U.S. Markets closed

Edited Transcript of EDR.MC earnings conference call or presentation 29-Aug-19 11:00am GMT

Q1 2020 eDreams Odigeo SA Earnings Call

LUXEMBOURG Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of eDreams Odigeo SA earnings conference call or presentation Thursday, August 29, 2019 at 11:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Dana Philip Dunne

eDreams ODIGEO S.A. - CEO & Executive Director

* David de la Roz

eDreams ODIGEO S.A. - Director of IR

* David Elizaga Corrales

eDreams ODIGEO S.A. - CFO & Executive Director

================================================================================

Conference Call Participants

================================================================================

* Carlos Javier Treviño Peinador

Grupo Santander, Research Division - Equity Analyst

* Isabel Carballo

BBVA Corporate and Investment Bank, Research Division - Chief Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Q1 fiscal year 2020 results presentation call. I must advise you that this conference is being recorded today, Thursday, 29th of August 2019. I would like to hand the call over to the company now, David de la Roz. Please go ahead.

--------------------------------------------------------------------------------

David de la Roz, eDreams ODIGEO S.A. - Director of IR [2]

--------------------------------------------------------------------------------

Good afternoon, everyone, and thank you all for joining us today for our first quarter fiscal year 2020 results presentation for the 3 months ending 30th of June 2019. I'm David de la Roz, the Director of Investor Relations of eDreams ODIGEO. As always, you can find the results materials, including the presentation and our results report on the Investor Relations section of our website.

I will now pass you over to Dana Dunne, our CEO, who will take you through the first part of the presentation. Thank you.

--------------------------------------------------------------------------------

Dana Philip Dunne, eDreams ODIGEO S.A. - CEO & Executive Director [3]

--------------------------------------------------------------------------------

Thank you, David. Good afternoon, everyone, and thank you for joining us. Today, I'll give you an overview of our first quarter results. Following this, David Elizaga, our Chief Financial Officer, will take you through the performance of our consolidated financial statements in more detail. I will then conclude today's presentation with our outlook for the full fiscal year 2020.

Please turn to Slide 4. I'm pleased to say that we have achieved solid set of results in the period of the first quarter, in line with our guidance to the market. These are: bookings were 2.9 million, minus 1% year-on-year, which is in line with our strategic revenue model shift as we've guided to the market. Revenue margin was EUR 141.5 million, which is up 5% year-on-year, driven by an increase in the revenue margin for booking of 7% and is in line with our strategy. Adjusted EBITDA reached EUR 28.1 million, up 8% year-on-year. And the cash position, net of overdrafts, stood at EUR 137.1 million, up 10% versus EUR 124.9 million in the first quarter of last fiscal year FY '19.

Our results have followed our guidance and reflected seasonality and investments we made to complete the shift in our revenue model in March 2019. For Q1, we guided to low single-digit revenue margin growth, a reduction in bookings and adjusted EBITDA growth rates. Results have been in line with guidance and in fact, for the revenue margin has been better than expected. Q1 performance reflects a strategic progress as the business achieves its KPIs. This, in particular, is revenue diversification ratio has increased to 46% from 38% in the same period last year. Product diversification ratio is increased to 76% from 60%. Overall, our revenue diversification is very strong, as you can see, through our revenue diversification and product diversification ratios. In fact, it is a balance of products which has been growing and some products performed better than others. I'm especially pleased with dynamic packages as well as ancillaries, both growing at over 30% year-on-year in revenues. At the same time, other products are not showing a satisfactory performance. For example, we recently changed our car provider and we are not pleased with the performance, being one reason why nonflight revenue was down year-on-year. Also, our industry-leading subscription program, Prime, is proving very successful. The number of subscribers continues to increase. We're adding over 25,000 per month, and we've reached already 325,000 total subscribers, and we've rolled it out to 4 of our largest markets. In addition, mobile bookings continue to grow and reached 40% of our total flight bookings in the first quarter of FY '20. This is a 4 percentage points above the same period last year. Overall, we've delivered solid set of results in Q1, which is in line with our guidance. Also, our revenue diversification is paying off well, growing at 25% and is now 57% larger than classic customer revenue. I'm pleased to say that our encouraging Q1 means we are on track to meet our full year guidance targets.

Moving to Slide 5. Diversification revenue continues to drive growth as the largest revenue contributor with revenues increasing 25% in Q1 of this fiscal year, representing 46% of our total revenues. This impressive growth offsets our intentional reduction in classic customer revenues, which have decreased to account for 35% of the group's revenue margin in Q1. This is down from 42% the same period last year. This is the first year in which revenue diversification revenues are larger than classic customer revenues, which is a major milestone for eDreams ODIGEO. With the shift in our revenue model, we have had significant success. The product diversification ratio and revenue diversification ratio have increased to 76% and 46% in Q1 FY '20 from 60% and 38% from Q1 FY '19. This is a remarkable 16 percentage points expansion and 8 percentage points expansion in only 1 year.

Let's now turn to Slide 6, where you can see the progress we have made in performing against some of our other KPIs. We are continuing to make good progress on our other 3 KPIs as we successfully execute on our strategy. On an annualized basis, our customer repeat booking rate has increased by 3% since last year to 50%. As with increased price transparency, there is some short-term impact on traffic and the number of bookings. We are confident that this short-term impact will lead to improved performance to increase loyalty as customers return to make additional bookings, offsetting any initial impact. We have been seeing this in segments of our business that have been using the new price display for more than a year.

If we look at mobile bookings as a share of flight bookings, you will see that we have significantly continued to increase the number of customers booking through our mobile channel. In the last 5 years, we have gone from 15% of our total bookings being via mobile device to now 40% of our total bookings.

Lastly, on KPIs, let's look at the changes to the acquisition cost per booking index. Assessing the change in acquisition cost per booking index year-on-year, you can see that it has decreased slightly due to the implementation of our marketing pricing strategies. If you look at the decrease in acquisition cost per booking since FY '15, which marks the arrival of the current management team and implementation of the new strategy, you will see the significant progress we have made with acquisition cost per booking down by as much as 19 percentage points.

With that, I will now hand you over to David Elizaga, who will take you through our consolidated results.

--------------------------------------------------------------------------------

David Elizaga Corrales, eDreams ODIGEO S.A. - CFO & Executive Director [4]

--------------------------------------------------------------------------------

Thank you, Dana, and good afternoon, everyone. If you could all please turn to Slide 8 of the presentation, I will take you through the financial results in more detail. I am pleased to say that we have achieved solid results in the period with Q1 performance as guided to the markets.

Looking at the income statement for the first quarter of fiscal '20 on Slide 8. You can see that revenue margin has increased by 5% to EUR 141.5 million, reflecting the increased diversification revenue, and as a result, the increase of 7% in revenue margin per booking. This is directly due to executing our strategy as we accelerate investment in the transition to mobile and diversify our revenue model.

On the cost side, variable costs grew by 4% as a result of higher merchant cost due to strong growth in the rest of the world markets as well as new variable costs related to the sale of ancillaries. Our fixed costs increased by 6% due to higher investment in platform capacity. As a result, adjusted EBITDA for the quarter amounted to EUR 28.1 million, up 8% year-on-year. If we continue to look at the income statement, you will see that EBITDA decreased by 24%. This was due to the increase in our nonrecurring items, mostly because of the provision related to the social plans regarding the closing of Milan and Berlin call centers for a total amount of EUR 7.8 million. We expect to provision an additional EUR 3.6 million over the next 2 quarters, and we expect cost savings from the fourth quarter of fiscal '20 onwards, so from January next year, once both call centers are closed at the end of December 2019.

Full details can be found in Note 2.2 of our unaudited condensed consolidated interim financial statements. Full details of nonrecurring items can be found in our results report and in the Excel file. The D&A and impairment increased by 29% relating to increase of software capitalized in March 2019. Financial losses decreased mainly due to the variation between the interest expense of 2023 senior notes, which was 5.5% and the 2021 senior notes of 8.5% with a positive impact of EUR 3.3 million. It is also important to note that the income tax expense in the first quarter of fiscal '20 was EUR 1 million lower than in fiscal '19. This is caused by a mix of the following factors: lower income tax expense in the U.K. due to the recognition of a one-off reorganization provision and higher income tax expense in Spain due to higher profits, which are subject to a 25% rate. Finally, adjusted net income was EUR 9 million in the first quarter of fiscal '20, up 58% on last year. This is as a result of the increase in adjusted EBITDA plus savings in interest expense, which flowed through to the bottom line in the case of the adjusted net income.

Turning now to Slide 9. I'll take you through the cash flow statement. Cash position net of overdrafts stood at EUR 137.2 million, up 10% versus EUR 124.9 million in the first quarter of last year. The solid cash performance was driven by net cash from operating activities, which improved by EUR 35.1 million, mainly reflecting lower outflow in working capital in the first quarter. The better outflow in working capital is due to higher merchant share, 2 more points versus for same quarter of last year; increased in the average gross sale per booking, 6% year-on-year; and working capital optimization measures mainly focused on improvement of commissions collection and conditions with credit card suppliers. There's a reduction in income tax paid, which decreased by EUR 3.1 million from EUR 7.8 million to EUR 4.7 million due to a mix of lower advance payment in Spain, higher advance payments in the U.K. and no one-off advance payment in the Spain in June '19 related to a pending tax audit that we are undergoing. There was an increase in adjusted EBITDA by EUR 2 million and higher noncash items, which are nonrecurring items accrued but not yet paid, notably the provision that we've made for the redundancies in the call centers of Berlin and Milan, which is not cashed out yet.

There was cash used in investments of EUR 7.2 million, which was broadly in line with the same period of last year. And cash used in financing amounted to EUR 1.7 million, also broadly in line with the same period of last year. Overall, we finished the first quarter with a solid cash position net of overdrafts of EUR 137.2 million, up 10% versus EUR 124.9 million in the first quarter of last year.

Before I hand back to Dana, please turn to Slide 10 for an overview of our debt position. As a result of our solid cash position, net leverage ratio was reduced from 2.7x in June of '18 to 2.5x in June of '19. In the first quarter, the gross leverage ratio remained relatively flat at 3.7x in June '19 versus 3.8x in June '18, which gives us ample headroom versus our covenant ratio.

I will now turn the presentation back to Dana, who will take you through our closing remarks and the outlook for fiscal 2020.

--------------------------------------------------------------------------------

Dana Philip Dunne, eDreams ODIGEO S.A. - CEO & Executive Director [5]

--------------------------------------------------------------------------------

Thanks, David. If you can turn to Slide 12, ahead of our outlook for FY '20, I would like to highlight eDreams ODIGEO's top strategic priorities as we intend to revolutionize the online travel sector. As we outlined at our FY '19 results presentation, we are moving away from the transaction-only model to one that includes a revolutionary subscription model and engaging with the customer throughout the full travel journey. And we are having excellent success with this. In addition, our goal is to leverage our leading market position in flights and attach other products by building differentiating content and products like ground transportation, tours and in-destination activities while continuing to grow revenues as we create value for our shareholders.

Turning to Slide 13. I will talk about our outlook for this fiscal year FY 2020. We expect FY '20 to be much better year than FY '19, but it will still not reflect all the businesses' underlying potential. This is because there are still a number of major markets that are still to reach the necessary 12 months maturity of our new revenue model being in place.

In Q1, reflecting the seasonality and investments we've made to successfully complete the shift in the revenue model in FY '19, we guided for low single-digit revenue margin growth, reduction in bookings and solid adjusted EBITDA growth rates. Results have been in line with the guidance, except for revenue margin, which has been better than expected. From Q2 onwards, we expect growth in bookings, revenue margin and adjusted EBITDA in line with our full year guidance. There will be quarterly variations due to timing of changes we made in the last fiscal year. As a result, outlook is unchanged, and we expect our annual targets for the fiscal year 2020 to be, bookings and revenue margins to increase in the range of 4% to 7% versus FY '19, adjusted EBITDA in the range of EUR 130 million to EUR 134 million.

With that, I would now like to hand over to questions. We'll start with questions from the phone. And if there's additional time, we'll answer the questions sent to us in the webcast. For the webcast, we'll take questions on a first come, first serve basis. So we'll also try to group questions of similar nature. Should we not have time to respond to questions from the webcast, the Investor Relations team will make sure those are answered afterwards. Operator, if you could, please open the conference for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Carlos Treviño from Santander.

--------------------------------------------------------------------------------

Carlos Javier Treviño Peinador, Grupo Santander, Research Division - Equity Analyst [2]

--------------------------------------------------------------------------------

Three questions from my side. The first one, I don't know if you could give us any reference on this petite savings from the closing of your call centers in Milan and in Paris -- and in Berlin, sorry, and how -- well, what kind of savings could we expect from that -- from. My second question will be on the guidance for next quarters. While it's clear that you're expecting that growth should be more or less in line with annual guidance moving forward, but with some quarterly fluctuations, I don't know if you could give us some light on what you're expecting for Q2 with 2 months now over in the quarter. So any kind of indication specifically on Q2 should be nice. And finally, my third question is on M&A. Last quarter in the conference call, you talked that you were analyzing some M&A opportunities. It will be nice if you could elaborate a bit on -- if you advanced on that or now these opportunities are closed, or you could be closer to announce anything, even considering that this is quite a sensitive issue, but if you could give us any updates on that, it would be helpful.

--------------------------------------------------------------------------------

David Elizaga Corrales, eDreams ODIGEO S.A. - CFO & Executive Director [3]

--------------------------------------------------------------------------------

Thank you, Carlos. I'm going to take your questions. First, with reference to savings expected from the call center closures, we are looking at payback of the total expenditure putting together the EUR 7.8 million already provisioned and the additional amounts that we expect to provision in the Q2 and Q3 of -- just under 2 years were paid and savings should be relatively stable from the first quarter onwards -- sorry, first quarter of calendar '20, so fourth quarter fiscal for us, after the existing call centers are closed and we are fully moved over to the outsourcers.

As to your second question on guidance of the next quarters, I think you should expect a gradual improvement throughout the year where Q2 is going to be quite similar. I'm talking now in terms of EBITDA growth. Q2 is going to be quite similar in terms of year-on-year EBITDA growth as the Q1 has been. And then in Q3 and in Q4, you will have gradual improvements to get to the guidance that we're providing for the aggregate of the year.

As to the change in the M&A, let's say, there, like you say, it's actually a quite delicate topic, and we are to be constrained by the nondisclosure agreements that we signed for each one of these opportunities. We're -- all I can say is that we're working on a few and that the one that we're working on has a mixed nature. And we have both scale alternatives as well as product alternatives, and we're working in parallel in both, but I cannot make any prediction as to when and if any of those would close.

I just want to make certain that our shareholders really benefit from closing any of those acquisitions, so we make very well sure that if we close them, they are for the benefit of all of our investors.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

(Operator Instructions) At this moment, there are no questions on the audio call. We do now have a question from Isabel Carballo from BBVA.

--------------------------------------------------------------------------------

Isabel Carballo, BBVA Corporate and Investment Bank, Research Division - Chief Analyst [5]

--------------------------------------------------------------------------------

I was wondering if you can provide a little bit more detail of the evolution of bookings and revenue margin per booking in between flights and non-flights, please.

--------------------------------------------------------------------------------

David Elizaga Corrales, eDreams ODIGEO S.A. - CFO & Executive Director [6]

--------------------------------------------------------------------------------

I'm going to repeat your question because it was actually quite tough for us. I think your line is a bit low. It was quite tough for us to listen to it, so I think I have it. I will repeat. If I make any mistake, please correct me. Your question was if we could give any more light on the evolution of the bookings between flights and non-flights.

--------------------------------------------------------------------------------

Isabel Carballo, BBVA Corporate and Investment Bank, Research Division - Chief Analyst [7]

--------------------------------------------------------------------------------

Correct.

--------------------------------------------------------------------------------

David Elizaga Corrales, eDreams ODIGEO S.A. - CFO & Executive Director [8]

--------------------------------------------------------------------------------

And actually, according to disclosure -- yes, okay. I'm not -- I'm doing okay. My hearing, I'm very glad. We don't disclose any longer the distinction between bookings of flights and nonflights. Our main segment disclosure is one of the top 6 and the rest of the countries and then the things that look like products, let's say. We have the distinction between diversification revenues, classic customer revenues, the provider revenues and the meta and advertising. And we don't need any more disclosure about bookings of flights and non-flights as we were doing in the past.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

At this moment, there are no further questions on the call. (Operator Instructions)

--------------------------------------------------------------------------------

David Elizaga Corrales, eDreams ODIGEO S.A. - CFO & Executive Director [10]

--------------------------------------------------------------------------------

I'm going to take then questions which are coming from the webcast. The first one comes from Nizla Naizer from Deutsche Bank. And the question is, on the subscription product, do you plan to introduce this to more markets going forward? And there are another 2 or 3 questions from her, but I think it's probably better to just respond one by one, and I think it's going to be clearer to the rest of the audience. So let's go ahead with that first one. On the subscription product, do you plan to introduce this to more markets going forward?

--------------------------------------------------------------------------------

Dana Philip Dunne, eDreams ODIGEO S.A. - CEO & Executive Director [11]

--------------------------------------------------------------------------------

So first, Nizla, thanks for the questions. About our subscription product, yes, we do plan to introduce it to more markets. In fact, we actually see a lot of growth opportunities from this, and they're along 3 dimensions. So the first one, the dimension you talked about, which is geographic one. And so there's absolutely lots of opportunities for us to continue to push this forward, and we've rolled it out to 4 of our major markets already, and we will continue to roll it out to other markets also in the future.

We have this -- and besides just major markets, there are small minor markets that we can absolutely roll this out to as well, and we just simply do a trade-off of the opportunities that we have on this dimension versus the 2 other dimensions that we have in terms of growth opportunities for us around this product. And so the second dimension would be around, let's say, the product features and functionalities itself. So we have now 2 years almost with this product, which isn't -- on one hand, it's a very long period of time. On the other hand, it's not. So the amount that we've achieved is phenomenal in 2 years. When you think about like Amazon, they introduced their product, a subscription product in 2005 actually, when you look at like Spotify, Netflix, et cetera, those were in the late 2000s or in the early 2010s when they've introduced it. And so in the short period of time, we've had a phenomenal amount of success. And having said that, there still are many other things that we can still do just in terms of features and functionalities to improve the value that we actually provide the customers around this. So we've made these trade-offs between geographies in this dimension. And then the third one will be a customer segmentation dimension. And there's lots of opportunities for us to continue to segment this product along different customer cohorts as well and different customer needs. And so again, so for the future, we're absolutely thinking about these opportunities, and there are changed trade-offs between one versus the other on a continual basis.

I think the second question you had was around the subscription product. Can you remind us about the subscription product per month? I think that's a subscription fee per month. So it depends upon the market. We vary it and we test different subscription prices per market. So some markets will have, let's say, like EUR 40, EUR 45. Others will have like EUR 70, EUR 75. And really depending upon the market and the value that we actually provide with.

Then the next question, I think, from Nizla, there's a subquestion is around, which markets we've already introduced it. So we've introduced it to the big 4 markets for us, and that would be Spain, Italy, Germany and France already for it. And then I think on last one, in terms of I think Nizla's last question about this was around retention rates, what are the retention rates on this product. For that type of level of detail, let me just refer to kind of what we had -- what we've said before, which meaning at the year-end, one in June, which was -- we gave a sense for what it was initially, which was around in that -- in the -- sorry, in the 63% to 65% of customers were able to resubscribe, but we actually had a very small percentage actually saying that they didn't want to actually act -- opt out from it. And so we continue to see a strong type of performance in there with some opportunity to actually improve it. For more details about this product, what we're trying to do is on the, I believe, the 19th of November, is hold an Investor Day, and anyone is absolutely invited to it, and we'll give much more details focused on the Prime product, in particular, with that on the 19th of November.

I think Nizla's last question is a macro one. She says, "Are you seeing a slowdown in the travel in your end of the market, which markets remain strong from your point of view?" I would say that the market is all right. It's not necessarily a market that has been booming. And it's not -- definitely not a bad market at all, but this summer has been, from a European point of view, a very, very hot summer, and that typically influences or reduces the amount the people searches that they do for travel and also typically means that they stay more on average in their home markets than traveling. And so we see a slight weakness in that sense, from a general European point of view, and in particular, the U.K. market is absolutely a slow market and that will be, we think, driven, to a large extent, not just from the weather, but also from all the concerns about Brexit that the U.K. population is undergoing and has been undergoing for a long period of time.

--------------------------------------------------------------------------------

David Elizaga Corrales, eDreams ODIGEO S.A. - CFO & Executive Director [12]

--------------------------------------------------------------------------------

But just to be clear, our guidance that we have reiterated, of course, includes everything that we're seeing on the current trading throughout the summer.

--------------------------------------------------------------------------------

Dana Philip Dunne, eDreams ODIGEO S.A. - CEO & Executive Director [13]

--------------------------------------------------------------------------------

Absolutely, and I think we actually are taking a little bit of market share as well, so we feel that we are doing well within this market.

--------------------------------------------------------------------------------

David Elizaga Corrales, eDreams ODIGEO S.A. - CFO & Executive Director [14]

--------------------------------------------------------------------------------

We have more questions coming from the webcast. This is a question from (inaudible) and he says, "How are you sensitive to any financial problems of Norwegian Airline?" I'll take that one. We have a quite rigorous system of following up on airlines that may be going through financial -- special financial difficulties. And as you may be aware, there have been already, during 2019, I believe it's been 3 or 4 bankruptcies. And as you may have noticed, there's been nothing coming in our financial statements so far. So with Norwegian and any other airline that has problems or financial difficulties, we take a number of measures to make sure that we are protected in the financial risk vis-à-vis their airlines. Doesn't mean that we are immune, we will never get any impact, but I just want to make people know that we look at this very rigorously and we monitor very closely. And so far, we've been quite successful at avoiding financial impact of any of these difficulties of certain carriers.

We have, at this point, no more questions from either the conference call or the webcast, so then I am going to thank everybody for joining the webcast and conference call today. And before we conclude, I would like to remind you, and I already gave you the news that on Tuesday, the 19th of November, we will be hosting our second Investor Day alongside publication of our first half results, which will include a full financial review and then a strategic review. The Investor Day and the results publication will take place in our Barcelona offices. And save the date, and full details will be sent to you in the coming days. So in the meantime, we'll be happy to receive your questions via our Investor Relations teams and/or the investor e-mail address, which is investors@edreamsodigeo.com, and we really look forward to see as many of you who can make it in our Barcelona office, in which we'll be focusing a lot on the new Prime products. Thank you, everyone, for joining, and good afternoon.

--------------------------------------------------------------------------------

Dana Philip Dunne, eDreams ODIGEO S.A. - CEO & Executive Director [15]

--------------------------------------------------------------------------------

Thank you, everyone.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

Ladies and gentlemen, this concludes today's conference. Thank you for dialing in, and you may now disconnect your lines.