Corporate Travel Management Limited (CTD) Earnings Call Transcript & Summary

Thank you for standing by. And welcome to the CTM Half Year Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Jamie Pherous, Managing Director. Please go ahead.

Thank you, Taylor. And good morning, everyone. My name is Jamie Pherous, and with me is our global CFO, Neale O'Connell, and we're pleased to present our results for the half year to December 2019. If we can go straight to Slide 5 and the highlights of the business. So firstly, we always report to underlying EBITDA and underlying EBITDA is flat with the prior year at $64.5 million. This is excluding the impact of AASB 16 leasing standard, and applying the standard, underlying EBITDA was $68.5 million. It's very important to note that this is consistent with our assumption share with the market at the beginning of the reporting period, where we said the lower end of guidance assume the continuation throughout the entire half of a difficult trading environment as a result of Brexit, the U.S.-China trade tensions and the demonstrations in Hong Kong. In fact, it's exactly what we experienced through the whole half. So in hindsight, our assumptions are very sound. But despite all this, it's about the underlying business, and all regions grew in TTV, which is a remarkable achievement given the macro backdrop underscoring the market share gains in all regions. I do want to highlight a few regions, particularly Asia and Europe. Both regions defied the macro backdrop and grew profit in the most difficult environment either region has experienced since we listed 10 years ago, underscoring how successfully CTM has been able to export our model on a global scale. ANZ, of course, also continued its strong run of outperformance to market. And U.S.A., whilst business is being won, the onboarding of new clients has been slower than we expected. As we talk through the U.S. results on Slide 11, you'll see that North America is winning business and this activity will allow North America to take a strong momentum into FY '21, which we'll talk about shortly. And again, underlying NPAT, which we always talk to, attributable to owners of CTM was down 8%. And this is primarily due to software amortization, which we flagged and, of course, an expected higher effective tax rate given the geographical mix of profits. And again, the Board declared a half year dividend of $0.18 a share, consistent with the 1H '19 amount. Okay. We'll go through the regional performance now, and we'll start with the waterfall bridge summary on Slide 7. So as you can see, this waterfall chart breaks down the growth into organic and acquired EBITDA and we've been -- the EBITDA at the time of acquisition announcement. And the key points to note here is that, although organic growth up $0.9 million, the net result is the rest of world grew $4.4 million and the U.S.A. was down $3.5 million. Of course, the macro effects of Brexit, the Hong Kong riots and the U.S.-China trade war negated much of our growth in the first half. Also, global overhead as we flagged was up $2 million versus the p.c.p., and this is mostly due to additional costs to support the long-term growth of the business, particularly across finance, our legal counsel, insurance, et cetera. And whilst we expect in the second half it'll also be up another $2 million on the prior year, we do expect global costs to remain at these levels into FY '21. So if we go on to Slide 8, the regional overview. I won't talk much about this. It's really just a snapshot of the regions that we'll talk through shortly. But we also present constant currency given over 70% of our revenue is now generated outside of ANZ. And as you can see, we received a $2.1 million FX benefit during the period, and this is roughly $1 million above our assumptions. But I think it's very much tied to a deteriorating AUD and a deteriorating macro backdrop. So let's go into the regions. Let's go to Slide 9 if we can, ANZ. Again, I don't know much more to say about this other than it's an exceptional result in the midst of a difficult backdrop in that sense. The region continues to outperform. You can see the margins in -- for the business to grow 9% in profit in this particular half is an excellent result. Again, we expect to have continuing market share growth because of the strong service proposition and technology platform we've developed in this region. If we move to Slide 10, Asia. Again, underlying EBITDA are up 6% on the prior corresponding period. Again, this is a really exceptional result in very difficult 1H '20 conditions. And so we're all aware about the Hong Kong demonstrations and what that did as well as the U.S.-China trade war. And the most important thing here is TTV and revenue growth does include Lotus for 1 quarter that wasn't there the last year. But more importantly, it's a successful execution of supply revenue strategy that we flagged that's really protected the business against the negative macroeconomic shocks, and that continues into the second half. But more importantly, underbuying business really is performing well, and that's really because of the technology gains. We're getting good tractions in clients. We're resulting in more client wins and improved sales pipelines. So the good thing pre-corona, which we'll talk about, is that what we found late in the half, the business really came good, I guess, in a sense that the Hong Kong demonstrations and trade war impact abated significantly very late in the half, which bodes well when we look at the underlying business performance. Onto Slide 11, North America. Spend a little bit of time here. Whilst TTV was up 10%, profit was down 20% and down a few million more than we planned. So what happened here? This is primarily because, whilst we are winning business, the business won onboarded slower than we expected. And that's a combination of being client related and tech related. We want to make sure our tech was probably too perfect before we let clients have a go at it. It's this impact that didn't quite offset the temporary increase in costs that we've previously flagged to the market. So as you can see, revenue was down 1%, but we did expect this. And this is what happens when we move traditional clients from full service to online or lower fees. We're going to get a lower transaction revenue per transaction. Clearly, doing this was a one-off thing. It took some energy and cost, but it's very important that we underpin the advocacy of happy clients because happy clients happy with the technology certainly helps us win future business and become our advocates. And as we said, whilst this was slower than we had hoped, things have turned very quickly in the last few months for us in the U.S.A. And this is primarily because of the new leadership that we've put in play, and he is making a difference. We have a new CTO, who's really accelerated the take-up of technology with customers. And some of you may have met our new COO at the AGM last November. Both are getting what I'd call stuck into it and getting results. And then if we talk about the costs, as we did previously flag, we are carrying excess costs at a temporary. And I'm pleased to advise that these costs are on track to reduce, and we expect circa USD 2 million to come out of the cost base in the second half. Of course, it's ex CTP acquisition of course with more in FY '21. But the key point I want to make is the blockages we have experienced have been resolved, and the proof is clients being won due to technology. As you can see, as we stated here, over USD 100 million of clients we've actually won that haven't commenced trading that will commence this half. And there's similar volume in the final decision making. We're seeking 1 of our 2 remaining providers in the process. And this is really important because this is the sort of wins in part that we've always aspired for in the U.S.A. Yes, it's taken us a little longer than we hoped, but the point is, at this point in time, we're there. So when we stand back and reflect on where we're at in the States, now we've got the scale -- we've got some scale. We've certainly built a profitable business, but now we have that superior client value proposition that we have in every other market. And now that we have our own tech up and running, it's being used and clients are happy using it. It is clearly now making a difference to our wins. So this is why we expect the U.S. to be the largest contributor to new client wins in this calendar year and particularly FY '21. So again, as you guys know, whilst anything we win today doesn't make much of a difference to 2H because the time they transact, it won't come until May or June, what all this is doing is giving us really strong momentum for FY '21 in 2 ways. Firstly, we're going to have a strong profit growth leverage because we're going to have costs out combined with a good top line outcome. And those sort of numbers we're talking about, we're still -- where we got -- still got 4 months to go in the year of wins, sets us up pretty nicely. And again, on top of this, we've got CTP, which had no contribution to U.S. in the first half, coming on, and we expect their past success in higher education to fuel more organic growth opportunities in the year ahead. So again, as we said, it's taken us a lot longer than we hope with North America, but we think we're there. If we go to Slide 12, Europe. Just going back to Europe, again, an excellent result, underlying EBITDA up 15% on the p.c.p., an extraordinary result given the Brexit backdrop that we had. And this has been a number of years now of outperformance, and it's a great credit to the management team over there. Again, the business is consistently gaining market share. We're getting high client adoption of CTM technology. That's why the margins are there. But most importantly, post-U.K. election, we really are experiencing some improved client activity, which bodes well for the future. Okay. I think now I'm going to hand over to our CFO, Neale O'Connell, to talk through the group financial summary.

Thanks, Jamie, and welcome to everyone on the call. I'll run through some of the financials. Onto Slide 14 with the profit and loss. As Jamie laid out earlier, the underlying EBITDA is flat year-on-year. Underlying NPAT declined due to the expected increase in software amortization and the effective tax rate. We expect that effective tax rate to be circa 25% moving forward. We also expect the amortization of capitalized computer software to be in the region of $6.5 million to $7 million for the second half, similar to the first half. Turning to Slide 15, and you'll see a reconciliation from EBITDA to underlying EBITDA, including the AASB leasing standard impact. The major items here are the nonrecurring items of $3.7 million and the AASB 16 impact of $4 million. I want to quickly touch on the provision for legal settlement relating to a documentation of meal and rest breaks for hourly employees in our California office for the period 2014 to 2020. Under California law, we are -- we must be able to prove meal and rest breaks were actually taken. Whilst we've made no admission of wrongdoing, but to avoid a lengthy litigation, we have come to a mediated agreement. And this is still subject to court approval, and therefore, we have made a provision accordingly. Moving to Slide 16 and the balance sheet. We've set out the balance sheet, which you see that -- shown December compared to June '19. The lower current assets and liabilities to December is due to the normal timing and seasonal variation compared to June. Pleasingly, we can see total borrowings have reduced by $14 million to $25.3 million. As we discussed at the full year -- FY '19 full year results, we renewed our group finance facility for 3 years to give us flexibility. This further strengthens CTP for the -- CTM for the future. The new leasing standard result in increase in assets and liabilities as noted. It is also worth noting that, subsequent to year-end, we acquired CTP for $25.7 million. Moving to Slide 17 and our cash flow. Operating cash conversion was at 27%, which is once again due to the timing cycle of fixed supplier payments. We expect strong reported operating cash flow conversion in the second half due to the timing of payments in this half. As expected, we note that CapEx for the full year to be $25 million, $22.5 million of that to be technology CapEx. Turning to Slide 18 and a further breakdown of cash flow. We thought this would be useful to illustrate the point regarding timing of payments impacting the reported conversion. We provide the further breakdown and to show payments track -- P&L receipts and payments track to the reported EBITDA. The small differences to EBITDA, as you would expect, is due to comparing cash versus accruals. But this does demonstrate what we've always said, is this is the balance sheet movements that drive the variance in reported cash flow. Payment timing in the first half -- of this half resulted in one more payment cycle for our biggest region being Asia compared to 30 June '19. Hence, the reported cash conversion is low. The opposite occurs when reported cash conversion is high, and that example, as you can see, was the second half of '19. Just a reminder, these payment cycles are fixed to industry-wide and short term. You'll continue to see these type of fluctuations moving forward as you have in the past. In the appendices on Slide 29, there is a cash flow conversion history that we've previously shown that shows underlying operating cash conversion is near 100%. Lastly, we have included in the appendices a detailed summary showing the impacts of AASB 16 leases on the P&L. You'll note that by adopting AASB 16, this had -- has had an unfavorable impact to NPAT -- of $1 million to NPAT and will have an unfavorable $2 million impact for the full year. We hope that extra information is helpful. I'll pass you back to Jamie now, and he will take you through the remainder of the presentation.

Yes, thank you, Neale. If we can go to Slide 19, technology. As we've said before, technology is an important part of our client value proposition, and it becomes the #1 reason clients are choosing CTM over a competitor. And that's even starting to occur in the States now as well. Over the next 3 slides, I want to walk through our unique approach, the benefits of our strategy and the financial outcomes of this strategy to the CTM business model. Onto Slide 20 and the value-add technology. So if we go through this slide pretty carefully, firstly, it's very important to know that what we're doing different and if you follow me on the very right-hand side. What we're doing is really unique. As we said before, CTM is building our own client-facing technology, and we're doing it in-region, in-house with our clients to address specific customer needs in regions and maximize feedback loops, the speed and local market usability. By doing so, this gives us speed-to-market and drives innovation from our client base. By doing so, we're certainly controlling our destiny, and with some of the changes in travel and distribution, we've put ourselves in a really good position. So by doing that, there's a number of outcomes when clients are embracing our technology. We talk about the benefits of the technology investment. Firstly, it's no doubt it strengthens our value proposition, and that's going to help us win and retain clients or grow market share. Secondly, we get improved productivity driving EBITDA growth. And if we come to the left table there -- the left-hand side table, that's what's really happening. So what that table shows, in the dark blue, it shows revenue per FTE growing at 30% over the last 3 years and EBITDA per person growing at 66% over the same period. So why is productivity growing? It's really because, as clients use and refine our technology with us for basic travel needs, they end up making it very highly usable. So it's freeing up our staff for the highly complex and demanding travel bookings, in fact, the sort of bookings that make or break clients, to be honest with you, because it's the technical stuff that's really important for customers. So this, in turn, creates a higher service and helps win and retain clients. So it's a circle. Secondly, EBITDA is a combination, not just the productivity but it's a much lower cost per transaction for our tools through the scale we've created. So nearly all of our competitors are using third-party technology and a number of different pieces of technology meshed together to form a solution. So when you add those transactions up, it's often both expensive. It's very difficult to update and very unproductive to support not just online but off-line and after hours. And that's the big advantage we have. And thirdly, it's a barrier of entry we really have created. I mean if you take a step back, we've got a combination of a lower price point should we need to. And we've got a strong usability out of our technology, and we've got tailored innovation based in local regions, which is really creating sustainable competitive advantage for the business moving forward. So if you go to Slide 21, the content factory. This is really what we're really doing quite well. What this means at the moment, we're not relying on any one system for our content. That means we can collate content from multiple sources as we choose and deliver it to our clients in the most efficient usable way that they want it delivered. Of course, this allows us to customize offerings down to the client and the traveler, which we haven't been able to do before. And of course, the more adoption we have in our technology, the greater the impact we can have to our clients and also with our suppliers. Coming to Slide 22, again, this -- it's just how useful and usable our technology is. This is a recent slide pack from our latest tech showcase that we did late last year in Australia. I think the key point here is just to show how usable and useful our technology is. Okay. Off to guidance on Slide 23. Well, what a difference a few weeks can make, hey, and we thought the worst was over with the macro behind us in Asia and Brexit. So it's quite interesting, isn't it? But let's go to Slide 24 if we can. What I want to do is walk through, in a lot of detail, our assumptions on this coronavirus. What we want to do is isolate that impact for you and what it means to FY '20 but also beyond FY '20 because we believe it is an isolated and temporary issue that will unwind eventually. So firstly, I want to talk about how we've assessed the impact of the coronavirus. Again, it's not our first virus we've had to go through in this company. So what we've done, we've gone all the way back to 2003, and we've carefully analyzed our own previous experience with pandemics back to that basis. And on that note is we've tried to estimate then what's the potential impact of the virus to earnings. And as we said, it really comes down to 2 criteria all the time. One is duration, which is the time frame. We'll talk about that time frame, how it works. There's always a peak impact period, then a recovery period. And secondly, it's severity. And severity is an inability to travel or a reluctance for people to want to travel. And I want to talk to both those assumptions because that underpins what we're thinking. So firstly, if we come to duration. History suggests the average impact duration of these viruses is 4 to 6 months. We have assumed the impact is all of 2H '20, essentially 6 months. Secondly, history suggests there's a peak impact period that lasts 1 to 2 months. We have assumed the peak impact period lasts for 2 months, and that's February and March. And thirdly, history suggests that corporate activity, in particular, rebounds very quickly as people have to get back to these countries that they couldn't travel to, and we have assumed activity gradually returns to normal levels by July 2020. That's our assumptions. But clearly, this has been really difficult this time because this is unprecedented, what's happening at the moment, the first time governments have effectively closed borders by suspending travel to and from China. I mean China is essentially closed for travel, and this new factor makes it very difficult for us to determine the severity impact. So what does that mean for us and the border closing? And we're doing the best we can to manage this. So firstly, what I must say is Asia, compared to our peers, Asia is a very material part of our business, and that's just how it is. And we're happy with that because we're a global business. We want to be where we think the future growth is. However, what's important to note is approximately 1/3 of all our transactions derived in Asia relate to flights to and from China. So that's pretty material. So February to date, our activity is down 50%, and again, 50% is unprecedented in any time in our 25-year history, including GFC. So this is all post-Chinese New Year, which has extended to 10 February, and we've put this down a lot to the closing of Chinese borders essentially or the effective closing of borders. So more importantly, we can't control that, but what we can do is mitigate the risk to manage the temporary cycle as best we can. And again, I want to just remind you, we're a service business, and our aim is to protect our staff because we have great staff in Asia. We've been highly successful in Asia but at the same time, do our best to reduce costs in line with what we expect to be temporary activity reduction. So what are we doing about it, particularly with staff leave? We're looking at shorter working weeks, leave without pay for those that want it and just taking all the staff leave we can, particularly in the next 8 weeks. Of course, we've frozen all non-client-facing projects and nonessential costs to best match the activity declines that we can in the next few months. Secondly, I do want to touch on supplier revenues. As we flagged at the full year results, we've done some really good work and the guys worked really hard on shoring up supplier payments. And as you've seen in the evidence of 1H, that's been very successful, and we're comfortable with -- particularly in 2H, just to lay that out there. And I want to also say that this -- we have a nimble business. Again, Asia's battle hub. They've been through the toughest 9 months that we've ever experienced in Asia. So they are very nimble, and these initiatives are already well underway. So we've moved very quickly in the last 5 days. Let's talk about the round of world impact. As we flagged in our ASX release at 29 January, the rest of world has very low exposure to China, but not just China, all of Asia. And this is primarily because, thankfully for us, the natural hedge we have in our business globally is that we have very high domestic or in-region activity in our transactions. So for example, ANZ and Europe are approximately 90%, domestic or within European region Europe and U.S.A. is approximately 70%. So we take a view at the moment, under 2% of our rest of world transactions are related to flights to and from China, and it's under 4% for all our transactions from each region to all of Asia, okay? So that's an important note to note. And in fact, Europe and U.S.A. is well under that threshold, so they have the lowest exposure. Hence, when we're looking at activity as of yesterday, Europe and U.S.A., there's been a minimal impact to date relating to coronavirus. Now I want to talk about Australia. Whilst the activity is under 4%, we've got a bit under 10% of all our TTV or transaction value goes to Asia. We are experiencing activity decline, particularly the last week, which we expect is related primarily to Covid-19, but we can't be sure. As you're aware, there has been other things like floods, but the point is we are seeing an activity decline that is above that TTV exposure to Asia. So costs are being closely monitored as well, and of course, we've got contingency plans for all of these things. And we will move very quickly should there be signs of activity deterioration in these other regions. If we go to Slide 25, the impact of corona on guidance. I think it's really important to note the business and the underlying business at this point. Until the very recent coronavirus travel restrictions, CTM was tracking towards the lower end of underlying EBITDA guidance as we flagged, consistent with our assumptions shared with the market at the beginning of the reporting period. Okay? And why we were comfortable with that is because everything that impacted the first half, being Brexit, which was clearly resolved; Hong Kong demonstrations and the U.S.-China trade war, both of which have dissipated. Particularly, we saw that in the December numbers in our Asian region. They came back really quite strongly. So what that does, it implies that 2H '20 underlying EBITDA approximately $100 million, which is 17% up on last year. That's what the underlying business is doing when you back out the temporary effect of corona. So with coronavirus, we've assumed an underlying EBITDA impact of $15 million to $40 million. Now that's a really wide range, but I want to talk you through that range, so you're comfortable with the prudence and the work we've put into this. So what that's going to do, FY '20 underlying EBITDA guidance is reduce it to $125 million to $150 million, which is effectively is around flat with last year to 16.5% down on the p.c.p., and that does exclude AASB 16. Of course, our EBITDA would be higher with that. So let's just focus on these assumptions and why the guidance range is so wide. The higher end assumes the patriation activity or the recovery time frame is less than the 2 months peak duration with a 4 months' recovery time frame that we have suggested, okay? That's the higher end, and again, we don't know what can happen. But that's also a possibility because it has happened in the past. But it's the lower end of guidance that we want to talk through. That assumes the current client activity we are experiencing doesn't recover at all, i.e., the peak impact period lasts the whole half and doesn't recover. And additionally, there's another more significant impact in the rest of the world that we can't -- we haven't currently experienced, and we can't see as a flow-on effect to China being closed down for a very extended period of time, like 6 months, okay? So what I'm trying to say is that leads to why the guidance range is so wide, okay? And I want to make this very clear. Whilst history suggests a 6-month peak duration is highly unlikely, the fact is we cannot be certain today's activity decline that we're seeing won't continue. We don't have a crystal ball. But we thought it's prudent to tell you that because if we see what we're seeing today in activity and it was to continue, this bottom end is actually or could be in play. Again, I want to stress, history suggests this is highly unlikely, especially for a flu-related virus, but we don't have a crystal ball. Okay? So our focus right now is really on what we can do to mitigate what we can't control, and of course, to people that follow stock, my head is already in FY '21 and what we're doing to ensure we have a successful year ahead. So I want to remind you again, CTM is agile. We're already putting things in place to mitigate the risk. We've been through many cycles like this before, particularly being listed as well. And I think we have the experience and demonstrated that experience to manage these situations. We've already moved swiftly to mitigate the activity declines outside of our control as we've already stated. So if we move on to Slide 26. So in essence, we're doing everything we can to mitigate the exposure that we can't control, but also, we're doing everything we can to ensure we come out the other side as strongly as we possibly can. And that's what we're going to talk about beyond FY '20 because there is no doubt that CTM is facing the most extraordinary combination of macro challenges we've ever seen in 1 financial year in our 25-year history. This is unprecedented, what we're going through. But we're a lot more adaptable and ready to tackle this than we could have ever been in the past. But what's really important is that I want to enforce a few things. This guidance is coronavirus specific. We are not losing clients. The underlying business is performing well, and our fundamentals remain very, very strong. As we said before, you can see by the results, we're winning business. The model is working globally very successfully. And our technology is now rolled out, and clients are advocating it globally, which is really important. So all regions are finally positioned for organic growth. So the key point is we -- at the end of the day, we can't tell you when coronavirus is going to roll off, but what we can tell you that these pandemics historically do unwind in 4 to 6 months. And we've assumed that it will unwind. And I also want to remind you at this point, too, that pre-coronavirus, we're on track for a 2H '20 of around $100 million or 17% up. So again, we do anticipate all these macro events will unwind, and when they do, we think our financial performance will be materially different. And the last point I want to talk about is the strength of the business. We've got strong operating cash flow. Our balance sheet remains very strong, which gives us a great capacity for ongoing M&A and to be opportunistic should those opportunities arise in the coming months. Onto Slide 27, our last slide. Again, as we said before, I just want to bring you back to our long-term strategy. We do have a good track record of strong performance and execution. We've been doing this for 25 years, and since inception, we only had 1 year out of 25 where CTM didn't deliver all of the above, which is TTV, EBITDA and dividend growth. Want to remind you the huge untapped growth opportunity ahead of us. We know how big the corporate travel market is, and on TTV '19 -- FY '19, we only transacted over $6.5 billion, and that's under 1% of the global market. So we've got this huge market to grow into. And the next key point is how we're going to grow into that market. Firstly, our value proposition really is compelling to the corporate market, as we said over and over to the investment community. To be successful in corporate, you've got to be able to combine highly personalized service with technology and deliver return on investment. You can't do one without the other to be successful, and I think we've clearly demonstrated we can do that in every region we operate. And I think that, moving forward, the U.S. is our opportunity now. And of course, the unique competitive advantage we've created. We've built our own client-facing tools, as we said, in-house, in-region and with our clients. And that large investment has delivered a strong return on margins, as you can see, in both market share growth and margins in ANZ and Europe, and the opportunity now exists for us to do the same thing in the U.S. and Asia. And of course, our aspiration hasn't changed. We want to be the best in the market, in every market that we operate. We want to be a company that's achieving the best metrics we can in our industry, which is high compound growth, free cash flow, and we don't require debt to generate growth. So at that point, I'll hand over for questions. And we've gone a little bit over time, but we'll hand over to questions now if we can. Thank you.

[Operator Instructions] First question comes from Quinn Pierson from Crédit Suisse.

Jamie, Quinn here. Hopefully, you can hear me. The connection is quite poor.

Quinn, I can hear you.

Yes. Okay. Great. Just thank you for the background on coronavirus. Just so I can understand, what is the assumed peak reduction in activity? So you've said 50% reduction in February so far in Asia. Is that the assumed peak? And so the top end of the guidance, is that 50% reduction for 2 months? The bottom, is that reduction for the -- through June? Or is the peak assumed reduction in activity a different number?