Global Business Travel Group, Inc. (NYSE:GBTG) Q4 2023 Earnings Call Transcript
Global Business Travel Group, Inc. (NYSE:GBTG) Q4 2023 Earnings Call Transcript March 5, 2024
Global Business Travel Group, Inc. misses on earnings expectations. Reported EPS is $-0.1 EPS, expectations were $-0.06. GBTG isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. And welcome to the American Express Global Business Travel Fourth Quarter and Full Year 2023 Earnings Conference Call. As a reminder, please note today's call is being recorded. I will now turn the call over to the Director of Investor Relations, Jennifer Thorington. Please go ahead.
Jennifer Thorington: Hello. And good morning everyone. Thank you for joining us for our fourth quarter and full year 2023 earnings conference call. This morning, we issued an earnings press release, which is available on SEC.gov and on our website at investors.mxglobalbusinesstravel.com. A slide presentation, which accompanies today's prepared remarks is also available on the Amex GBT Investor Relations webpage. We would like to advise you that our comments contain forward-looking statements that represent our beliefs, our expectations about future events, including industry and macroeconomic trends, cost savings and acquisition synergies among others. All forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the statements made on today's conference call.
More information on these and other risks and uncertainties is contained in our earnings release issued this morning and in our other SEC filings. Throughout today's call, we will also be presenting certain non-GAAP financial measures such as EBITDA, adjusted EBITDA, adjusted EBITDA margin, adjusted operating expenses, free cash flow and net debt. All references during today's call to such non-GAAP financial measures have been adjusted to exclude certain items. Definitions of these terms and the most directly comparable GAAP measures and reconciliations for non-GAAP measures are available in the supplemental materials of this presentation and in the earnings release. Participating with me today are Paul Abbott, our Chief Executive Officer; and Karen Williams, our Chief Financial Officer.
Also joining for the Q&A session today, is Eric Bock, our Chief Legal Officer and Head of Global M&A. With that I will now turn the call over to Paul. Paul?
Paul Abbott: Thank you, Jennifer. Welcome to everyone, and thank you for joining our fourth quarter and full year 2023 earnings call. We once again delivered outstanding financial results, driven by continued share gains and our focus on margin expansion. In the fourth quarter, we generated revenue of $549 million and adjusted EBITDA of $80 million which nearly doubled year-over-year. Our strong full year results finished above the guidance we issued at the start of the year with revenue up 24% year-over-year and adjusted EBITDA up nearly 4x year-over-year to a total of $380 million. Strong demand for our leading software and services resulted in continued share gains. We reported a record new wins value of $3.5 billion in 2023.
This includes a record $2.2 billion of SME new wins, demonstrating continued progress with this large profitable customer segment. Our focus on driving operating leverage is clearly evidenced in our 2023 financial results. For the full year, adjusted operating expenses increased just 9% compared to 24% revenue growth, and we drove significant adjusted EBITDA margin expansion of 11 percentage point’s year-over-year. Finally, our evolution to positive free cash flow is an important milestone for the company that provides us with additional opportunities to invest in our growth and drive shareholder returns. We are rapidly deleveraging, resulting in reduced interest expense and a 2-notch credit rating upgrade from S&P Global. In 2023, we continue to execute our strategy and deliver outstanding financial results.
Our strong momentum is clearly evidenced by our key operational and financial metrics. Starting with transaction growth, full year '23 transactions were up 19%, driven by increased demand for business travel and our share gains. TTV grew by 23%, driven by the strong transaction growth and an increased mix of international bookings. Revenue was up 24% to reach $2.29 billion for the full year, driven by strong growth in transactions, TTV and increased demand for our products and professional services. Finally, our focus on margin expansion and driving strong operating leverage resulted in adjusted EBITDA growth 269% to $380 million. So looking at our trends in more detail, we saw relatively faster growth from SME customers, supporting our increased focus on this attractive customer segment.
Full year '23 SME transactions were up 20%, global multinational transactions were up 17%. Domestic transactions were up 13%, while international growth was even stronger at 21%. Growth in hotel transactions were up 20%, which outpaced the 16% growth in air transactions. This reflects industry trends as well as our intentional focus on increasing our volume of hotel bookings as we continue to strengthen our hotel content and display, providing customers with more value and more choice. Finally, here on a regional basis, transaction growth was 16% in the Americas, 20% in EMEA. Asia Pacific growth was significantly higher at 29% as we saw the benefit from a delayed recovery in this region. And so Amex GBT continues to grow and to gain share. Our revenue performance versus our major business services and travel peers is very favorable.
This is driven by two factors. First, our strong new wins performance and second, the increased demand for business travel, meetings and events from our diverse and premium customer base. So, turning to the commercial highlights. We continue to gain share and reported record total new wins of $3.5 billion in 2023. Importantly, our customer retention rate was 96%, 1 percentage point higher than the previous year. Our biggest growth opportunity remains in the SME customer segment, which represents approximately $950 billion of travel spend. We are already a leader in managed travel in this segment, 70% of this opportunity is not currently in a managed travel program. As our progress clearly demonstrates, more and more SME customers are recognizing the value of our leading software and services and a professionally managed travel program.
As a result, SME new wins for 2023 totaled $2.2 billion a record for our business that is up $100 million year-over-year. Of this, approximately 30% has come from previously unmanaged customers who are looking for the service, savings, and control that our solutions provide. This is 5 percentage points higher than our mix of unmanaged new wins in 2022. Moving on to our product and technology highlights. Developing our own software platforms, Egencia and Neo, enables us to improve the end-to-end customer experience and to leverage automation, machine learning, and AI to drive cost savings. We exited '23 with 78% of our transactions coming through digital channels. Over 60% of the digital bookings now come through our own software platforms, Neo and Egencia.
In fact, in 2023, we have 40% transaction growth on Neo and 24% transaction growth on Egencia. We firmly believe that companies like ours stand to create significant value through automation and AI. As a leading software and services company for both travel and expense, we have the opportunity and we have the expertise to increase automation, improve the customer experience, and reduce cost. And to further accelerate our progress, we recently announced the creation of a new AI initiative and dedicated team focused on increasing productivity through the adoption of next generation AI. The focus is in four areas across our organization, customer service, finance, engineering, and the broader workplace. This new team will play an important role delivering cost savings and improving the customer experience.
And finally, here yesterday, we announced an important new integration with American Express to help SME businesses control their indirect spend, manage their expenses, and book travel. We are seamlessly integrating American Express's virtual cards into our Neo1 spend management platform. We're combining procurement, expense management, online travel and payments into a single software solution. And by combining these typically disconnected processes, we are delivering unique control and savings to businesses. And we're also extending our software and services beyond travel to include procurement, expense management, and payment. We are excited about this opportunity to bring the value of Neo1 to more businesses through our partnership with American Express, a global leader in small business payments.
And now I'd like to hand it over to Karen to discuss the financial results in more detail before we move on to our 2024 outlook.
Karen Williams: Thank you, Paul, and hello, everyone. I've previously talked about my focus on achieving outstanding financial performance by growing revenue and adjusted EBITDA. Specifically, this translates into three key priorities when it comes to managing our financial performance, which are focused on accelerating cash flow generation, driving operating leverage and continued margin expansion and importantly, creating capacity to invest and drive long-term sustained growth, both organically and through strategic M&A. I am really happy with the progress we made in Q4 and full year 2023 in all of these areas. Our strong revenue growth, substantially higher earnings, significant margin expansion and positive free cash flow are testament to this.
In addition to us triggering $30 million of incremental investments as we focus on driving long-term sustained growth. So now let's turn to our financial performance in more detail. We delivered strong results in the fourth quarter. Revenue reached $549 million which was at the top end of our guidance. Solid transaction growth and continued momentum on our yields drove our revenue growth. As a reminder, our revenue model is driven by volume, sales and recurring revenue. In Q4, our revenue yield, which is measured as revenue over TTV, reached 8.7%. This was up 70 basis points versus Q3 2023, driven by our continued focus on revenue optimization, the impact of our mix, specifically international growth and then the typical Q4 seasonality due to timing of annual performance incentives and triggers.
We grew revenue by 4% year-over-year, but I encourage you to look at Q3 and Q4 together as we have different phasing of supplier revenue in 2022. H2 revenue growth was 10%. Before we talk about adjusted EBITDA, let's talk about expenses, which are a key area of focus for us. Operational efficiencies, cost saving initiatives and lower incentive costs more than offset the investments we are making in our sales and marketing engine. Software platforms and AI. This resulted in a net reduction of $15 million or 3% in adjusted operating expenses year-over-year and a reduction of $7 million quarter-over-quarter. This strong operating leverage translated into $18 million of adjusted EBITDA in the fourth quarter, up $37 million or 83% year-over-year, as adjusted EBITDA margin expanded by 6 percentage points to reach 15%.
We achieved free cash flow generation of $32 million in the fourth quarter, continuing the momentum we have seen in 2023 on generating positive free cash flow. This was driven primarily by our working capital actions, which I've discussed on previous calls. On a full year basis, transactions grew 19%, driven by strong travel demand and net new wins as we continue to gain market share. TTV grew 23%, aided by stronger international mix. This resulted in revenue of $2.3 billion up 24% year-over-year and at the high end of our most recent guidance update and above the initial guidance provided coming into 2023. Our focus on driving operating leverage resulted in adjusted operating expense growth of 9%, well below our revenue growth. And to specifically call this out, we saw a 15 percentage point difference between our top line growth and expense growth in 2023.
We increased our adjusted EBITDA margin 11 percentage points above the prior year to reach a 17% margin. And very importantly, on a full year basis, we generated positive full year free cash flow of $49 million. This evolution to positive free cash flow is a pivotal turning point for the company, driven by adjusted EBITDA growth and prudent working management, including our critical Egencia working capital initiative. Our leverage ratio or net debt divided by last 12 months adjusted EBITDA is now 2.3x as of December 31, 2023. This represents a very significant step down for us as a company. In December 2022, this stood at 8.9x. As you can see from the chart on this slide, the momentum we saw in 2023 is a critical proof point that demonstrates our discipline on the balance sheet.
And as you will hear from me later, very importantly, we are lowering our leverage ratio target range from 2x to 3x down to 1.5x to 2.5x. The reduction in our leverage ratio in Q4 drove 75 basis points of interest rate reduction on our outstanding term loan. And based upon our latest performance, we have now triggered a further step down, which drives an additional 75 basis points interest rate reduction. And so, in total, this 150 basis points production results in approximately $25 million of annual interest expense savings. And as our non-call option rolls off in July 2024, we have the opportunity to refinance our debt and further reduce our interest expense. This momentum was recognized recently by S&P Global Ratings, who gave us a 2-notch credit upgrade rating to B+ based upon our rapid deleveraging and positive cash flow.
I am now going to turn back to Paul to speak to how this momentum is continuing into 2024 before wrapping up with our 2024 guidance.
Paul Abbott: Thank you, Karen. Now I'd like to turn our attention to the year ahead. I want to start by sharing how we think about our financial model in 2024 and beyond. How our financial model can deliver industry leading returns in a more stable growth environment. You've already heard from the airlines, hotels, OTAs that the industry is now settling into a more stable level of growth. The powerful financial model that we have built positions us for industry leading returns in this more as stable growth environment in 2024 and beyond. We expect to deliver 18% to 32% adjusted EBITDA growth in this stable growth environment in 2024. And let me take you through the build. First, we expect business travel demand from our premium customer base to grow above GDP, as it has done consistently for several decades prior to the pandemic.
Second, we have a significant runway for growth in a very large fragmented market, and we expect to continue to gain share and deliver revenue growth ahead of the industry. Third, margin expansion. Operating leverage is expected to drive 18% to 32% adjusted EBITDA growth, benefiting from increased productivity and scale. We're focused on a disciplined cost structure and margin expansion. We continue to shift more and more transactions to digital channels, making further investments in automation and AI and delivering on the synergies from the Egencia acquisition. Now that we've reached a more stable growth environment, we can shift even more of our focus towards driving productivity and efficiency gains. After two years of significant hiring and training in response to industry recovery.
Fourth is capital deployment. We have reached a pivotal moment in the business where our free cash flow can now fund incremental opportunities. Our free cash flow is accelerating, thanks to our EBITDA growth, a significant reduction in restructuring expenses, lower interest expense from deleveraging and prudent working capital management. Now that we are firmly free cash flow positive and growing, we can shift more focus to organic and inorganic growth investments. And finally, as part of our financial model, we have a proven track record of accretive M&A and delivering on the synergies that can further accelerate our financial model. M&A remains a significant and attractive opportunity in a large fragmented market where scale is becoming even more important.
So looking to the year ahead, we feel the ground beneath us is more stable and the demand outlook is robust. There are a few external data points, I want to draw your attention to here that show our customers and industry experts also expect business travel demand to remain robust. First, our own most recent customer survey shows that our top 100 customers expect travel spend to be up approximately 4% in 2024. Client sentiment has improved since the previous quarter survey with a 6 percentage point increase in positive sentiment, and the percentage of clients expecting to spend more on travel has increased by 3 points. With many organizations embracing hybrid and remote work, bringing distributed teams together regularly for face-to-face interactions at meetings and events is a growing necessity.
According to our meetings and events 2024 global forecast, it's surveyed over 500 meetings and events professionals from around the world. 67% of respondents say corporate meetings and events budgets are increasing through 2024. Forward looking spend in our own meetings and events business supports this trend, currently up 10% versus the same period in 2023. GBTG's most recent poll shows that 87% of travel buyers expect travel budgets to increase or hold steady in 2024. Morgan Stanley's corporate travel survey shows 8% expected growth in business travel in 2024. Finally here, one of the largest U.S. airlines issued guidance for 3% to 5% capacity growth in 2024. So in summary, I am more positive than ever for our future. We are confident that 2024 will be another year of share gains, strong growth in profits and cash flow and continued margin expansion.
I'll now turn it over once again to Karen to provide our 2024 guidance and our capital allocation framework.
Karen Williams : Thanks, Paul. And so let's turn to 2024 guidance. We believe our operating leverage can accelerate above industry revenue growth into even higher adjusted EBITDA growth and free cash flow generation. We are guiding to full year revenue of $2.43 billion to $2.5 billion which represents growth of 6% to 9%. As Paul described, the travel demand environment has reached a point of stability. As such, we expect same-store sales to contribute 2 to 5 percentage points of revenue growth in 2024. On top of this, as we continue to gain share, we expect our net new wins to contribute approximately 4 percentage points of additional growth. As discussed, we are very focused on driving operating leverage and margin expansion, which scales single-digit revenue growth to significant adjusted EBITDA growth of 18% to 32% in our 2024 guidance to a range of $450 million to $500 million.
This reflects expected margin expansion of 150 to 350 basis points to reach a full year 2024 adjusted EBITDA margin of 18% to 20%. And it is important to note that this strong margin expansion is net of significant investments in future growth, particularly in driving our sales and marketing engine, our software platforms and AI. In 2024, we will benefit from the carryover of some of our cost transformation initiatives and will additionally realize incremental benefits from our continued focus on productivity within the enterprise. Finally and critically, we expect our strong positive free cash flow generation to continue to accelerate in 2024. We are targeting free cash flow conversion of approximately 25% of adjusted EBITDA. This means we expect to generate more than a $100 million of free cash flow in 2024 or more than double our 2023 free cash flow.
This significant step up is driven by strong adjusted EBITDA growth, the reduction of integration and restructuring costs, lower interest expense as we deleverage and the continued benefit from the Egencia working capital initiative. While I'm not going to walk through it on this call, I encourage you to review the free cash flow details provided in the appendix of our earnings presentation. Now that we have reached a stabilized level of travel demand growth in the industry, we will no longer be providing quarterly guidance. However, we have also provided historical quarterly seasonality details in the appendix of our earnings presentation to help you with your models. We expect the seasonality of revenue and adjusted EBITDA this year to be similar to last year.
And so thinking about capital allocation, 2023 was a pivotal moment for us as a company as we turned free cash flow positive, and this accelerates in 2024. Our capital allocation framework is now very much focused on growth, cash generation, and reinvestment to drive shareholder returns. Our first priority is accelerating cash generation with a longer term free cash flow target of 45% to 50% of adjusted EBITDA. Second, we continue to deleverage, now targeting a range of 1.5x to 2.5x net debt to adjusted EBITDA over the long-term. And as I said earlier, this new target leverage is lower than our previous range, reflecting our strong focus on the balance sheet. And third, we will look to invest in high return organic growth and accretive M&A.
So to wrap things up, why should investors be excited about Amex GBT in 2024 and beyond? First, we expect revenue outperformance as business travel stabilizes at or above GDP growth and Amex GBT continues to win and gain share. Second, operating leverage focused on productivity and leveraging AI and automation is expected to deliver 18% to 32% adjusted EBITDA growth in 2024. And as we look over the medium to long-term, we expect further opportunity to expand our margins. Third, we are accelerating free cash flow after last year's positive inflection. On top of this, we have an opportunity to refinance our debt for even more interest expense savings. Finally, our evolution to positive and accelerating cash flow supports investment in long-term sustained growth.
Organically and through accretive M&A. So we can now move into Q&A. Paul and I are joined by Eric Bock, who is our Chief Legal Officer and Global Head of M&A. Operator, please go ahead and open the line.
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