CWT US, LLC (GBTG) Earnings Call Transcript & Summary

Good morning and welcome to the American Express Global Business Travel Investor Call to discuss its anticipated acquisition of CWT. As a reminder, please note today's call is being recorded. I'll now turn the call over to the Vice President of Investor Relations, Jennifer Thorington. Please go ahead when you're ready.

Hello, and good morning, everyone. Thank you for joining us for our call to discuss our agreement to acquire CWT. This morning, we issued a press release, which is available on sec.gov and our website at investors.amexglobalbusinesstravels.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 or expectations about future events, including the closing, integration and effects of the acquisition, CWT's expected financial results, 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 press release issued this morning and our other SEC filings. Throughout today's call, we will also be presenting certain non-GAAP financial measures such as adjusted EBITDA, adjusted EBITDA margin, 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 are available in the supplemental materials of this presentation and in the press 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. Paul will cover the highlights and benefits of the transaction, and Karen will discuss the expected synergies and additional transaction details. Paul will then provide closing remarks before we open for Q&A. With that, I will now turn the call over to Paul. Paul?

Thank you, Jennifer. Welcome, and thank you for joining us. This morning, we announced that we have entered into an agreement to acquire CWT for a transaction value of approximately $570 million on a cash-free debt-free basis implying an equity value of approximately $500 million. CWT is a global business travel and meetings provider, projected to generate approximately $850 million of revenue and $70 million to $80 million of adjusted EBITDA this year. This accretive transaction is expected to deliver significant shareholder value. We have identified approximately $155 million in annual run rate synergies within 3 years. Our proven track record gives us confidence in achieving this goal. This values the transaction at a pre-synergy multiple of 7.6x and an impressive post-synergy multiple of just 2.5x adjusted EBITDA. On a revenue basis, this represents an attractive multiple of just 0.7x. Approximately $430 million of the transaction consideration will be financed with the issuance of new shares of common stock at a fixed amount of $6 per share. This represents an important step towards diversifying our shareholder base. Cash on hand will fund the retirement of CWT debt and the remaining transaction consideration. This structure maintains our balance sheet strength with pro forma leverage remaining within our target range of 1.5x to 2.5x after the transaction closes. This highly accretive transaction is forecasted to be breakeven to EPS in year 1 and accretive thereafter. We expect closing will occur in the second half of 2024 subject to customary closing conditions, including the receipt of certain regulatory approvals. This transaction is a unique opportunity to significantly grow our business. We will welcome 4,000 new customers to the proven Amex GBT software and services model, create more choice for customers and more opportunities for our people. And importantly, this transaction will create significant value for shareholders. Taking a closer look at CWT headquartered in Minneapolis. CWT has a long history in travel, formed in 1994 from the combination of Carlson Travel Network in the U.S. and Wagonlit Travel in Europe. They have approximately 4,000 customers with a strong presence in high-value segments, including energy, resources and marine, media, entertainment and sports, life sciences and defense and government. 56% of the CWT TTV is generated in the United States. As you know, SME is an important strategic focus area for us. And it also represents an important strategic focus for CWT, who have been focused on expanding further in this area including a relationship with Booking.com for business to support an expanded offering for small business customers. CWT also operates a Professional Services division, including meetings and events and consulting services. CWT's vision of a tech-enabled future for business travel is aligned with our software and services model. CWT's digital products include the myCWT app with over 2.5 million downloads and an AI-powered tool AnswerIQ. CWT sees immense potential in using generative AI across its products and services. Through the integration of CWT, we will grow our footprint in high-value industry verticals, expand our professional services business and bring more customers onto our software solutions to further differentiate our business and add significant value. Moving on to the benefits of the transaction. First of all, this transaction will deliver more choice and more value to customers. CWT customers will have access to Amex GBT's proven software and services model for travel and expense. Amex GBT brings together the best people and the best technology on a global scale. Our marketplace delivers the most comprehensive and the most competitive content, and we provide the broadest portfolio of professional services in the industry, all supported by the trust, safety, security and service that customers expect from American Express Global Business Travel. Our business partners will have access to even more premium customers and modern retailing capabilities further enhancing our value proposition to our suppliers. Our platform and our financial model has proven operating leverage. Adding 4,000 customers will create greater capacity for investment in our leading software and services. Second, we've identified a material synergy opportunity that makes this transaction very attractive, and Karen will address this shortly in more detail. Third, this transaction grows our TTV by approximately 45%, our revenues by approximately 33% with a highly attractive post-synergy adjusted EBITDA multiple of 2.5x. We project the deal to be breakeven to EPS in year 1 and accretive thereafter. Finally, this is an important step towards diversifying our shareholder base. The new equity issuance that will finance a large portion of the deal has a fixed basis of $6 per share, and it reflects CWT's confidence in the value of the combined company. Importantly, the deal financing also maintains our strong balance sheet and pro forma leverage within our target range. On our last earnings call, we talked about how we are positioned for industry-leading returns in a stable growth environment in 2024 and beyond. This acquisition fits firmly within our priorities to drive growth, productivity, customer value and shareholder value. For the full year 2024, CWT is projected to generate approximately $14 billion of TTV, $850 million in revenue and between $70 million to $80 million in adjusted EBITDA. So on a pro forma basis, we project the combined companies to generate approximately $45 billion in TTV, $3.28 billion to $3.35 billion in revenues and $520 million to $580 million in adjusted EBITDA in 2024, based on our previously provided guidance for the year and before considering any synergy impact in 2024. After the acquisition closes, importantly, there remains a significant runway for continued growth. Global Business Travel spend represents a large underpenetrated opportunity of $1.4 trillion in 2024. So we see significant opportunity to continue to drive share gains and growth both organically and inorganically. I'll now turn it over to Karen to talk about the identified synergies in more detail and other transaction details.

Thanks, Paul. We have a clear and established playbook for M&A and achieving synergies. I am confident in our ability to execute this transaction and unlock the full potential of combining our 2 businesses. This is an incredible synergy story. We anticipate that we can take this business from $70 million to $80 million to approximately $230 million in adjusted EBITDA with a clear plan to a bottom line synergy opportunity of $155 million that is primarily driven by what we can control, which is cost. We have identified significant benefits to extract through consolidating the cost base of CWT and Amex GBT. Importantly, we expect AI and automation to be a significant opportunity for us. CWT is very aligned with this focus and has several generative AI use cases within its myCWT platform, highlighting the incredible leverage we have for margin expansion in the future. Reflecting the scalability of our model, approximately 80% of the synergy target is related to improved efficiency from consolidation. The remainder is related to vendor optimization. Our projections realize approximately 35% of the synergy target in 2025, ramping to the full run rate in 2027. We are confident in our ability to create the projected value and achieve a highly attractive post-synergy multiple of 2.5x adjusted EBITDA. Now that we have largely finished integrating Egencia, we have the financial and people resources to turn our focus to the integration of CWT. We have a dedicated, experienced integration team who have a proven track record in executing our synergy plans and delivering on target. I will now share 2 examples of that track record of highly accretive acquisitions and significant value creation. Highlighted on the left side of the slide, we acquired HRG, the fourth largest TMC in the world at the time which added approximately 25% TTV and 24% incremental revenue to Amex GBT for an acquired adjusted EBITDA multiple of 11.4x that we now own or 5.1x post synergy. And on the right side of the page, we acquired Egencia, the leading global B2B travel software platform in a transaction that added approximately 27% and 24% of incremental TTV and revenue, respectively. The purchase multiple of 18.8x adjusted EBITDA and total synergies delivered to date and forecast in 2024 drive a post synergy multiple of 5x. Our powerful business model built on unrivaled choice and value to customers and premium value to suppliers enables us to identify material synergies that drive down acquisition multiple. This provides the ability to make attractive acquisitions for sustained long-term growth in our large fragmented market. On our fourth quarter earnings call, we discussed our evolution to positive free cash flow and the pivotal turning point it represents for the company. And in 2024, we anticipate this momentum in free cash flow generation to accelerate. So being able to fund a portion of this acquisition with cash on hand is an important milestone for our business. In addition to its alignment with our business strategy, one of our objectives with this acquisition is to drive progress in the diversification of our shareholder base. Pro forma for the newly issued shares CWT holders, which are primarily investment funds, will own approximately 13% of the combined company. We've been thoughtful with the lockup period and the way in which we phase it. The lockup agreement allows CWT shareholders to sell 50% of their shares after 3 months and all shares after 9 months. And as you may have read in our announcement press release, CWT is highly confident in the future value creation of the combined company. Both companies' Board of Directors have approved the transaction which is expected to be completed in the second half of 2024, subject to the satisfaction of customary closing conditions. The financing of the deal will keep pro forma leverage within our target range of 1.5x to 2.5x to preserve our strong balance sheet position and maintain future flexibility. On the last earnings call, we talked about the opportunity in the second half of this year to refinance our existing debt and lower our interest expense further. Importantly, the opportunity remains, which we expect to trigger in the coming months. I've previously talked about my 3 key priorities when it comes to managing our financial performance: our strong revenue growth, substantially higher earnings, significant margin expansion, positive free cash flow and growth investments are testament to the progress we have made. The acquisition of CWT is clearly consistent with these financial priorities and is expected to supercharge our progress. My third financial priority is focused on accelerating cash flow generation. The acquisition is anticipated to be accretive to free cash flow after upfront integration costs. Second is driving operating leverage and continued margin expansion. We are confident in our powerful and scalable operating model will close the margin gap at CWT versus ours and then continue to expand margins for the combined company in the coming years. The third priority is to invest to drive long-term sustained growth. This includes both organic investment and investment in accretive M&A. The CWT acquisition falls squarely within this priority. It is projected to be breakeven to EPS in year 1 and accretive thereafter and represents a highly attractive post-synergy multiple of 2.5x adjusted EBITDA. In summary, I am incredibly excited about this transaction. With our proven track record, I'm highly confident in our ability to execute, drive further growth and deliver significant shareholder value. I will now turn the call back over to Paul.

Thank you, Karen. As I mentioned on our recent earnings call, there is a significant M&A opportunity in a large and fragmented industry. Our agreement with CWT clearly shows that we are executing against this attractive opportunity and delivering on our M&A priorities. Our first M&A priority is to drive growth. This acquisition will immediately grow our revenues by 1/3 with the potential for even greater earnings growth over time. CWT brings a diverse set of customers by industry, geography and size. Second is cost synergies and productivity. We have identified a significant opportunity of $155 million in total synergies in 3 years. Third, customer value. The acquisition of CWT provides increased customer choice, more volume on our software solutions and brings an additional 4,000 customers to the Amex GBT platform, increasing investment capacity for our leading software and services. And finally, of course, shareholder value. We expect to acquire CWT for a highly attractive post-synergy multiple of 2.5x adjusted EBITDA. We project the acquisition to be accretive to EPS and drive significant shareholder value. So to wrap things up, on our recent earnings call, I shared our powerful financial model with all of you and how it positions us for industry-leading returns in a more stable growth environment in 2024 and beyond. And our anticipated growth in adjusted EBITDA in 2024 is 18% to 32%. First, the foundation of our financial model, 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 are going to continue to grow ahead of the market by driving share gains with our differentiated value proposition. Third is margin expansion. We are laser-focused on a disciplined cost structure and margin expansion. Our operating leverage is forecasted to drive 18% to 32% adjusted EBITDA growth in 2024 before the impact of CWT. And as we integrate CWT, we expect to deliver significant synergies as we improve efficiency and optimize the combined cost base of the company. And we continue to be committed to driving continued margin expansion for the combined company. Fourth, capital deployment. We have talked about the pivotal moment that we reached in our business where our positive free cash flow can fund incremental growth opportunities. And finally, I shared before how M&A presents an opportunity to further accelerate the strong performance you are already seeing in our business. The acquisition of CWT is a powerful example of the incremental value we can create through very attractive and accretive M&A. And we have a proven track record of delivering synergies and value creation through M&A. In closing, our business performance is strong, and our financial model is delivering returns ahead of the industry. The agreement to acquire CWT will accelerate our performance further and deliver significant value for customers and shareholders. So we can now move into Q&A. Karen 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 up the line.

[Operator Instructions] Our first question comes from Peter Christiansen of Citi.

Congratulations on the deal, Paul and Karen. I had 2 questions. First, should we think that there's a potential here to improve supplier costs? Meaning that now that you'll have more market share with the CWT platform, will you be able to help deliver better cost savings for your underlying clients? And then I have a follow-up.

I mean, yes, Pete. I mean, creating more value for customers is really at the center of the transaction here, and that comes in a range of different forms. The first one is really being able to give more choice and more value to customers. So customers being able to access all of our proprietary software solutions, so including Neo, Egencia. Also, customers having access to -- we have the broadest set of professional services in the industry meetings and events and consulting services and our sustainability solutions and then a critical part of it is access to our marketplace, and this links back to your question as well, which is how we save customers' money? And we do that by giving them access to the most comprehensive and the most competitive content and creating the most valuable marketplace in travel. And certainly, that will be a big benefit to CWT customers to have access to our marketplace and to get access to the best and most comprehensive content in the industry.

That's helpful, Paul. And then I'm just curious, maybe, Karen, this is for you. The free cash flow conversion potential now is together as one entity, do you think that, that ceiling or that potential is improved with this? Obviously, there's leverage, there's synergy savings, which you've talked about and some other things. But if I think about that bridge between EBITDA and free cash flow, do we think the potential there for that to be higher than Amex GBT by itself now together with CWT, you think that potential is higher?

Yes. So thanks, Pete, for the question. So as you would expect, we'll incur some integration expenses but we do expect our free cash flow to remain positive into '25 and then really resume that acceleration at a faster pace as that integration progresses. So we feel very good about it.

So now the pace of your free cash flow conversion improvement over time should improve, should we think of it that way?

So post the integration that initial year in '25, which is really the heavy lift, beyond that, yes, that's right.

[Operator Instructions] Our next question comes from Duane Pfennigwerth of Evercore.

Just curious on the relative footprints. Maybe you could speak to the biggest difference in geography and biggest difference in maybe industry vertical footprint versus yours? And I guess relative to your own capabilities, what do you view as their biggest relative strengths?

Yes. Thanks, Duane. I think when you step back and look at the businesses, in terms of the profile geographically, there's not a huge difference. Actually, CWT has a slightly higher percentage of business in the U.S., so the 56% of the business in the United States, so slightly higher in the Americas. When you look at the industry split, they have about 35% of their business in SME and so that will bring about $5 billion of additional SME volume across to us, and that grows our SME business by about 35%. So that's really attractive. And then when you look at the global multinational customer base, they've got a really good footprint in some high-value industries. Energy, mining, marine has been a specific focus for CWT, they have a division focused on that kind of natural resources vertical. They also have a large government and defense business, U.S. government and defense. And they also have a pretty decent presence in life sciences and also media and entertainment. So for us, the attraction there is we also have a footprint in some of those, and it will give us sufficient volume in those industry segments to sort of really create dedicated verticals for those specific industries. And those are verticals we like. They're verticals which have more complexity, more value and tend to have high levels of customer retention and customer loyalty.

Great. And then on the revenue synergies, which you called out as the smaller share relative to the cost synergies. I'm just curious, is it more on the supplier side or the customer side where those revenue synergies would be realized?

The $155 million that we talked about in terms of synergies is cost. So we have not included revenue synergies in that $155 million. You should think about us taking this business from where it is today at approximately $75 million of adjusted EBITDA and taking that up to $230 million of adjusted EBITDA, and that's purely through cost savings. Any revenue benefits that we might get would be in addition to that, but we've not put that into the business case.

Okay. And maybe just last one, if I could sneak it in. High level, can you just speak to the regulatory process from here? What approvals are you needed? And when do you expect to get there? Just kind of the next 1, 2, 3 hurdles that you need to clear?

Yes. Sure. I'd love Eric to pick that up. He's leading for us.

Yes. Thanks, Paul. We believe this transaction will close, as Paul mentioned, in the second half of this year. And so that is our plan. Yes, we will be making some regulatory filings in the jurisdictions, including the United States, where they're required but we're confident that this transaction should close in the second half of the year. So that's our plan. We'll do this as promptly as possible to make that happen.

[Operator Instructions] We have no further questions in the queue, so I'll turn the call back over to Paul Abbott for any closing remarks.

Okay. Look, thank you very much, everyone. In closing, we are very excited about this unique opportunity to grow our business together with CWT to deliver even more value to our customers and our shareholders. We appreciate you all joining us today and for your continued interest in the company. Thank you.

This concludes today's call. Thank you for joining. You may now disconnect your lines.