eDreams ODIGEO S.A. (EDR) Earnings Call Transcript & Summary

Good afternoon, everyone, and thank you all for joining us today for our Q2 fiscal year 2021 results presentation for the 3 months ending 30th of September 2020. I'm David de la Roz, the Director of Investor Relations at eDreams ODIGEO. As always, you can find the results materials, including the presentation of our results report on the Investor Relations section on our website. I will now pass you over to Dana Dunne, our CEO, who will take you through the first part of the presentation. Thank you.

Thank you, David. Good afternoon, everyone, and thank you for joining us. Today, I'll give an overview of our Q2 of this financial year's results, current trading to date and what we have done to even further improve our strategic position over the past few months during the pandemic. Following this, David Elizaga, our CFO, will take you through our financial performance in more detail. I will then finish with some closing remarks. Please turn to Slide 4, which gives a summary of our performance during Q2. During Q2, we have improved our performance as the market picked up significantly versus Q1. Yet we also saw renewed softening towards the end of the quarter. Trading shows the strong and rapid turnaround we experienced during the summer period. Trading improved from the April trough at minus 96% year-on-year in bookings to an average of minus 62% in the second quarter of fiscal year '21 despite further travel restrictions being imposed in some markets starting in early August. Clearly, July to September 2020 was still an extraordinary trading period because of the COVID-19 situation and its related travel restrictions. Of note, revenue margin, down 75% year-on-year in the second quarter of FY '21, reaching EUR 34.4 million, and doubling the amount of Q1 FY '21. This was driven by a decrease in bookings of 62%. And the reduction in revenue margin per booking, which was driven by lower average basket value of bookings due to the COVID-19 situation. Which results in lower classic revenue from customers and lower revenue from providers. Marginal profit, which is revenue margin minus variable costs, this stood at EUR 11.5 million positive. That's the 10x the amount of Q1 and increasing the variability and flexibility of our cost structure, adapting to the new mix of bookings made by customers during COVID-19. This resulted in marginal profit per booking increasing 2.5x from the Q1 figure to the Q2, despite revenues decreasing more than bookings. And adjusted EBITDA was a loss of EUR 2 million, an 86% improvement on the Q1 FY '21 figure. Another highlight is how we are managing our liquidity. Through these difficult times for the travel industry, we, at eDreams ODIGEO, have managed our liquidity well. Which remains strong despite short-term trading and acceleration of reimbursements to customers. Because we have a strong liquidity position, we made a proactive decision to accelerate the refunding to our customers who are suffering from the airlines, in most cases, taking a long time to refund. In terms of our liquidity, cash performance was better than in Q2, the previous financial year. Our liquidity position at the end of September and October stood at EUR 115 million and EUR 117 million, respectively, and is higher than March and June figures, excluding the acceleration of the reimbursements. The main reasons for this development is the high variability of the cost structure and good fixed cost management. This was offset by proactive decision to accelerate the reimbursement of our customers versus inflows received from suppliers and a decrease in bookings due to higher travel restrictions. Combined, these create a working capital outflow. We have reduced our average monthly cash burn, excluding working capital and taxes from EUR 13 million to EUR 6 million, and we have a strong liquidity reserve. Our no-action stress test implies we can run the business at current booking levels through the end of 2021. And as we have highlighted in our July and August results presentation, we are using this period to improve our strategic positioning. Specifically, Prime is shining during these tough times. Prime subscriptions and share of total bookings continues to grow. Prime members in the second quarter of FY '21 reached 664,000 members. That's a 71% increase versus the same period the last financial year. Share of bookings or share of total bookings reached 26% in Q2 of this year versus 7% in Q2 of the last financial year. Prime is proving to be successful proposition to customers even in this current depressed market with 100,000 new subscribers alone in Q2 of this financial year versus just Q1 of this financial year. And we are on track to reach 2 million subscribers by 2023. In terms of current trading, the short-term outlook is largely outside our control and driven by travel restrictions in COVID-19. October and November numbers are showing minus 67% to minus 73% bookings growth year-on-year. It remains impossible to predict the future with any accuracy given the uncertainty around COVID-19 and travel restrictions, and therefore, we continue to offer no guidance for this financial year. Now I will go through the points I have just mentioned in more detail in the following slides. Please turn to Slide 5, in which we cover our diversification revenue KPIs. Overall diversification revenue is proving to be more resilient than classic customer revenue during these times. And our product diversification ratio and revenue diversification ratio have both improved. The product diversification ratio increased from 80% to 87%, a 7 percentage point improvement in a single year. Similarly, the revenue diversification ratio increased from 48% to 56% in Q2 FY '21. That's an 8 percentage point improvement again in a single year. Please turn to Slide 6, which demonstrates the progress made against our other 3 KPIs. On an annualized basis and to be expected, our customer repeat booking rate decreased due to the spread of COVID-19. This is reflected in the strict way in which we calculate this ratio. However, Q2 performance improved meaningfully versus Q1 FY '21 and is 3x greater, moving from 7% to 22%. This has been mainly driven by the success of Prime as a customer proposition. As a result of COVID-19 situation, which is distorting the relevance of this KPI, we have decided to discontinue the reporting of this KPI till further notice. Also, we have really stood out in terms of mobile, yet again, which bodes well for the future. In the last 5 years, bookings through mobile have risen exponentially, from 18% of total bookings to 57%. We have always prioritized and focused on mobile and have led the industry in Europe. Now in a post-COVID-19 world, mobile will become even more important, which is demonstrated by almost 60% of our bookings, are now actually completed on a mobile device. Lastly, on KPIs, let's look at the changes to the acquisition cost per booking index, which improved by 48 percentage points year-on-year. This is due to the adaptability and flexibility of our business. And the fact that more than 80% of our costs are variable. However, I want to make it clear that this very low level is not sustainable for the long term. As travel restrictions ease, we expect to spend more in online marketing, and this ratio will trend back to more normalized levels. If you can now turn to Slide 8, let me brief you on our current trading to date and what we have done to improve our strategic position during the pandemic. Current trading shows that short-term outlook is impacted by travel restrictions. We have seen this by the rapid rebound in bookings during the summer. As travel restrictions ease, trading improved from the April trough at minus 96% to minus 59% in August. This is positive in that in a matter of months, a large portion of the market returned in a very short period of time. Towards the end of the summer, there was a return in Europe to increasing COVID-19 cases with further travel restrictions imposed by some governments. This has reduced bookings to minus 73%, which has stabilized more recently. In comparison to the market, our trading suggests outperformance against airline industry, gaining market share versus supplier direct due to better quality, more comprehensive content and flexibility and a focus on leisure travel. Please turn to Slide 9, where I update you on the trading outlook based on analysis from the IATA Economics team published on the 29th of September. The good news is that the leisure customers are still willing to travel if allowed. We saw this in the summer, and we strongly believe that any further lifting of restrictions or the introduction of a vaccine is likely to result in a sharp rebound again. The announcement of Pfizer, BioNTech and Moderna vaccines as well as the AstraZeneca announcement this morning and 8 other companies in stage 3 trials, all this brings forward scenarios of travel returning sooner in 2021, which will favor more leisure travel companies like ours. Before the latest vaccine announcements, IATA survey suggests that over 80% passengers will return to air travel within 6 months from now. Russia recovered to pre-crisis levels due to the news about its vaccine. And China is only 20% below pre-COVID-19 levels due to strong domestic demand. Please turn to Slide 10. We are pleased to continue to report strong liquidity and a consequence of our strong business model and active management of the situation. We have achieved this despite increasing travel restrictions and the acceleration of reimbursements to customers to protect our brand. Given our strong liquidity position, we made the proactive decision to accelerate reimbursements to customers versus inflows received from airlines, which resulted in EUR 40 million cash outflow during the quarter. This resulted in liquidity positions of EUR 115 million and EUR 117 million at the end of September and October, respectively, both of which is higher than March and June figures, excluding acceleration of reimbursements. We have achieved this through 4 things: one, high variability of the majority of our costs; two, fixed costs and CapEx were reduced; three, obtaining additional financial resources of EUR 15 million from government-sponsored loan due 2023; and four, by reducing our average monthly cash burn, excluding working capital and tax, from EUR 13 million to EUR 6 million. Furthermore, our no-action stress test shows we can run the business at minus 70% bookings year-on-year through the end of the calendar year 2021. The minus 70% is our average booking performance from March through October. It is important to note the conservative nature of this no-action stress test calculation. It assumes we take no action on fixed or variable costs. None. No improvement made to working capital nor any improvement in our business whatsoever. If you can now please turn to Slide 11. I'm delighted to talk to you about the success of Prime as a customer proposition. Prime is performing strongly in this weak market. The number of subscribers has continued to improve and has risen by 100,000 in 3 months from Q1 to Q2 of this financial year, despite all of the market conditions. As you can see on the right-hand chart, Prime subscription rate and share of Prime continues to grow. Prime members in Q2 of this financial year grew 71% versus the same period last year. That's growing from 389,000 subscribers in Q2 FY '20 to 664,000 subscribers in FY '21. And the Prime share of total bookings almost quadrupled from 7% in Q2 FY '20 to 26% in FY '21. In addition, we launched Prime in new markets, the U.K., most recently in November. We also launched new products launching hotels in 4 of our largest markets being France, Italy, Spain and Germany. Also, I'm pleased to say that in our most recent survey with over thousands of responses from customers, Prime customers showed good levels of customer satisfaction, equal or higher than pre-COVID-19 levels. If you can now turn to Slide 12, let me brief you about what we have done in customer service to be on the side of the customer. First and foremost, during these times of high airline cancellations, we are focused on the customer. To have this as a key competitive advantage and to encourage customers to come back when travel restrictions are lifted. These are some of the key highlights on our canceled flight management: One, 92% of canceled flights have been resolved and are processed. Two, we have invested in significantly increasing our contact center capacity. Three, we have developed automated flight cancellation identifier, which automatically identifies canceled flights and proactively informs customers through all possible touch points and proposes options to the customer. Four, we have contacted all customers who apparently have a solution, e.g., they've gone directly maybe to the airline, just to ensure that the customer really has a solution. Five, we have informed customers of long lead times by airlines and where possible, propose a voucher as an alternative. But always, allow customers to choose between a cash refund and a voucher. We want to be on the side of the customer as their advocate and agent. Six, implemented automated processes that provide our customers near real-time updates on the status of the refund requests. And seven, we've accelerated the reimbursements to customers versus inflows we received from airlines for those cases where we know future cash reception from the airline is guaranteed. I could go on, but let's suffice to say that we have taken -- continue to take actions to help our customers and put us on their side. If you can turn to Slide 13. Let me conclude my part by summarizing what are our 3 top priorities at the moment. One, Prime, to introduce Prime in more of our markets, expand to other travel services and improve its effectiveness. Two, connectivity, improve the quality of the content by building a content-agnostic platform, which will facilitate taking content for many providers and taking even different content. Could be trains, air content, et cetera. And three, customer service automation, implement an automated customer service system, which is volume agnostic. So if there were much higher levels of customer demand, the system can automatically handle it with high levels of satisfaction. I'll now hand you over to David Elizaga, who will take you through our consolidated results.

Thank you, Dana, and good afternoon, everyone. If you could all please turn to Slide 15 of the presentation. I will take you through the financial results in more detail. Clearly, the pandemic had a significant impact in Q4 last year. And this has continued into the first 6 months of the current year. But let's outline the financial performance during the second quarter of our fiscal '21. Looking at the income statement. For the second quarter of fiscal '21 on Slide 15, revenue margin decreased by 75%. This was due to a decrease in bookings of 62% and lower revenue margin per booking. Driven by lower average basket value of bookings due to COVID-19. Customers are booking on average with less passengers per trip and to destinations closer to their homes. As a result, the revenue we get from providers is smaller. And the classic revenue we get from customers is also lower. When travel patterns return to normal, we expect revenue margin per booking to increase from its current level. On the cost side, variable costs decreased by 75%, which is the result of the adaptability of our business model to the new mix of bookings made by customers during COVID-19. Again, when travel patterns return to normal, we expect the variable cost per booking to increase from its current levels. These dynamics resulted in marginal profit of EUR 11.5 million positive. Marginal profit again is revenue margin, minus all of the variable costs. Those EUR 11.5 million are 10x the amount of the first quarter, increasing the variability and flexibility of our cost structure. Fixed costs decreased by 31%, driven by a decrease in personnel costs through a temporary employment reduction, as well as IT and external fees IT savings. As a result, the second quarter adjusted EBITDA amounted to a loss of EUR 2.1 million, which is 86% better than it was in the first quarter of this fiscal year. If we continue down the income statement, you will note that EBITDA amounted to a loss of EUR 3.6 million. This was primarily due to adjusted items in line with the same period of last year. Full details of the adjusted items can be found in a condensed consolidated interim financial statements and in the excel file that you can find in our website as well. The D&A and impairment increased by 29% relating to the increase of the capitalized software finalized in March '20. Our overall financial loss decreased by 10%, mainly due to the foreign exchange differences, partially offset by the increase in interest expense related to the use of our revolver and the new government-sponsored loan due 2023. The income tax expense amounts to EUR 1.3 million in the second quarter, which compares with an expense of EUR 3.3 million in the second quarter of last year, mainly due to lower taxable profits compared with the comparable period, the write-off of certain deferred tax assets related to tax loss carryforwards in the U.K. and no movement in the provision for income tax rates and no recognition of a deferred tax asset for part of the second quarter of '21 tax losses. Finally, adjusted net income stood a loss of EUR 19.3 million. We believe that adjusted net income better reflects the real ongoing operational performance of the business. Full disclosure of the adjusted net income can be found in Section 7 within the condensed consolidated interim financial statement tenders. Turning now to Slide 16. I will take you through the cash flow statement. In the second quarter of fiscal year, despite increased government restrictions and acceleration of reimbursements to customers, by EUR 40 million versus the inflows received from airlines, partially mitigated by higher volumes in September versus June resulted in a working capital outflow of EUR 1.8 million in the second quarter of fiscal '21. The group continues to have a strong balance sheet with liquidity position of EUR 115 million at the end of September, including the EUR 40 million acceleration of investment to customers versus the inflows received from airlines, EUR 106 million undrawn from our super senior revolving credit facility and the EUR 15 million new government-sponsored loan to finance the decrease of negative working capital, placing us in a position of strength as soon as normal activity resumes. The cash position net of overdrafts stood at EUR 0.5 million at the close of September. The cash performance during the second quarter of fiscal '21 was driven by net cash from operating activities improved by EUR 12 million, mainly reflecting the working capital outflow just described. And income tax paid, which increased by EUR 4.2 million from EUR 0.9 million to EUR 5.1 million, mainly due to the fact that there were no income tax payments on taxable profits, but we had an advanced payment in respect of an administrative procedure against the Portuguese tax authorities. There was no income tax payment and taxable profits. There was a decrease in adjusted EBITDA by EUR 31.2 million following the decrease of bookings, and we experienced an outflow in noncash items of EUR 3.3 million, when last year, we had an outflow of EUR 2.7 million. The driver of this quarter is that costs linked to COVID-19 flight cancellations were provisioned in the year-end of fiscal '20 but the outflow of that provision has happened during the last 2 quarters. We have decreased cash used for investments by EUR 2.5 billion from EUR 6.9 to EUR 4.4, due to the implementation of cost-saving measures to minimize the temporary impact of COVID-19. Cash used in financing increased by EUR 40.3 million, from EUR 12.9 million to EUR 53.2 million, mainly as a result of the repayment of EUR 54.5 million of the revolver, offset by the drawdown of the new EUR 15 million government-sponsored loan. I will now turn the presentation back to Dana to do the closing remarks.

Thank you, David. Turning to Slide 18. Let me conclude by giving you a quick recap of our overall view. We believe we are positioning ourselves for real success in the post-COVID-19 world. The strength of our finances, the adaptability of our business model, with the vast majority of our costs being variable and the mitigating actions taken during the pandemic allow us to emerge strongly and well positioned from the crisis. Our liquidity position at the end of October was EUR 117 million, including acceleration of reimbursements to customers, which could be used if needed in periods of slowing demand. Gross leverage ratio being waived for fiscal year 2021 gives us further financial flexibility. We have no short-term financial debt payments and our senior notes, new government-sponsored loan, bank facilities not due until 2023. The Prime subscription program is growing even in this poor market under extraordinary conditions. We have added 100,000 new subscribers since the end of June, and the share of total bookings reached is 26%. That's 4x more than the share in the same period last year. We have kept our teams impact and motivated to compete vigorously and serve our customers well. We are a leader in mobile, product quality and revenue diversification. And we are a true innovator in terms of subscription and customer proposition and experience. And we focus exclusively on the leisure travel consumer in markets that have shown a good ability to respond rapidly when travel restrictions start to ease, which following the news of Pfizer, BioNTech, and even AstraZeneca's vaccine, we hope this is in not too far distant future. Thus, we believe our future is bright. We will emerge a winner through these unprecedented times. With that, I would now like to take your questions. We will answer the questions sent to us in writing in the webcast. We will take questions on a first come first serve basis, but we will also try to group questions of similar nature. Should we not have the time to respond to all of the questions from the webcast, the Investor Relations team will make sure those are answered afterwards.

Okay. Thank you, Dana. I will start reading the questions that come through us -- that come to us through the webcast. The first set of questions, because there are 3 of them, come from Chadd Garcia of Shwartz Investment. The first one says, it looks like ex customer reimbursements liquidity would be EUR 157 million versus EUR 167 million at July. Is that correct? Yes. It is correct. Those will be the numbers, and it will compare as well to EUR 132 million in June and EUR 144 million in March. So adjusted for the acceleration in the refunds to customers, the liquidity would be EUR 157 million, and that would be higher than June at 152 and March at EUR 144 million. The second part of this, investor says, can you provide year-on-year revenue changes by month for the quarter? Unfortunately, not, we cannot provide this. But if I guess what this question is coming through, I would say that if you're interested in modeling liquidity, a much better proxy for the movements in liquidity is the bookings rather than the revenues because the revenues have movements from month-to-month that depends on provisions or adjustments to previous provisions, and therefore, is not such a good predictor of the movement in the cash as the bookings themselves. The third part of this, investor says, any thoughts on the jump in mobile bookings as percent of total bookings?

Let me take that, David. There's first just a context -- 2 parts of the context. Part one is that we have historically prioritized mobile. Not all companies do that, but we have from early on said that we first and foremost, want to develop for mobile and then for others. As opposed to many other companies doing actually the exact opposite. And so you've seen, over time, we really have made meaningful improvements in mobile. And it ebbs and flows from one quarter to another, and it really depends upon how much of our ideas are much more specific to mobile-only as opposed to translating between mobile and a desktop device, so to speak. And so that's why you do find some variability in the continuous increases of ours. Of late, more of our releases have been more focused really on the mobile-based solutions, coupled with the fact that, I think, in the COVID-19 situation, more people are reaching to mobile, more of these types of customers feel comfortable on a mobile device in doing bookings on a mobile device in these types of market conditions. I still believe, for the future, overall, it's going mobile, no matter what, you can't go around that. The extent to which the acceleration will happen like in the past quarter is yet to be seen. David?

Okay. I'll follow with the next question, which comes from Tom Gibney of BNP Paribas. The first question is, what would you expect the working capital outflow in the third quarter to be if bookings were maintained at current levels for the rest of the quarter? Now that is not such an easy question to address. And I'm going to presume that when you say current levels, you mean current year-on-year performance, okay? And there is a seasonality pattern by which normally, and absent any rising last-minute bookings in December for Christmas. Normally, November and December, are seasonally lower than September and October. So by keeping the same level of year-on-year performance, you would actually have a decrease in the absolute number of bookings. The rule of thumb is that around -- and we've said this before, around a 10% year-on-year gap would result in about a EUR 20 million outflow or inflow, depending in which direction it moves. And I think we would be below the 10 points, so probably a range of around 15 points. But as I say, there are many moving pieces in the cash as well. What happens with the refunds from the airlines, how much do we accelerate or not accelerate versus the customers. So I think this is a very directional response, please. The second question from this investor says, why have you reduced cash to quite such a low level? Well, the reason is that we have about 1/3 of our revolver credit facility, which has ancillary overdraft facilities. So we just can draw down immediately from the current accounts and just overdrop from them. And we're trying to be really, really optimized around every cost in the company, including the interest cost. And by doing this, we pay less interest on the debt that we're using. And the third part here says, do you have a sense of how your share of the overall OTA flight bookings market developed over the stronger booking period in July? And I think Dana is probably better positioned to respond to this one.

Yes, there's 2 points. The first one is just in terms of the data. There isn't, let's say, an easily verifiable market statistic that we can point to for this measure. However, we invest significantly in our own proprietary information in order to be able to come up with an assessment of what it is. And it does look like we've been taking market share during the summer months and even actually continuing into the OTA, all indicators that we see at least are definitely favorable to us. Absolutely. I do want to qualify that one thing. We are not focused on -- I mean, 100% of our energy is not focused on winning in the current market, right? The current market at minus 73%, minus 60% is not the real market. The real game is next summer, right? The vaccine is coming out, people are coming back to travel. And we want to make certain that we are the company of choice for that market. And so that's why so much of our teams are focused much more on long-term propositions on making certain, for example, on Prime, right? And making certain that Prime is really great. Now we've seen how -- the potential of it, but we have a lot more to come and a lot more to do on Prime still from it. And that's what we're focusing on. On the customer service, you can see how we're focusing on the customer and making certain that we keep a good report with our customers and good brands for when travel really does pick up as well. And we also have a customer automation project. And then the third area is around our connectivity. Again, not necessarily a short-term payout, meaning right now, current trading or the summer trading, but absolutely a longer-term payoff for us in that. And so hopefully, that gives you context of not only are we taking share in the short term, but we're really focused more on winning as the market returns to a much more normalized market. David?

Yes. Thank you, Dana. I will go then to the next question. The next question comes from [ Lenice Inkosky ] from Eaton Bank. Dana mentioned acquisition cost per booking will return to more normalized levels post COVID. What do you consider a more normalized level and what are some of the global travel recovery targets you would look to when assessing when to restart marketing spend? So there are 2 parts of this question. The first one, what is more normalized levels post COVID. The more normalized level would be the level of pre COVID. So you will need to look at our third fiscal quarter of fiscal '20 or the fourth fiscal quarter of fiscal '20, although that one already had about 6 weeks of COVID effect. So probably the third quarter is a better indicator. And I would take that level. And over time, that level should decrease somewhat because as the percentage of our bookings from Prime members increase, and given that the Prime members tend to repeat in cheap channels of acquisition, then they will have a positive influence in reducing the acquisition cost per booking of the aggregate of the company. And the second part of the question that says what global recovery targets you would look -- we would look at when assessing when to restart marketing spend? The way a platform works is actually more automatic than that. It's not like we're going to give an executive order from the boardroom saying, "Now it's time to restart the marketing spend because we see that the economy is doing X, Y or Z." Our platform automatically assesses the probability of revenue of each search that we get. And based on that, it automatically assesses how much to pay for performance marketing. So it's something that happens automatically in the platform. That's one of the reasons why it is so flexible on the way down as well because there are machines doing it automatically. I look now at the next question, which comes from Martin de la Concha of H.I.G Capital. It says revenue in the third -- well, it mentions the revenue for the last 4 quarters. And that in the fourth quarter of fiscal '20, we saw EUR 100 million unwind of working capital. Why did working capital not unwind even further in the following quarters as revenue decreased? How is it possible that negative working capital buildup in the first quarter when revenues have decreased to EUR 16.6 million? Well, I think here I'm going to quote myself a little bit earlier today in that revenues are not a good indicator for the evolution of the working capital. Bookings is a material indicator of the movement in the working capital. And you will remember that in the last 6 weeks of fiscal '20. So 2 weeks of February and 4 weeks of March, there was a very dramatic drop in the number of bookings. And we pay, on average, to our airline, which is a principal provider for working capital inflows on a 2-week period. That means that when there is a reduction in the number of bookings, the unwinding of the working capital happened just 2 weeks after. So already in the month of March, it was when we suffered the biggest drop in our working capital. Then after that, as bookings started to improve, even if the revenue year-on-year for that particular period was a big drop. As long as you have more bookings than in the period prior, you are going to be receiving an inflow of working capital and vice versa. So this is the way that you need to look at our working capital movements. The next question comes from Jonathan Morgan of CQS Management. And it says, what are you seeing so far in November as European lockdown restrictions have become effective?

David, let me take that one. Overall, I think, the market has stabilized pretty much. So in November, we -- our average is around 73%. There's lots of variabilities on it today, and that's normal, even without COVID, so to speak. So it's much more important to look at it on, let's say, an overall, let's say, week or several weeks basis. It really has stabilized on that. We don't see any deterioration at least for right now where we are in November. Again, I cannot predict the future from a short-term point of view about it. But overall, it seems to have been roughly stable. David, anything you want to add on it?