on a continuing basis being a very positive 31% year-on-year. Consistent with the first half, the introduction of AASB 15 as it relates to revenue recognition has not changed. It had no impact to the way we recognize revenue, and that's a positive. The other thing to guide towards as we think about FY '20 is our effective tax rate. I know we get questions as it relates to that. The best context I'd give you there is that we expect the same effective tax rate in FY '20 that we achieved in FY '19.

Moving forward to the next slide, being our balance sheet, Page 27. We have introduced a few more measures at the bottom there to give the audience a bit more understanding of our conservative position as it relates to our gearing levels. Overall, you can see gearing based on a net debt basis is very conservative, less than 0.2x. Equally, we've introduced the measures of return on equity and return on invested capital. Both are meaningfully above our weighted average cost of capital, which is around circa 10.5%. We do expect with the timing of DOTW earnings coming through into FY '20, along with the synergies and the organic growth that John mentioned, that we'll see a meaningful uplift in both of those measures as part of the FY '20 result. The change in the balance sheet between 2018 and 2019 is primarily driven through the introduction of DOTW to the group. And then the other item to note there in the other noncurrent liabilities is the Umrah Holiday put option. We own 51% of that business, and then we have the opportunity to own the residual 49% over time. So we've recognized that as a liability in our accounts as of June '19.

Moving forward to our cash flow slide on Page 28. Consistent to what we guided to at the first half, we came in on an adjusted basis at 98%, and this is comfortably in our range of 95% to 110%. And we anticipate and will guide to an FY '20 achieving the same cash conversion of 95% to 110%.

Moving forward to our CapEx slide on Page 29. As you can see there, with the introduction of DOTW, that has increased our CapEx. We did guide towards the mid-30s and we came in slightly below that, just under $33 million for the year. This is an increase of 17% on year-on-year basis. But having removed the introduction of DOTW and normalized it for Jac, our pro forma basis CapEx was actually marginally down 4% year-on-year.

Looking forward in terms of FY '20, as we had the full year of DOTW come through, we anticipate that CapEx will be up on the '19, up about 10% to 15%. And as we think about CapEx in the context of scale, being on Page 30, as you can see in the course of the last 3 years, the growth of EBITDA has materially outstripped our CapEx spend. And that relationship, we anticipate will continue to fall into the FY '20 year. There, we're obviously providing the basis in which we can continue to scale going forward as we invest into our platforms.

And lastly on Slide 31, dividends. We're declaring $0.135 payable on October 10 and that will be fully franked. With, obviously, the mix of income between our foreign operations and B2B growth in our domestic operations in the OTA business, we do still anticipate the ability to pay a fully franked dividend for the short term, but we'll provide any update if that were to change going forward. Equally, as we think about dividends going forward, we don't think about them in the context of a ratio or payout ratio as it relates to EPS. Instead, we think of that in absolute terms and we anticipate future dividends will be consistent with past dividends in terms of that anticipated growth. We do have the view that we will look to retain cash and obviously look to maximize that position as we anticipate more inorganic opportunities being presented.

And I'll leave it at that, and I'll hand over to John.

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John Guscic, Webjet Limited - MD & Executive Director [8]

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Thanks, Tony. So final slide. Financial year '20 outlook. We've had a cracking start to financial year '20. Our B2B business continues where we left off in 2019. TTV is up over 50%, excluding Thomas Cook. Webjet OTA business, TTV up 9%, compare and contrast that with the 2% that we experienced in full year '19. And Online Republic TTV up 4%, which is significantly above the minus 4% we delivered in FY '19.

As Tony has spoken and I have, we see significant opportunities for our business to continue both the organic growth and the inorganic through further acquisition opportunities, and we have a nice pipeline of -- we have a lot of activity, a nice pipeline of opportunities in front of us. So we'll provide a guidance range at our AGM on the 20th of November. But the summarized view is that for WebBeds, we continue to see significant opportunities for profitable growth in all markets and target opportunities to deliver the 8/4/4 by financial year '22. Webjet OTA, we continue to see above-market growth opportunities across both domestic and international flights as well as our ancillary products. And Online Republic, consistent with our FY '19 strategy, we will continue to focus on higher TTV margins and lowering acquisition costs for that business. And in summing up and wrapping up, I'd like to thank my team, all of our employees, all of our partners, all of our consumers and customers who trust us to deliver what is year 21 of the Webjet journey in which we have consistently outperformed the market, and we believe that we can consistently outperform the market in the years ahead.

With that, operator, I'll be happy to take any questions that you may have from any of the participants.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from John O'Shea with Ord Minnett.

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John O'Shea, Ord Minnett Limited, Research Division - Senior Research Analyst [2]

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Well done on the result. Just a couple from me. Can you hear me?

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John Guscic, Webjet Limited - MD & Executive Director [3]

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We can hear you, John. Thank you. Yes.

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John O'Shea, Ord Minnett Limited, Research Division - Senior Research Analyst [4]

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A couple from me. Firstly, more of a micro question. Just on the effective tax rate. I notice that was sort of around that 19%, 20%. Tony, what can we expect for that moving forward and what sort of drove that?

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Tony Ristevski, Webjet Limited - CFO [5]

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John, we expect it to be 19% next year, or underlying before AA, around 15%. We don't see the change -- rate changing year-on-year. I think in the '19 year, if you look at our annual report, there's a reconciliation there of the tax rate. We had a few things that were a benefit this year in our tax expense that have come through that won't repeat next year. So hence, why we are guiding to the same effective tax rate year-on-year.

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John O'Shea, Ord Minnett Limited, Research Division - Senior Research Analyst [6]

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Okay. So you're saying that, that 19% number, you would expect moving forward, just for clarity?

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Tony Ristevski, Webjet Limited - CFO [7]

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Correct. For FY '20, yes.

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John O'Shea, Ord Minnett Limited, Research Division - Senior Research Analyst [8]

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Yes. And further on?

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Tony Ristevski, Webjet Limited - CFO [9]

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Look, it's premature to provide anything beyond that at this stage.

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John O'Shea, Ord Minnett Limited, Research Division - Senior Research Analyst [10]

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Sure. Sure. Now just, obviously, you've given some comments, John, on the at least $40 million now coming to $27 million to $33 million. Now obviously, the organic growth is a critical component of that. Can you give us some sense as to how you see that organic growth? In the past, you've been quite specific about how you see your growth in both of those businesses. Can you give us some sort of view of that and sort of how we should think about the quantum of organic growth that the Webjet business can deliver as we look forward to this year?

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John Guscic, Webjet Limited - MD & Executive Director [11]

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Well, if we start with the Webjet OTA business, we would expect to outperform the market and as we sort of -- well, as we have explicitly stated, we believe we've done that in the first 6 weeks. So that's our statement there, outperforming the underlying market. So going to be -- and for clarity, that will be at bookings and TTV level and EBITDA. So it's not at the expense of our revenue margins. And on the B2B side, it will be a substantial outperformance of the market. The plus 50% has the free kick of DOTW but we've substantially outperformed organically, and we outperformed organically during the course of the year. We believe we can do that again with the same drivers of FY '19. And those drivers are, we will sell at a greater rate than the underlying market. Assuming our revenue to TTV margins are flat, we believe that the cost associated with growing our business will be lower than the revenue run rate. So that will see EBITDA expansion in FY '20 for our B2B business. That's a bigger driver than just pure top line growth.

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John O'Shea, Ord Minnett Limited, Research Division - Senior Research Analyst [12]

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Sure. [Just pointing out] the DOTW, can you give us some sense of what you believe your organic growth in that business is in a broad sense?

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John Guscic, Webjet Limited - MD & Executive Director [13]

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Yes, it's clearly well north of double digits.

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Operator [14]

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The next question comes from Wei-Weng Chen with JPMorgan.

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Wei-Weng Chen, JP Morgan Chase & Co, Research Division - Research Analyst [15]

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Well done on the results. A couple of questions from me. So the first one was -- so you dropped your EBITDA B2B opportunity by $7 million to $13 million. How much of that drop was actually brought into FY '19?

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John Guscic, Webjet Limited - MD & Executive Director [16]

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A small number. Of that number that you're talking about, the smaller number came into FY '19. The vast majority was the reduction in the Thomas Cook expectations for FY '20.

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Wei-Weng Chen, JP Morgan Chase & Co, Research Division - Research Analyst [17]

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Yes. So the next question was going to be on that, the Thomas Cook reduction. So TTV has kind of effectively halved. Is that -- does that mean a halving of EBITDA as well?

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John Guscic, Webjet Limited - MD & Executive Director [18]

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Well, I think we sort of guided you to that answer, Wei-Weng, in my previous answer, and the deduction from $40 million down to $27 million to $33 million. So it would be approximately half though, yes.

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Wei-Weng Chen, JP Morgan Chase & Co, Research Division - Research Analyst [19]

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Yes, okay. And then just on Thomas Cook TTV expectation, you've said [actually,] FY '19 was at $200 million and now we kind of -- can we think about this $150 million to $200 million as if things -- if the conditions stay the same, then you fall in the middle of that range? If things get worse, you get to $150 million? And then the best case scenario is that it's flat year-on-year?

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John Guscic, Webjet Limited - MD & Executive Director [20]

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That seems -- that's -- look, we're 6 weeks into the year. That's our view, yes.

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Wei-Weng Chen, JP Morgan Chase & Co, Research Division - Research Analyst [21]

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Okay. Great, great. And then just a question on the -- you've developed a framework to extract synergies for acquisitions. What's the thinking there with M&A?

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John Guscic, Webjet Limited - MD & Executive Director [22]

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Well, the thought process is that we are still under 4% of the entire market. We have 30,000 directly contracted hotels today. I would like to increase that number and I would like to distribute our product across every travel vertical and every geography. And we're not massively penetrated in any market. So our thinking is in Europe, which is our biggest business, we're still a long way behind the guy who's #1. In Middle East, where we are #1, we still believe that, in particular in the African market, that geography for us, we see that there's opportunities. Asia Pacific, again, we think that fast-growing market, where we are now #2 in aggregate, is really fragmented and we'd like deeper penetration there. And we've got a decent business now in North America and a nascent business in Latin America. So we believe there are opportunities there. So for all those reasons, we think there is massive headroom on the upside of bookings and TTV opportunity. And we have IT platforms, organizational structures that businesses can fit into and we can run those businesses at a lower cost base than they could under previous ownership. Now it took us a little while to get that formula right with Jac, but it certainly hasn't taken us anywhere near that amount of time to get it right with DOTW, and that's given us an increased level of confidence around making further acquisition in the B2B space.

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Wei-Weng Chen, JP Morgan Chase & Co, Research Division - Research Analyst [23]

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All right. And then just the last very quick question. What's the profile to get to 8/4/4? Is that going to be lumpy for FY '22? Or is there is going to be a reasonably straight-line increase?

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John Guscic, Webjet Limited - MD & Executive Director [24]

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Directionally, we can get there. And I just do very simple math simulation. If I'm making $5 for every $100 worth of TTV, you can work it out when we get to 8/4/4, what's required. So it's just a blending of that incremental every dollar coming -- every incremental dollar of B2B delivering $0.05 back to the EBITDA line that will get us there. So it's as simple as that. But the mechanics and the driver are not increased revenue margin, it's lower costs on our side. And that's a factor of selling -- leveraging the investments and the acquisitions that we've made in building out our direct contracting teams, having more direct contracting inventory available for our salespeople to sell to our customers, and our IT and operations structures not being required to lever those up. So you'll see that again in the FY '20 result, where we anticipate the operations side of our business not -- which is significant. It's the largest employer in the Webjet group, and it's the -- and the WebBeds business has got significant employee numbers. We don't expect to see the growth that we're going to achieve in FY '20 being replicated in incremental employee costs.

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Operator [25]

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The next question comes from Quinn Pierson with Crédit Suisse.

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Quinn McComas Pierson, Crédit Suisse AG, Research Division - Co-head of the Small Cap Research [26]

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So I guess, firstly, on the consumer division, on particularly the Webjet OTA. Historically, this has been a kind of perennial double-digit earnings growth business. Obviously, the macro has been a bit more challenging, and that's reduced. If the macro kind of, I guess, recovers back to historical norms, does this business return back to double-digit profit growth? Or given your higher market share, maybe plucking the low-hanging fruit on ancillary products, is it just, I guess, challenging to get back into double-digit earnings growth?

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John Guscic, Webjet Limited - MD & Executive Director [27]

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Look, Quinn, theoretically and philosophically, there's no constraint on our business to stop us going back to double-digit growth in the Webjet OTA business. So let's talk about the specifics, and I'll address your specific question and add another wrinkle for you to think about. So the B2C business, the underlying booking volumes over the last 6 months went backwards quite significantly. And you just need to look at the data from Sydney Airport, you look at the monthly trends out of the [Bitra], and you'll see that the market declines in domestic and the run rate for international growth declined significantly during the year. And there's no doubt that impacted us. If those were to reverse, and it's too early to say that, that has happened, we know what we have done to drive the outperformance. It's too early to understand what the underlying numbers are because we're probably a month or 2 from seeing that. But when we see that, we'll be able to have a view about how meaningful that could be going forward.

The driver that is over and above what we're talking about is, in the past, we have always said that our ancillary product growth rate in the last 3 to 4 years has outstripped our underlying growth rate. Most of those sales have been at higher margin and we have been happy with the outputs, the exception being hotels. Well, our hotel sales were up significantly during the latter part of FY '19. And if we can continue to lever that, that gives us significant upside potential to the Web OTA business.

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Quinn McComas Pierson, Crédit Suisse AG, Research Division - Co-head of the Small Cap Research [28]

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That's helpful. And then maybe just secondly, just on the Umrah hotels, if I'm pronouncing that correctly, I mean, could you maybe just elaborate a little bit more on the size of that market because it's a very big number? Kind of is that -- to what degree is that all addressable? And maybe just articulate a little bit more how to think about, I guess, the profit ramp-up towards FY '22.

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John Guscic, Webjet Limited - MD & Executive Director [29]

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Well, let's start with the latter part, then I'll go through what we're doing. So the profit ramp-up is -- we'll lose a bit of money in the first half of this year, be closer to flattish in the second half. So overall, we expect to lose in FY '20 for Umrah Holidays International. Breakeven to positive in FY '21 and meaningfully positive in FY '22. That's the high-level expectation of Umrah Holidays International.

So religious pilgrimage is currently a 6-million-person travel business on a global basis, where people outside of Hajj come to Mecca and Medina to undertake Umrah, and that -- the Saudi government has the desire to make that 30 million people to do that over the course of 2020 -- 2030, sorry. The reason that that's a realistic opportunity for them and is an addressable market for us is as follows: You need -- everything is capacity constrained in Saudi Arabia today from -- you have quotas for every market of who can go. Those quotas are gradually going to be relaxed over time, so increased numbers. And as you see the wealth effect across all markets, travel has always been an aspirational part of the benefit of the wealth effect as people got wealthy. And if you're a Muslim, it is something that if you have the financial means and the health to be able to undertake it, Umrah is something that everyone should do at least once in their life. So for all of those reasons, it's a significant addressable market. And our competitive advantage is not that we're selling hotel and travel packages in Saudi Arabia; it's that we can facilitate the pre-approval process of an automated visa application process locked into a hotel booking commitment that drives an outcome that nobody else has been able to replicate yet, and that's what we're launching in the market as we speak. And we now have customers going as of July to Saudi as part of our Umrah Holidays International business.

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Operator [30]

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The next question comes from Tim Piper with Royal Bank of Canada.

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Timothy Piper, RBC Capital Markets, LLC, Research Division - Analyst [31]

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It's Tim here. Just going to dig into the Destinations of the World business a little bit. Firstly, can you quantify the synergies that you realized in FY '19?

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John Guscic, Webjet Limited - MD & Executive Director [32]

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We did a couple of million of costs and maybe 1 or 2 of revenue in FY '19.

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Timothy Piper, RBC Capital Markets, LLC, Research Division - Analyst [33]

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Okay, great. And just in light of the reversal in the earn-out, can you just provide a bit more commentary around how that business has performed sort of versus initial expectations?

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Tony Ristevski, Webjet Limited - CFO [34]

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It's Tim here -- Tony. Yes, look, it's performing to plan as far as our organic and budget targets are concerned. What we have in there is a higher benchmark of expectations, which are really toppy in terms of run rate for both businesses combined. So it was something that we've put in there that is quite aggressive in terms of target.

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Timothy Piper, RBC Capital Markets, LLC, Research Division - Analyst [35]

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Okay, sure. And just one further one. You've commented a couple of times on acquisitions. Just given your scale and the growing efficiency in the business and the global operations [was], how are you thinking about acquisitions now for the B2B business, given where you currently sit and sort of the growth it's generating?

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John Guscic, Webjet Limited - MD & Executive Director [36]

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Yes. I won't repeat what I've said just 2 questioners earlier or 2 participants who've asked questions earlier. But the opportunity for us to grow and continue is massive. When we've got 4% of the entire market, there's 96% that we'd like to get. And we know the framework of the things we need to do to drive profitable growth. The first one is getting more direct contracts. At the moment, we've got 30,000. Our short-term objective is to get to 40,000. So anything that facilitates that is useful. Anything that gets us into areas where we are underpenetrated are useful. So those are the 2 highest priorities. And then the third is anything that gives us an opportunity to scale up even in areas where we are significant today. And I would class Europe and Middle East where we are significant today, we would still look at it. So the order of priority is: one, more direct contracts; two, where we're underpenetrated; and three, scale opportunities in markets where we have a clear #2 position.

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Operator [37]

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(Operator Instructions) The next question comes from Tim Plumbe with UBS.

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Tim Plumbe, UBS Investment Bank, Research Division - Director and Research Analyst [38]

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Apologies if this has already been answered. I had to come on late onto the conference call. But John, just in terms of that trading for the 6 weeks of July, you mentioned B2B up 50%. Can you talk a little bit about the organic growth rates and maybe breaking down kind of what you're seeing out of Europe versus the rest in those 6 weeks?

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John Guscic, Webjet Limited - MD & Executive Director [39]

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Sure. Look, someone did ask that question a few minutes ago, Tim, but I'll give you a summarized view. We are outperforming the market across every geographic region. We are getting organic growth out of every geographic region and it's clearly north of 10%. That is the organic number and then there's obviously a contribution from the annualization of DOTW. So it's a very healthy growth rate as we go into FY '20. But as I've been at pains during the presentation to talk about what is our strategy, the organic growth rate is great, but our focus is on profitable growth and high-margin sales with direct contracts and delivering out the scale benefit of a lower-cost infrastructure to support that business are the more relevant metrics that we're focused on.

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Operator [40]

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Thank you. There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.