Q3 2023 Global Business Travel Group Inc Earnings Call
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Good morning, and welcome to the American Express Global business travel third quarter 2023 earnings Conference call. As a reminder, please note today's call is being recorded.
I'll turn the call over to the Vice President of Investor Relations RAC, but please go ahead.
Hello, and good morning, everyone.
Yes.
Earnings Conference call. This more fully in the earnings press release, which is available on Sec's Dot Gov and on our website third stop in that global business travel dotcom.
What's the basis.
A copy of today's prepared remarks is also available.
<unk> Investor Relations.
Yeah.
We would like to advise you that our comments contain forward looking statements that represent our beliefs or expectations.
Future events.
Including industry and macroeconomic trends cost savings.
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 non-GAAP financial measures have been adjusted to exclude certain items.
Some of these terms and the most directly comparable GAAP measures and reconciliations for non-GAAP measures are available in the supplemental material 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, Eric Buck, our Chief legal officer head of global M&A with that I will now turn the call over to Paul Paul.
Thank you Barry and welcome and thank you all for joining our third quarter earnings call.
In the third quarter, we once again delivered outstanding financial results driven by our focus on margin expansion cost savings again.
<unk> C is synergies and.
<unk> continued share gains.
Our results are ahead of guidance with revenue and adjusted EBITDA growth of 17% and 135% respectively.
Importantly, we generated very strong free cash flow in the quarter that was ahead of expectations.
I'm pleased to report we are now free cash flow positive on a year to date basis.
This is an important milestone for the company and an inflection point that demonstrates our continued momentum.
Based on this we had the confidence to reiterate our full year 2023 revenue and adjusted EBITDA guidance.
We are increasing our expectation for free cash flow for the full year.
Strong demand for our leading software and services in the quarter resulted in continued share gains we reported new wins value of $3 3 billion over the last 12 months.
We also have continued momentum in our product and our technology leadership with 77% of transactions now coming through digital channels further contributing to our cost savings.
SME customers represent the largest growth opportunity with the fastest growth and the highest margins in the industry.
And our results continue to be very encouraging.
We reported double digit SMA transaction growth and strong SME, new wins value of $2 2 billion over the last 12 months, including a significant contribution from previously managed customers.
Finally, our focus on delivering significant margin expansion is clearly evidenced in our third quarter results.
Adjusted operating expenses increased two 7% compared to 17% revenue growth.
And our adjusted EBITDA margin was up nine percentage points year over year, and two percentage points over the third quarter of 2019.
Adjusted operating expenses decreased quarter over quarter.
And we expect this momentum to continue into the fourth quarter.
Turning to transaction growth.
The industry is transitioning to more normalized growth rates, but our third cool quarter transaction at CTV growth remains strong.
Third quarter transactions increased 7%.
Driven by demand for business travel and our ongoing share gains.
The reported growth rate in the quarter was negatively impacted by approximately one less workday in the third quarter of 2023 and.
So on a workday adjusted basis transactions actually increased 9% in the quarter versus 2022.
<unk> grew 8% or 10% on a workday adjusted basis.
Looking at our transaction trends in more detail.
We're going to focus here on the workday adjusted growth rates, we continue to see relatively fast growth from SME customers.
Our strategy and our focus on SME growth is clearly paying off.
Any transactions were up 10% in the quarter.
Global multinational transactions were up 7% in the quarter.
Growth in hotel transactions outpaced EBITDA by five percentage points up 11, 6% respectively.
This is driven by a continuation of the trends that we've seen over the last several quarters as well as our focus on increasing the volume of hotel bookings as we continue to strengthen our hotel content on our hotel display.
International Air transactions continued to outperform domestic up 7%.
Finally here on a regional basis growth in the Americas, and EMEA were up 8%, 9%, respectively Asia Pacific continued to outperform but starting to show year over year signs of normalization with growth of 12%.
So turning to the commercial highlights for the quarter, we continued to gain share with a reported $3 3 billion of total new wins.
And importantly, we maintained our strong customer retention rate of 95%.
Our biggest opportunity remains in the SME segment.
And this represents a total opportunity of approximately 950 billion off travel spend.
Within the SME segment.
We are already the number one player in managed travel, but 70%, but this SMB opportunity is not currently in a managed travel program.
And with our leading software and services that are proven.
At scale globally.
We are very well positioned to capture the significant opportunity in our results continue to prove this out.
SME new wins value over the last 12 months totaled $2 2 billion.
Of this approximately 30% has come from previously managed.
Customers.
Customers, who are looking for the service and the savings and the control the our solutions provide.
In addition to the strong SME new wins, we continue to gain share across sectors in global multinational.
I am very pleased to report a recent global multinational new wins include Blackstone, the world's largest alternative asset manager.
Steve one of the world's leading mining companies.
Warner Brothers discovery of correspondent, leading media and entertainment companies in the World.
And finally, one of the world's largest global financial services firms.
Our growth algorithm is driven by organic growth.
And net new wins and share gains.
Although we can't control the macro environment, we can control the share gains and net new wins.
And we are very confident in the strength of our future sales pipeline and expect a strong new sales momentum to continue.
As we head into 2024.
Even if macro events do result in.
In a lower growth environment.
We expect new wins alone to provide a baseline of four to five percentage points of volume growth in 2024.
And finally here we were recently awarded eco farthest platinum for the second year in a row. This places us in the top 1%.
Independently assessed companies across the world and demonstrates our commitment to the highest standards of sustainability.
Moving onto our product and technology highlights.
We have the leading software platforms across all segments of business travel.
In a gensia EMEA.
These solutions are proven.
At scale on a global basis.
And they bring together the best people and the best technology in the industry.
Owning our own software platforms enables us to improve the end to end customer experience.
Increased automation and to reduce our operating costs.
77% of our transactions now come through digital channels and over the last four years, we've seen an increase of approximately 12 percentage points in our share of digital transactions.
Transactions, all neo antigens yet.
Increased 13% in the third quarter.
Which is well above our overall transaction growth of 7%.
Highlighting more and more share moving to our own software platforms.
Direct result.
Customer demand that we're seeing for our proprietary software solutions.
Over 60% of our digital transactions now come through our own proprietary platforms Gensia EMEA.
Yeah.
We are constantly working on new and innovative ways to meet and exceed customer needs recently, we expanded our live chat services to Microsoft teams.
And we now have six different chat channels, so that customers can efficiently manage their travel in the enterprise solutions that they use every day.
This increases customer satisfaction it promotes more bookings through our marketplace.
Year to date.
Amex GBT mobile user growth has nearly doubled mobile interactions grew by more than 140% and chat volumes are up almost 50%.
And this is important because it also unlocks a significant opportunity for us through AI powered solutions for both improving the productivity of our people and improving the customer experience.
40% of our costs are people serving customers in the voice channel.
Using AI and automation to drive efficiency is something we've been doing consistently for several years.
Including our acquisition of 30 seconds to fly a company that specializes in travel artificial intelligence.
But looking ahead, we have an even bigger opportunity.
With generative AI and large language models, we have the opportunity to drive further efficiency.
At an accelerated pace.
Finally, we continue to ensure that our customers have access to the most comprehensive and the most competitive content.
In our marketplace.
Including NBC content.
In the third quarter, we continued our expansion of MDC and are now working with 10 airlines on MDC initiatives.
So to sum up our third quarter performance.
We again delivered outstanding financial results with strong revenue growth and positive year to date free cash flow, we remain highly focused on driving margin expansion through cost savings and delivering on the egencia synergies.
This combined with our strong new wins in.
And the growing momentum we have in the SME segment.
Gives us the confidence to reiterate our full year 2023 revenue and adjusted EBITDA guidance and increase our expectation for full year 2023 free cash flow.
So that completes my review of the Q3 highlights I would like to hand, it over to Karen to discuss the financial results in more detail before moving on to our balance of year outlook.
Thank you Paul and Hello, everyone.
So before I get into the details let me give you the highlights.
As you will recall my three key priorities when it comes to managing our financial performance.
First achieving outstanding financial results by growing revenue.
Adjusted EBITDA and increasing free cash flow.
Second driving continued margin improvement.
And third creating capacity to invest and drive long term sustained right.
As you have some pool, we delivered strong results in the third quarter.
<unk> to drive momentum and strong performance year to date.
In the quarter, we grew revenue by 17% year over year, we increased our adjusted EBITDA margin nine percentage points above prior year reported positive free cash flow totaling $107 million in the quarter.
And importantly are now free cash flow positive for the year.
We have produced incremental investments in the quarter and year to date, we have treated just under $30 million of Opex.
And Capex investment on an annualized basis.
Based on driving our sales and marketing engine.
Investing in our own software and.
And AI.
Looking at the third quarter results in more detail revenue of $571 million increased 17%.
This was ahead of our guidance.
We have solid transaction growth of 9% on a Wednesday adjusted basis, and we saw continued outperformance on ideal.
As a reminder of <unk>.
Revenue model is driven by volume.
I'm retiring revenue.
And so as I said.
Our outperformance was primarily driven by a yield which is measured as revenue over <unk> and reached 8% in Q3.
The struggle as the new yield in the quarter was driven by our continued focus on revenue optimization.
And by the recovery momentum we have seen in 2023.
Particularly as a result of that.
Strong year over year International mix.
Additionally, as we look at the demand for meetings and events, we continue to see strong performance with double digit growth.
Now before we talk about adjusted EBITDA net discuss expenses, which are a key area focus for us.
Our adjusted operating expenses increased 7% in the quarter was revenues grew 17%.
Was transaction growth drive increased cost of revenue and investments in the business results in higher sales and marketing spend.
Our drive to improve margins realized.
Energy of which we are on track to exceed $60 million of expectations. This year and our cost saving initiatives resulted in a net $9 million reduction quarter over quarter.
And so this performance translates into delivering $95 million of adjusted EBITDA and significant margin expansion in the third quarter.
Adjusted EBITDA margin reached 17% nine percentage point here or anything yet.
Notably.
The strong margin performance with often two percentage points ahead of third quarter 2019 pro forma adjusted EBITDA margin.
I thought I said in my opening comments, we have to.
Free cash flow generation of 107 million in the third quarter.
This was driven primarily by net working capital actions.
We've provided more detail on free cash flow in the appendix of our earnings presentation, which are not meant to walk through on this call.
Encourage you to review to provide more context.
On our last two calls I discussed the again, Tim Watson Caf two initiatives once again on the things within our control we are delivering.
On this critical initiative, we are realizing the benefits earlier than expected.
Approximately $50 million positive free cash flow generation came from these initiatives and I expect to see a similar level of benefit in Q4.
Additionally, it is important to remember the seasonality of our business, where cash usage decreases in H T.
<unk> and <unk>.
This is certainly reflected in our third quarter performance.
Importantly, we are now free cash flow positive on a year to date basis.
As another pivotal moment for the company.
Our leverage ratio net debt divided by last 12 months adjusted EBITDA is now two seven times as of September 30th.
Our net debt is now $927 million.
This in a very significant step down for us as a company and a critical proof point in terms of the momentum and focus on the balance sheet.
We are now in our target range of two times to three times net leverage.
This reduction in our leverage ratio will drive 75 basis points of interest rate reduction on our outstanding term loan beginning later in the fourth quarter.
And just as an additional point to note we expect a further step down in our net leverage during Q1, 2024, which will drive a further 75 basis point interest rate reduction.
And so let's discuss guidance.
Turning to the fourth quarter in more detail, we are maintaining Q4 guidance with revenue expectations of 535 million to $550 million.
As a reminder, revenue growth in Q4 is lower due to the outperformance of supplier yield in the fourth quarter of 2022.
We saw a different things increases last year with the majority of performance payments paid in the fourth quarter, resulting in revenue yield of eight 9% in Q4 that is seven 4% in the prior two quarters of 2022.
As already discussed we are very focused on margin expansion and cost reduction we expect operating expenses to continue to trend down sequentially in the fourth quarter.
This is driven by the changes we announced in January relating to our reopened ization egencia finishes.
Increased digital adoption and our overall focus on productivity.
This results in fourth quarter expectations for 75 million to $85 million of adjusted EBITDA.
With an adjusted EBITDA margin of 14% to 15%.
Representing year over year, adjusted EBIT margin expansion of six to seven percentage points.
Turning to the full year.
Given our outperformance, particularly on revenue yield in the third quarter, we expect to be at the higher end of our revenue guidance range.
This would represent 23% of revenue growth year over year.
But given the investments that he mentioned, we expect to be closer to the midpoint of our adjusted EBITDA guidance range.
Representing an adjusted EBITDA margin of 16% to 17% with productivity gains and high operating leverage delivering 10 to 11 points of year over year margin expansion.
Looking beyond the end of this year. We are currently working throughout 2020 for planning process.
We recognize that the economic and political environment has become more uncertain and it is difficult to predict the impact. This may have on business travel demand in 2024.
And while we are lending to establish 2020 guidance at this point.
I wanted to provide some insight into how we are thinking about next year.
Our top line growth is driven by organic growth and net new wins.
As we've shared before business travel demand has grown at or above GDP for decades.
So it is logical to assume organic growth will track at or above GDP next year.
And there are a couple of data points Stanley.
I want to draw your attention to.
All clients and GBT a polling are supportive of continued growth in business travel.
This is seen enormous recent customer survey, which shows that 88% of our top 100 customers expect that travel spend to be flat.
In 2020 for 2023.
And <unk> right.
Our results show that 72% of buyers expect travel budgets to increase or hold steady in 2024.
But let's turn to what is in our control and quite frankly, we are delivering outstanding results.
On top of organic growth you have heard us talk about our share gain and we expect our net new wins to contribute four to five percentage points of volume price in 2020 for.
This is a strong baseline going into next year.
Finally.
We expect our continued focus on productivity and cost savings to drive further margin expansion in 2024.
We will continue to benefit from our tendency of synergies and cost savings initiatives and expect continued momentum in margin expansion.
So in summary.
We delivered strong third quarter revenue growth.
Net adjusted EBITDA margin expansion.
Year to date free cash flow.
Our net leverage ratio and creating capacity to invest but the longer term growth.
We are delivering strong results, we feel confident in our full year 2023 guidance and we are well positioned heading into 2024 and beyond.
So we can move into Q&A.
Ron and I are joined by Eric bulk.
Chief legal officer.
He will head of M&A and compliance and corporate Secretary.
Please go ahead and open the line.
As a reminder issue relates to ask a question you can press star followed by one on your telephone keypad.
If you'd like to remove your question you May press star followed by two.
Please ensure you're on mute locally when asking your question.
Our first question for stay comes from Duane <unk> from ethical.
Please go ahead.
Good morning, this is Jake on for Duane.
Were there any surprises by region or customer type this quarter. If we further segment contribution from new wins from recovery of existing customers that were in the baseline in 2019, what industries are you seeing recovery on same store sales basis.
Yeah, Thanks, Jason nice to speak to you again.
No I would just say to any real surprises I mean, mostly as a continuation of the same trends as you heard from me in the presentation.
SME continues to outpace global multinationals hotels outpacing <unk>.
Asia Pacific is that from a recovery standpoint, still a little bit ahead of EMEA, which is a little bit ahead of the Americas and those teams have been consistent now for a year.
I'd say those trends.
No surprises at all but what we have seen in terms of changing the actual technology sector sure.
Some actual improvements in Q3.
And that was I think a sector that I referenced before where.
From a global multinational segment perspective that industry has lowest recovery right.
And so I think we were encouraged to see some improvement in that sector specifically in Q3.
But that is the only thing I would call out that's different from prior quarters.
Okay. That's helpful. And then just if I can get a follow up here could.
Could you explain the change in share count and how we should think about that going forward.
Sure Eric do you want to take that one.
Sure.
May be referring to you know we did the beef a exchange in summer so.
That took the class A's.
About 74 million shares to about 465 million shares as we consolidated into one class of stock.
So really when you look through the piece and the as we remain at 465 million shares were up a little bit to that 467 million shares at some rsum vesting in September but.
The stock count really is pretty consistent but you're basically you're probably seek the more class a outstanding due to the exchange offer that we completed.
Right that makes sense. Thank you.
Our next question comes from Lee Horowitz of Deutsche Bank Your.
Your line is not really pendant. Please go ahead.
Great. Thanks, so much for the time can we talk a bit more about sort of a state of the macro environment. However, the most recent trends in your business as you pointed out.
Industry growth rates next year and is there any details you may be able to share with us as it relates to sort of monthly trends to help us.
Better understand the current state of the industry.
Yeah. Thanks Lee.
Well as it relates to Q3 initially also workday adjusted growth rate was 9% that was pretty much in line with what we expected and what we put in our guidance as you look out to Q4.
You heard from me earlier in the tools that we are confident of.
Coming in at the high end of our revenue guidance. So.
That is the most immediate outlook for for us.
2024, specifically as you mentioned that you know, we're not kind of ready to establish guidance for 'twenty four.
But given some sort of insights and how to think about 'twenty four previous conversations.
The two basic elements to 2020 for the first one.
Is what we directly control, which is what we're going to deliver in terms of continued share gains.
And the second one is the one that's more difficult to predict is what is the overall broader industry growth's going to be in.
In 2024.
What fuel is left in the tank on on recovery and what kind of macroeconomic.
GDP.
Environment are we going to be in 2024. So those are the sort of the variables as such.
The one we directly control share gains and we see four to five points.
<unk> growth in 2024 from our new wins as a baseline and then you're going to have to make a judgment about what you think is going to come in terms of additional recovery and what you think will come from the broader macro economic environments.
And that is challenging.
I think.
There's probably more uncertainty now than when we did this call 90 days ago.
Macro political and economic conditions.
Pretty uncertain.
And so I do think as you look out to 2024.
It's not clear yet.
Those headwinds and <unk> going to influence the overall market growth in 2024.
What we are doing is making sure does.
Does that we are prepared for different growth scenario in 2024.
And making sure that we have the flexibility in our model to adapt if we are in a higher or lower growth scenario and I think we've proven.
In terms of the cost savings the synergies the margin expansion.
They will serve us very well if we do find ourselves in a lower growth environment in 2024.
But obviously I think we need a little bit more time to see exactly how the year ahead is going to is going to play out.
Helpful. Thanks.
Just one follow up sort of on a.
Chris you had some time to be talking more about the promise of generative AI technologies. Obviously, you guys have a big head count organization. So presumably there's a lot of benefits. So that it can have across the P&L I guess, how quickly do you think some of the cost savings that can be gained via digital age ins and the like can be realized.
But you know it seems like with technology very quickly and perhaps you know this can be a margin driver next year, just any help there would be great. Thanks, so much.
Yes, sure 40% of our costs.
People costs that are in the voice channels, serving southern customers.
And so.
But that does present, an opportunity for us to drive productivity gains and improve efficiency and also at the same time improve the customer experience.
Driving productivity gains with automation and AI.
Not new to us we do that today with the Genocea with Neo we analyze the demand that comes in to the voice channel.
And we look at what's driving that demand and we build those features into our own software platforms. That's why our digital adoption rate is now 77% of transactions coming through digital channels.
And so when you asked about the time line associated with these things some of it is already happening today I think what is very interesting is the power of generative AI in the law.
Large language models.
Just open up new possibilities for us to do some of these things at much much greater scale.
And we are focused in three areas. One is the area I just mentioned, which is all travel counselor productivity environment.
The second area is our finance function and looking at ways that we can use AI to automate more of our.
Finance processing.
And the third actually is product and tech.
Using AI to actually do more of a basic.
Programming and engineering work.
Those three areas for us are all.
Interesting areas of focus that can deliver savings over the medium to long term and we have.
A cost savings plan.
Rolls out over multiple years, and we have savings against AI driven automation in 'twenty four 'twenty five and 'twenty six.
So I hope that gives you.
A flavor for where it's headed.
Oh, thanks, so much.
As a reminder, if you'd like to ask a question you can press star slipped by one on your telephone keypad.
Our next question comes from Toni Kaplan of Morgan Stanley.
Your line is now open. Please go ahead.
Hey, Paul this is hilary on for Tony.
Just wanted to ask on transaction volume.
I know you guys wanted to kind of move on.
On the 2019 benchmarks, but just based on our estimates it looks like.
Transaction volumes has kind of stayed around this.
Mid to high seventies, as 2019 pro forma levels the past three quarters. So just wondering.
If you have any color on why the volume recovery may be slowing down a bit or like how do you see that going forward. I know you expect a baseline of 4% to 5% growth for next year, but just wondering anything else that you could add to that.
Yeah.
Yeah, well I think we said earlier in the year that we'd probably see a couple of points additional recovery per quarter and thats pretty much what we've seen.
I think the latest.
That's for kind of for Q3 is volume recovery on transaction and sales is around 70 778, our revenue recovery is just up around.
Roughly 80% level.
And we have been seeing some sequential.
Improvement quarter over quarter, you do have to.
Normalized for.
Workday adjustments in order to get that view, but that's basically the patent the patent is actually very consistent with what we guided to at the beginning of the year.
I just want to come back to the four 5% to make sure it's clear.
I wasn't guiding to 45% gross in total next year I was guiding to four 5% as a baseline of what we control, which is the impact of the net new wins and the share gains.
So.
What we'll have to do over time is to make a judgment about what level of market growth is going to come in addition to that.
And that's what I was saying earlier that is a more difficult judgment to make in this environment. Because there clearly is a greater amount of economic and political uncertainty. So I just wanted to make sure that point was clear.
Great I appreciate that great color.
Just wanted to touch on margins if I could.
I know, we kind of have a limited history here, but.
Wondering if you could tell us like how we should kind of expect the cadence of margins going forward should we expect kind of a.
Step up from Q1, Q2, and then subsequent steps down in Q3, and Q4 going forward are still kind of too early to tell.
Hi, Henry it's Karen here and.
And we have talked in the past.
About just the seasonality of our business and so with the high volumes in the first half you would expect high volumes.
First to look at this on a on an annual basis well we funded.
Around 16, 17% on a full year basis, we have also talked about.
Over time, the expectation around our margin.
In between.
No <unk> on May 20 <unk>.
And expectation that we will see productivity.
Efficiency gains going forward and so approx.
Approximately a one point improvement, but the reason why we guide to a range is because we will and one of our priorities is around investment and says if there are investments that will drive the long term growth of this business.
We will make those investments as you can see that we've done this year.
So hopefully that gives you a bit more color in terms of how we're thinking about it but you should be thinking about the seasonality.
As well.
At this point.
Great. Thank you.
Thank you.
Tom We currently have no further questions. So I'll hand back to Paul Abbott for any further remarks.
Thank you to everyone for joining the call appreciate the questions and your interest in the company and we look forward to speaking to all of you again soon thank you very much.
Thank you for joining today's call you may now disconnect your lines.
Thank you very much.