Flight Centre Travel Group Limited (FLT) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Flight Centre Travel Group Full Year Results Presentation. [Operator Instructions] I would now like to hand the conference over to Mr. Graham Turner, Managing Director. Please go ahead, sir.

Good morning everyone. Thanks for joining us today for our FY '24 results presentation. The format is the same as normal, but I'll briefly run you through it before handing over to the more important people. Firstly, you'll hear from Adam Campbell, our CFO and the CEO of our Global Business Services area. You'll then hear from Chris Galanty, our Global Corporate CEO; and James Kavanagh, our Global Leisure CEO. JK will hand over to our Head Graham Skroo, who will run you through our prospects for the year ahead and also our longer-term outlook. After that, we'll go to Q&A and our Supply CEO, Greg Parker, will join us for that part of the presentation. Thanks. I'll hand over to Adam.

Thank you, Haydn, and welcome, everyone. And again, thanks for taking the time to join the call this morning. As I look back on FY '24, I know that all of our teams should be very proud of what they've achieved. We progressed in the execution of our key strategies and plans. We've seen significant improvement in our key metrics, and we've delivered strong returns to our shareholders. We've seen ongoing TTV growth over the past 12 months with higher productivity across all 4 of our divisions. Revenue margins have continued to recover. Our cost discipline has continued, and we've continued to invest for the future Flight Centre Travel Group, not just the current. Underlying PBT of $320 million, finished midpoint to our guidance and reflects what I think is a pretty solid overall result. With $23.7 billion in TTV, our net margin of 1.35% was also a good stepping stone towards our ultimate margin target. Our TTV, whilst a record for us, did slow in the second half. Given the airfare deflation that we saw in key markets as well as industry-wide lower growth rates in the corporate travel center overall. The closure of GoGo in the second half and the Indian foreign exchange business at the start of this year also had an impact. Having said all of the above, that record TTV represented 10% growth year-to-year in both the Corporate and Leisure segments and was achieved with much greater productivity. The 100 basis points increase in revenue margin for the year was another positive outcome. And whilst Greg can cover any specific questions that you might want to go into, as a general comment, our total available margin across all of our product categories continues to improve. And that includes traditional back-end structures in air as well as new strategic initiatives like NDC, where we now have specific NDC agreements in place with various key airline partners, such as Qantas and Singapore Airlines. Chris and Jack, they will also cover their segment's specific initiatives that are improving our revenue margins shortly. Cost discipline has also remained front of mind with our operating cost base 15% below 2019 levels and with further opportunity to reduce that cost margin of 9.6% as volumes continue to increase. And we see economies of scale via our Global Business Services division, our productive operations initiatives in corporate and further productivity and cost-out improvements in our other divisions. As we announced previously, as well as Indian foreign exchange business that was closed at the start of the year, we've also closed the underperforming GOGO and Discova Central Americas businesses. StudentUniverse has been restructured and now forms part of the Jetmax business, and we expect that the $6.5 million in trading losses for that business will not reoccur in 2025. In addition, the Infinity and Travel Junction wholesale businesses have also been restructured with Infinity now part of Envoyage and servicing our independent agents and agencies. And TTJ operating separately for the bedbank providing API access for B2B customers. Again, we expect heavy reduction in the $6 million losses reported by these businesses in FY '24 as we look ahead to '25. All of the initiatives and outcomes to date that I've spoken about means that we've got the building blocks in place as we progress towards our target of a 2% PBT margin. We've also got strong momentum as we finish FY '24 with Leisure PBT margin above 2% for the second half, Corporate above 2% for the fourth quarter, and both the ANZ and EMEA segments above 2% for the full year. Obviously, PBT margins will be lower in the seasonally softer first half of FY '25. But again, it's great to see some of these results starting to flow through. We do believe that we're a business that should be operating at a 2% net margin. And to do that, we'll need to see our Corporate and Leisure businesses operating at around 2.2% to 2.3% for the full year. As we've spoken to many times, we won't sacrifice our business to achieve that goal in a specific time frame by sacrificing our nonfinancial assets, abandoning important strategic investments that are currently operating at lower margins or slowing growth in highly profitable but lower-margin businesses. Indeed, in FY '24, we saw 15% year-on-year TTV growth in lower-margin businesses compared to a 5% annual growth rate in higher-margin businesses. So although we have a path to achieving this target in FY '25, our business mix may impact that time frame. Chris and JK will talk to the Corporate and Leisure segments shortly, but it's worth highlighting that the Corporate PBT of $211 million was a 44% increase year-on-year and included record profit for Corporate traveler. Leisure profit more than doubled for the year, with revenue margin improving 110 basis points and net margin finishing at 1.7% for the full year and in excess of 2% for the second half, as mentioned earlier. The other segment, we also have another slide on, and that segment has also improved significantly this year, reducing from $100 million PBT loss to a loss of $79 million. Additional investment in TPConnects were more than offset by improvements in our operating businesses such as Discova Asia, Back-Roads and Top Deck, as well as the exclusion of GOGO and Discova Central Americas given their closures. Total head office costs have also improved from $74 million in losses to just under $60 million due to previously quarantine head office space in Brisbane, Melbourne and New Jersey being sublet or exited during the year, normal cost discipline through the support businesses and improved net interest in the segment. Finally, our balance sheet continues to be in a healthy position with cash in excess of $1.1 billion and operating cash inflows for the year of $420 million. During FY '24, we have had undertaken almost $450 million in capital management initiatives, including repaying $250 million of bank debt and nearly $50 million in overdraft facilities, $84 million to buy back convertible notes and $62 million in fully franked dividends paid during the year. Although the first half of each year will always be seasonally softer and is generally a cash usage period. Over the full FY '25 year, we again expect to accumulate operating cash flows as profitability builds, and we utilize our COVID era gross tax losses of $1.2 billion to offset taxes payable. And we'll use that cash to continue our capital management initiatives, including the buyback of convertible notes in the short and medium term. I'll now hand over to Chris to run through our Corporate division.

Thanks, Adam. I'll give a few more insights into our very pleasing corporate results and an update on our global corporate strategy. I'll start off by reminding everybody that we continue to address the market with 2 global winning brands, FCM and the enterprise and large market space and Corporate Traveler in the SME space. We do this, which is a very different approach from our competition because we believe that customers in the 2 respected categories have a fundamentally different problems that they're solving. And by having dedicated brands, we can better address those problems. Also, customers in the large market and SME space are acquired very differently with different sales cycles by having dedicated management, a dedicated sales and marketing machine, we can win these customers and achieve better growth rates for our competitors. A few results highlights. I'm pleased that transaction volume again saw very good growth with transactions up 11% on the previous year. A key strategy of ours is to improve revenue margin, and I'm pleased to say that we saw a 30 basis point improvement in revenue margin and our underlying profit before tax margin was up by 40 basis points as well. We again have excellent customer retention rates in the high 90s, and we signed $2 billion of annualized new customers. This means that our corporate business is a materially larger business than pre-pandemic. All of our 4 regions have seen significant growth since 2019, and our global corporate business is now 37% larger, and this is in the marketplace that we estimate is around 80% of pre-COVID levels. We continue to grow by growing to win. This is our strategy about winning and retaining customers through organic growth. Our excellent retention rates in both brands and our very strong pipelines in both brands mean that we continue to win and onboard and welcome new customers and the future pipeline in both brands is also looking very strong. In SME, in particular, we've invested heavily in our U.S.A. business where we see significant growth opportunities, and that includes investing with boots on the ground in major cities such as New York, L.A. and Chicago. We've also been focused on generating new revenue streams by solving further problems for customers in areas such as software sales, consulting, payments and meetings and events. Our strategy of productive operations, which is really about improving both our customer experience and enabling us to achieve better economies of scale as we grow is underway. It's focused on 3 key areas: firstly, the digitalization and standardization of our operations are building 1 single global operating system for both brands, enabling our customers to self-serve more easily and more readily and giving access, greater access to content by the right channels to our customers at all times. I'm pleased to say that we're already seeing some benefits of the investment in productive operations, and we achieved our 11% transaction volume growth this year with 5% fewer staff in June '24 than we had in June '23. This means that customers are self-serving more and our business is becoming very productive. We continue to focus on running our productive operations and the whole program will continue throughout this financial year and into next month, and we hope to see continual productivity gains as the program continues. With the mass adoption of Melon and FCM platforms being a key strategy of that, I'm very pleased to say that today, over 95% of FCM customers are now using FCM platform, and all new customers go straight on to the FCM platform. Melon, which is live in our 3 Corporate Traveler, Northern Hemisphere markets, the U.S., Canada and United Kingdom is our fastest-growing product in the brand. We've seen over 340% growth in Melon transactions this year. And today, over 40% of our online transactions in these 3 markets are on Melon. And we expect that rate of reduction to continue and in fact, to grow this coming year. Productive operations, both our customer-facing solutions and our consultant-facing solutions are partly powered by AI, and our AI Center of Excellence continues to focus on improving productivity, improving the customer experience and generating increased revenue for our business. We now have hundreds of thousands of transactions that are impacted and improved using AI. We've automated thousands of hours of agent time, and we now, through our FCM Extension product, which is an element or part of the FCM platform, we're seeing new revenue generated by solving customer problems using AI. Our strategy remains consistent moving into next year and our key drivers remain the same: continued growth through high customer retention and organic sales through our grow-to-win strategy, making sure productive operations continues to be rolled out to improve customer self-service to improve automation and digital solutions and to improve greater content access to our customers, achieving cost of scale benefits and making sure customers sell them online, which really improved our cost per transaction numbers and continue to focus on revenue generation through margin improvements. So that's a summary of the Corporate business, and I'll now hand over to James to give you an update on Leisure.

Thank you, Chris, and hi, everyone. I'm delighted to share that our Leisure division has delivered its best performance in a decade. And today, I'll provide an overview of the business performance, strategic direction and how we're positioned to grow into the future. So on Slide 25, you'll see an overview of our trusted portfolio of brands, which really caters to a wide range of customer segments from mass market to luxury, specialist travel and true to an independent agent offering, and a shout out to the Flight Centre brand who were awarded the Most Trusted Travel Agent in a recent study by Roy Morgan this year. This diversification sets us apart by providing the widest range of products to our customers, offering unmatched access to our suppliers and a significant career possibilities for our people. We believe that this customer-centric approach combined with our scalable business models are driving growth and profitability in the future. And each of the categories on the screen there show that we are exceeding $1 billion in TTV in sales, which really demonstrate we've proven our ability to adapt, to innovate and to grow. And the luxury, independent and specialist categories, they now account for 45% of our global Leisure TTV, which is a significant increase from 33% in FY '19, demonstrating strong growth in these attractive segments. Over $800 million in TTV alone was generated from a range of start-up businesses and products that are less than 2 years old, such as the Link Travel Group in the independent division, Travel Money's wholesale operations, Cruiseabout, MyCruise Touring in the specialist division and an Anywhere 2 Anywhere product offering on flightcentre.com. We continue to focus on cost efficiency and productivity, and this is evidenced in Australia, where the second half, TTV in the last year was greater than the same period in 2019 with less than half the network. So this really highlights that we have a displayed ability now to [ earn ] more with less. We're driving higher sales per employee and per store, thanks to our efficient technology and vastly improved employee retention, which now holds at 75%. On Slide 27, it illustrates the business model mix and the shift that is happening whereby 15% of our sales of $1.7 billion is coming from our online channels and 16% continues to come from the independent division of $1.8 billion. On Slide 28, you'll see a scorecard of our performance, and we're very happy to report, as you can see that TTV is up 10% and an excellent result in our revenue margin by continuing to focus on this have seen a 110 basis point lift, largely attributed to growth in components and all the strategic initiatives that we'll be focusing on in this space. What's very pleasing to see is an 80 basis point lift and underlying PBT margin, and that we've had 6 consecutive months of greater than 2% PBT margin in the second half, all while still achieving solid NPS results and great repeat customer scores. Onward to Slide 29, we showcased our strategic direction and our big moves. And the focus here on Leisure, number one, is to continue to differentiate Flight Centre with omnichannel capabilities. Now we're making substantial inroads and improvements in this space, particularly in our app, online platforms and in-store assets, which are essential for engagement with today's tech-savvy travelers. Our app alone is seeing over 53,000 downloads per month. And we've seen a 13% growth in bookings year-on-year while scoring 4.8 in the App Store, which is a great result. We're rolling out digital quotes, digital itineraries, and these really boost our productivity further, and they enhance upsell capabilities with our customers. Just like Corporate, we're following several AI initiatives and machine learning technologies. And these are really designed to actually test demand forecasting for us and focus on a range of propensity purchase modeling scenarios that will allow us to figure out opportunities when a customer is most likely to book. The result of this is a more personalized customer experience, which is driving conversion and satisfaction, and combined with our people's expertise, which has been famous for deals and holidays will certainly uplift future sales. And you can see more details on this on Slide 31 to 33, which will help you understand some of the positioning in this space. Our #2 big move is about the luxury travel market, and we expect significant growth in this area as we scale this cost on business, and also travel associates here in Australia and New Zealand. Both businesses offer one-of-a-kind holidays that are highly curated with experts who are in the know -- understand details and create inspiring holidays. So this segment for us is really quite lucrative. It's highly defensible. We sell a lot more components for booking, and it now accounts for about 10% of our TTV and Leisure but about 27% of profits. And I shared at our travel associates who have had a record year, and I've included a slide in the pack that you can get a feel for some of the activations we do within luxury travel to try and boost sales and attract more customers. Scott Dunn, we reported on quite a lot, and I mentioned at the half year about opening up our business in New York on the East Coast. The U.S. sales have grown 12% year-on-year. And the mix of customers coming from the East Coast now has grown from 29% of our customer base in FY '23 to 36% last year. The independent agent network continues to grow rapidly for us. We've built an ecosystem here that is attracting larger agencies, and this is all about offering market-leading content, product and commercial to our customers. We announced the launch of the Envoyage brand and it's rolling out successfully now across our 5 global markets. While Australia is actually the largest market, we're actually seeing really great signs in the U.S., which is the first country to launch the Envoyage business earlier this year. Number four, big move for us is about doubling our Cruise & Touring sales in the coming years with all the investments that we've made in this growth segment. So we're really aiming to leverage our existing brands in this space. And of course, we will be on the lookout for potential acquisitions here as well. But collectively, the Flight Centre brands, Travel Associates, Ignite and Cruiseabout are delivering sales in excess of 25% growth along in this category year-on-year. Ignite, the successful business that we bought in 2019 is a great success story. Growth in this area includes Touring alone is up 56% year-on-year, and we're really gaining pace. We announced the opening of the Cruiseabout business, and we've got 3 locations opened now with 6 in the pipeline. And what's really fueling this growth is also the investment in our people and their expertise. And the Flight Centre Travel Group is now the largest Cruise Line Industry Association accredited business for training our staff. Number five is all about our relentless focus on customer loyalty, and this is not just about maintaining high NPS for us. It's about creating repeat customers that will drive long-term sustainable growth while also gaining new customers through high referrals and investing in a range of different loyalty initiatives. So moving on to our key drivers of growth. To call out a few areas of focus here, the key for us is to continue to actually scale our winning model because we believe this will be the cornerstone of reaching more customers. We aim to expand our physical network further, grow our talent size of sales staff, along with continuing to grow our independent contractors to actually drive top line growth. In addition to this, product differentiation will be key, and we're looking to launch some new product lines that we believe will add increased value for customers, such as the Flight Centre Bundle & Save positioning, which is launching in September. We're also focusing on ancillary products and the captain pack now is one that is attaching at 65% globally while also making a difference in the local communities with our partnership with [indiscernible]. We rolled out a new global insurance contract later this year, and we expect this to provide greater value to our customers while also growing our margins. So you can see a range of these initiatives on the following slides through to 37, 38, which will illustrate it on these points. And in conclusion, as we close out FY '25, I just want to reiterate that we're really proud of the strongest performance that we've had in a decade, which shows right resilience, focus and growth. But looking forward, we're really committed to innovation, efficiency and excellent customer loyalty, combined with our strong financial performance gives us great confidence in our ability to grow and deliver sustained value to our customers and shareholders. And I'd like to take this opportunity to thank all of our team for their hard work and dedication, and to our investors for their continued support. I'll now hand over to Skroo.

Thank you, Jay. That was really exciting. As Adam did mentioned, we're targeting a sustainable 2% margin. It's aspirational, as we've said many times, but the results are moving towards this over a period of time. Profitable growth is a priority in the post-COVID era after a 5-year period of solid but basic profitless TTV expansion pre-pandemic. For example, our TTV increased almost 50% between '14 and '19, but our profit basically stagnated during that time around the $350 million -- $370 million. Our focus is on achieving that 2% margin target within the stretch time frame. It will not be to the business's long-term detriment. As Adam said, long-term value creation is the ongoing priority. We'll continue to invest in key growth drivers, specifically our people, which is obviously as everyone, our most valuable asset, retention, as you heard, has been strong post-COVID. And we recently recognized as a Great Place to Work in 25 countries. Our sales network is established, emerging in start-up brands and channels. Our products and systems to further enhance appropriately improve customer experience. We expect to spend also about $100 million on CapEx during 2025 weighted towards tech systems and obviously opening a certain number of new shops and teams in corporate. This will see further investment key projects, corporate productive operations and platforms, as you heard from Chris, Leisure omnichannel enhancements, HRIS, which is a human resources system and TPConnects on TTV aggregation. So in terms of market conditions, cost of living pressures have curbed decisionary spending in some sectors, but generally, travel has [indiscernible]. The market continues to grow year-on-year. We think it will be back to a normal 4% to 5% growth rate from this year. It's also a highly resilient sector historically, generally about a 6% CAGR in Australia short-term resident departures over a 40-year period pre-COVID. Rapid rebounds globally, the industries regained its growth trajectory fairly quickly after major downturns, Gulf War, 9/11, GFC. While there are [ also alluding ] pressures, there are also some potential tailwinds and these include higher interest rates because it helps to fuel strong demand amongst the older demographics, potentially, this will deliver higher returns on Flight Centre's large global cash and investment portfolio as well. Also as lower unemployment generally, plans across most key markets, a high percentage of the population sits within the traveling class. And if I should prioritize travel, they generally have the money to take off. Airfare deflation is another positive for us. International travel is again becoming more affordable, particularly in Australia as StudentUniverse volume grow. We had 88% growth in international tickets in Australia in July '24 versus July '23 with a 4% decline in average fares. Also since holidays are now becoming more affordable for families and other demographics. It's also delivers another potential boost to corporate travel activity as budgets start to extend further. I'll mention further index as our traditional measure of airfare affordability, compares to head on return London airfares spending with average wages. And as you may recall, this flight to London that we measured [ 1947 ] with close -- cost equivalent of 1.5 average wage, affordable increasing significantly over ensuing years and it's down to about 3 days just before COVID and it's now down to about 4 days as inflation starts to [ engage ]. We believe we're well placed to capitalize on opportunities. For example, we have a long track record of growth with diversified business, as you heard before, with strong customer value propositions across our brand portfolio. This has driven ongoing TTV growth. In the last 42 years, we've delivered 37 years of record TTV. And those 5 years, we missed that includes 5 COVID-related misses from financial year 2020 to 2023. So Leisure and Corporate businesses achieving strategic objectives. You've heard JK and Chris on this. Our Corporate business is materially larger than [indiscernible] and targeting significant productivity gains to drive stronger bottom line growth in FCM in particular. We have a more productive, more efficient and more profitable leisure business with SME delivering stronger profits and our Horizon 2 brands driving TTV growth. We aim to outpace overall market growth in both our Leisure and the Corporate sectors and deliver further margin improvement. So we believe we're operating in a growth market. We currently expect normal travel patterns to return, which is about 4% to 5% market growth annually, broadly in line with IATA's long-term projection of that 4% combat annual growth in passenger demand globally for the 2023 to 2043 period. There are positive lead indicators among Leisure and Corporate clients. For example, 70% of Corporate customers expect to travel the same or more during financial year '25. Almost 90% of Flight Centre customers expect to travel internationally within the next 12 months. Our balance sheet strength, we have a strong cash position to reinvest in the business, annual target, new M&A opportunities. Ongoing organic growth focus will consider M&A opportunities, our new products or systems to enhance our productivity, all our customer experience and new revenue streams in specialist travel sectors. So far, we had a positive start to 2025. Initial trading for 2025 is positive, with both TTV and PBT exceeding the same period '24. However, it is too early to read too much in these earlier results. 2025 TTV growth rate is likely to be obviously impacted by the ordinary airfare price deflation, which, in turn, is likely, hopefully, we believe, to simulate volume growth. We will give some 2025 guidance at the AGM in November. Our long-term priorities. No secrets here. Making sure we have the right people on the bus, and they're positive, productive, motivated, incentivized, people, workforce and culture with business P&L accountability and ownership. Product having a great range of quality, curated and personalized product, as well as mass product and great service in travel and travel-related fields. Our famous brands, creating and enhancing our famous brands are universally mentally and physically available to customers. Working with our customers and our suppliers, having satisfied customers, great relationships with suppliers, we consider paramount importance, and also the productivity in cost out. Continued to build things that are global tech products where possible, make us more productive and give our customers and our suppliers what they need. Heavy focus is on cost reduction during 2024 second half in growth. We're encouraged to start new businesses, which we call Horizon 3 businesses and grow our Horizon 2 businesses to become Horizon 1. That's all I've got to say.

[Operator Instructions] And our first question will come from Ben Gilbert with Jarden.

Just 1 for me. Adam, how should we think about the other costs into fiscal '25? Presume obviously, some internal [indiscernible] business just in terms of what's coming out of there, how we think about that delta from '24 to '25 that 100 should come down a reasonable [ outdrop ]?

Yes. So, sorry, the 100 was FY '23, we brought down to 79 this year. So look, the head office costs themselves will probably remain relatively flat around that $60 million mark. But the operating businesses should see further improvement. So we expect TTV under $10 million loss in this segment. Part of that is going to be allocated out into the Corporate and Leisure business as they start to get the benefit of TPConnects coming through into their results and part of it will be external revenue actually reducing that level as well. So we'd expect that to be under 10. TTJ and Infinity, which is just over $6 million loss, we also expect that to improve. Infinity is now part of JK's world and is importantly Envoyage business, so the independent agents and agencies there. So again, that loss should come out of there as well. So there should be a bit of ups and downs outside of that as well. We do expect the other operating business to improve a little bit going forward. But they're probably the 2 big ones that should lead to further improvement in that other sector -- other division.

Okay. And second is Corporate. So you've got 2 build of wins that you've talked to. What's the net when number appreciated these corporate contracts take a wider ramp-up, you always had a pretty strong start to the year. But it's a pretty material number, obviously, when you pump $2 billion on your base this year. I'm just trying to think about how we think and appreciate you're not giving guidance, but you could be thinking still high single, low double digit, definitely deflation pretty easily to corporate based on those wins alone.

Yes. So you are correct. I think with the larger contracted customers, the FCM customers, it does take a while for those wins to ramp up. We go through an implementation process, which can take a couple of months, even up to 9 months in some cases. It's complex global one. I think there is opportunity for growth in the SME space. With SME, we have to fight to make sure those wins turn into traded transactions, so traded revenue. And that's because they -- yes, many customers tend to have a noncompulsory booking program. It's why we have different brands too often. So a lot of that marketing and customer relationship management is about getting those transactions to actually trade at SME. So we have a much higher trade ratio to win with FCM, but it does take longer to come on board. So of the $2 billion, we'd expect certainly, well over half of it to trade in the following 12 months. And the better job we do with implementation, the better job we do. We're getting SME customers to trade, the faster the larger that trade volume is.

And just final one quickly for me. I think you guys mentioned you talked about 6 months of consecutive margins above 2% in Leisure, but the second half is typically or historically been seasonally higher than margins. We shouldn't necessarily read that you've got a more balanced seasonality because first half should still be seasonally weaker for Leisure PBT margins, right?

Yes, that's right, Ben. I mean we've still got that level of seasonality that comes through. Obviously, that second half was really positive for JK and the team, which is fantastic. But yes, that's right. You should expect those margins to be reduced as we go through this first half of '25. But we would be looking for improvement, obviously, on the first half of '24.

Your next question will come from Michael Simotas with Jefferies.

Just sort of thinking about your cost margins and revenue margins across Leisure and Corporate. Can you give us a little bit of help to understand the impact of airfare deflation on both of those things across the divisions? I know employing out a specific number is probably difficult, but just how we should think about the relative movement given the continuation of deflation and maybe some commentary on how deflation impacted on those 2 metrics in the second half?

Yes. So look, Corporate perspective, Mike, it doesn't make any difference to gross margin quite simply, but it can slightly improve revenue margin because in many cases, in Corporate, we have a fixed fee model for a transaction. So if the transaction value goes down, the fee margin as a percentage increases, so it may have had a minor impact in the second half, but we don't think it's material at this stage.

Why doesn't impact the cost margin given you're sort of measuring that as a percentage of TTV?

Well, because it still costs are the same to transact. So the margin may increase -- the cost margin may improve slightly on that. But to be honest, the main thing driving our cost margin improvement this year is not really a deflation. It's reproductivity gains. So you will see an improvement in the cost margin. That's largely being driven by automation, by digitization, and reduction in staff numbers. So we don't really consider the -- what we've seen in airfare deflation being the driver of gross margin reduction.

I thought it might have actually been a headwind to your cost...

Yes. Michael, I think, from a mathematic perspective you're exactly right. With the cost -- with deflation coming through, impacting on TTV and reducing TTV, it would on paper increase cost margin there. But as Chris said, I think the benefit that we're seeing more than -- is more than offsetting that through productivity coming through. And again, you see a bit of an improvement in the revenue margin from a similar perspective. But I think if you look at broadly that impact of deflation, a lot of that was really coming out of the Australian -- when we talk about 13%, a lot of that's coming out of the Australian market. And so there's probably more of an impact on the Leisure side of things. JK, do you want to talk to that?

Yes. Michael, just from a Leisure perspective, the math certainly do have that impact. And certainly, airfares come down, you would expect 2 things to happen. One is our cost margin would go up and also our revenue margin would come down because of the linkage with revenue to the cost of sale. However, the upside with airfare is coming down. It actually does enable us to be able to sell more products that have higher margins in there. And you can definitely see with some of the stats that I've shared that we have had a lot of growth in components and product lines like Cruise & Touring, we're selling a lot more of those now. So we're selling about 25% more year-on-year. And they naturally then drive up our revenue margin because of the product mix shift. So while it actually has some impact, it allows us to be able to sell higher margin products. And on the cost front, certainly, we have a lot of cost -- fixed costs within the business, but we do peg some particular cost to actually what's happening with sales as well. But our real focus is just making sure that we're a much more efficient business regardless of what the cost margin looks like and what the price of airfares are doing. It's just making sure that we can maintain productivity and efficiency.

That's good color. And then second one, the tiered based bonuses that you've got in the supply side of the business now, are they related to airfares or volumes?

Yes, Michael. Great, yes. Yes. Look, they're quite mixed across our supply chain. We had some that are linked to revenue. Some that actually factor in what prices the airfares are doing and some that are actually linked to coupon on tax numbers. That's quite vary around the globe at the moment. So there's not a one size fits all in that approach. But the encouraging thing that we're starting to see, which is impacted, obviously, on the increase in margin across all our categories and supply this year has just really been capacity retaining. And we are starting to see some really good positive momentum to bring back growth tiers and bonuses and different structures of deals moving forward. So actually ended the year quite well.

Great. And if I could just squeeze one more quick one in. Just how we should think about cost of touring sales or sort of the other bit that is between your revenue margin and your PBT ex the cost margin. It might be the same question that Ben asked earlier on other. But should we expect that cost of sales to sort of start to normalize or come down a little bit because it has increased a little bit over the last couple of periods?

Yes. I mean we certainly expect to see Touring continue to grow. So I'd say cost of Touring should continue to grow a bit there as well. I mean the critical thing with that really is the gross margin on that we're holding. So there's probably a positive, if you're seeing that grow, the revenue that we're getting is going to be growing at a higher rate as well. So it will start to normalize certainly. I mean we've certainly had a year or 2 where it really jumped back, but it will continue to grow as that business continues to recover and grow as well.

Next question will come from Sam Seow with Citi.

Just quickly in the U.S., you had some NDC changes there. Just want to understand how much of a drag that was to your second half Corporate PBT margin?

Yes. It did have a bit of an impact initially. And our priority throughout that period is to make sure our customers had access to content and got the best pricing. So we did need some efficiency gains in Northern U.S.A. Corporate with last 6 months. But the good news is by the end of the year we've rectified most of that situation with the supply chain. So that led to an improvement again. But yes, our priority was looking after customers in that period. So we accepted some productivity losses for a short period. But I'm pleased to say we have resolved that situation now.

Got it. And then if you were to adjust for those kind of changes, which you've now fixed, any kind of color on what you think your second half kind of Corporate PBT margin would look like?

I don't think it was material already. It didn't have that much of an impact over the period. So it was more of a bit of a frustration for our people. I don't think it had a huge impact. So I'd say, largely immaterial.

Got it. And then previously, I think you've outlined a lot of FCM wins that are in the first year, which were unprofitable, which is onboarded. Any chance you can kind of quantify that drag in FY '24 and perhaps the impact of a reversal as onboarding returns to more normalized levels?

Well, you can see that our profitability has improved this year, and that's partly because more of our volume is entering its second or third year for contracts because the wins obviously have been cumulative over the last few years. So there's always -- I'd almost have to normalize now. So I think our rate of wins now, which was exceptionally high during COVID as a percentage of our overall volume is now normalized. So I think moving forward, you should see gradual improvement in FCM profit margins because more of its volume is in later years of contracts. So we expect to see that continue to improve now.

That's helpful. And then, just on the return of back-end structures, could you perhaps frame up or quantify what that would look like in FY '25 versus kind of FY '24?

Yes, Sam. Look, we haven't seen any major change. I referred to in previous commentary about different buckets of airline carriers and the challenge to move some of the dominant carriers into a bucket 2 and 3 to look at more traditional structures. I think you alluded to some challenges in the Americas there with one of the carriers there. Thankfully, they're moving out of that bucket in 1 into a bucket 2 and 3, which is positive. Traditional back-end structures seem to just be progressing quite well. The big driver for us, which we're leading or my talented procurement team are leading is just how do we act on the front foot with a lot of our supply chain and put dealing models in place. We have some really good tracking now just in terms of how load factors are going on certain airlines where some of the weak periods are going. So I'm still waiting for them to come to us and ask for some assistance we're actually leading that charge a lot more. Backing structures across hotel and car, Cruise & Touring, all very, very stable at the moment. The cruise side of things and JK did his update before about one of the big moves about dominating in that cruise space, we've actually launched a B2B wholesale model in the cruise space down here in Australia and Cruise HQ, and that's deepened access to additional margin in that cruise category as well, which is obviously having a positive impact on overall revenue margin. And the other piece that's in there as well from a back-end and front-end contract margin perspective is that we're making some changes moving away from Cover-More, particularly for our Leisure business and across the Europe assistance, which will start in October and November this year. So a lot of work happening there. But that is about broadening our customer offering, but also increasing our attachment in the Leisure business, and we've got some pretty aggressive goals in that space.

That's really helpful. And then just one last, if I can. That 18% growth in international tickets in July '24, any reason to think that your business isn't keeping up with that, if not doing better than that in terms of exit rate?

So I might just -- I didn't catch the start of that, Sam. The 18% is July [indiscernible] that exit rate is more like 10%, 11% volume growth in Australia, I think, from memory. The 18% is July. That's just 1 month's result. It's probably pretty premature to extrapolate that.

Your next question will come from Lisa Deng with Goldman Sachs.

Just two questions on my front. One is actually on the corporate SME side of the business. We've talked a lot about FCM and that continues to be very strong. But can you give us a color on how the SME business is traveling. And then also part of the 2.0 new wins, how much of that was SME, please?

Yes, so our SME business, corporate travel is actually going very well. So it's in 6 markets. The main growth markets for us are the U.S.A., which is by far the largest opportunity, and we're really focusing on growing share there of that market, that's going very strongly. CT represents roughly 50% the winter, about half-half between the 2 brands. The advantage of SME for us is customers trade faster so we can get it implemented faster. We've invested a lot, particularly in the Northern Hemisphere 3 markets on our Melon product, which is a new technology products. And we're seeing a lot of productivity gains, in particular, in that brand because the rate of automation and digital product used by customers is increasing rapidly as well. So we're actually very pleased with the performance there. The reason FCM gets to momentum is, we tend to have more well-known customers, more famous customers, larger companies in that brand, but actually CT has more customers in its brand. So it's a very important part of our business.

Just going to say also Corporate traveler was record profit last year.

TTV record profits. Very strong performance in the SME partners.

And part of the $2 billion new wins?

It's about 50-50. So it's about half-half between the 2.

Got it. And then also the second question would be in terms of the competitive market or competitive landscape, obviously, in the U.S., we're seeing the potential Amex GBT and CWT acquisition as well as at the lower and smaller end of time, there's a lot of new start-up leveraging tech, like how are we thinking about we're able to continue to gain market share and what will be driving a key competitive advantage?

Yes. So let's divide into two. I think on the large market space with the Amex, CWT coming together. Look, we see it go, actually, we're very pleased because we want to see strong competitors in that segment. It means the category is doing well. And obviously, from FCM perspective, there are fewer players in that large market space, the more likely that FCM gets invited to a tender -- so with fewer competitors. The FCM brand grows stronger, and we're seeing that already. So that's good news. On the start-up and disruption space on technology, that's why we've invested in Netherlands. So we are bringing to get the product to market. We have brought a product to market, which absolutely goes head to head some of those digital disruptors, and we think it does very well against them. And our position is slightly different from there. So we very much have an equal digital product, but we also have that backed up by fantastic people of the 2. So we really do think we have a differentiated position. And that's why both brands are performing well.

The next question will come from Ben Wilson with Wilsons Advisory.

Just back on revenue margins for the Leisure segment. Just wondering if you can comment on, I guess, the likely outlook for full year margins next year. I appreciate the seasonality in first half or second half. I guess any increase or decrease in the overall margin may depend on the relative growth rates of, say, your luxury category, which is high margin versus independent, which is lower. I guess, can you comment on which category you see growing faster or any other things that will impact margins?

Yes. Well, you are right that a lot will depend on the mix of sales that shows up because of the vast range of margins that exist in each of the categories. But each of the categories are targeting revenue margin growth, probably not to the same extent as what's happened year-on-year, but we do expect to continue to see revenue margin growth coming through, largely attributed to a lot of the initiatives that are in place, and that will be things such as continuing to grow the number of components. A large focus on actually growing our ancillary products as well. And Graham touched on insurance as a new product line that's coming in. But also looking to increase things like the Captain's package -- the Captain's Pack, our purple ribbon fees, which are basically fees that our customers pay to us for service type products. So the more attachment we can get in that and the greater mix we can get in higher-margin products will see an overall uplift and continuous growth in revenue margin.

And then just on the Corporate side of things, just wanted to get a sense of how you see conditions globally at the moment. You mentioned a bit of a slowing climate later in the second half, but then transactions were up 11% in July. And while I guess versus PCP, that's a year ago, there's a little bit of COVID recovery from last year to now. I imagine that, that implies that conditions have picked up a little bit to start the new financial year, which I guess would be consistent with what we're pretty positive outlook statements from the offshore corporate-related peers in the June quarter results.

Yes. Look, I think we're broadly happy with the outlook. July was -- we're very pleased with July. It carried on the trend that we've seen throughout the second half of last year. So I think the one thing I'll remind everyone, one thing we said for a long time is, irrespective of how much customers are traveling. Our view has always been to have a very aggressive marketing and sales strategy to make sure we win market share. So if that looks good, that's great. We give better headwind. So we've got a tailwind. But I think we're always focused on growing share, not just relying on the customers traveling more. And at the moment, we're very pleased where we sit in the market.

The next question will come from John O'Shea with Ord Minnett.

Well done on the result first of all, guys. Excellent outcome for all of you. A couple of questions from me, given most of them have already been asked. I will just keep it pretty brief. First one is on the revenue margin in Corporate. You've mentioned what the Leisure side, and you mentioned before, Chris, about some of the FCM clients reasonably well progressed in terms of down that track. Are you expecting that mix impact to have a negative/positive impact this year? And how would -- how should we think about the outlook for revenue margins for the Corporate business in '25?

John, yes, we're pleased where the revenue margin sits now. The two things, I think, that are likely to changing for the positive is one that CT growing at faster pace than FCM. So if that happens, revenue margin naturally improves because the SME business trades at a higher revenue margin. And the second thing will be the growth in new revenue stream. So we've had a real position on things like software sales, consultancy, meetings and events. And all of those things contribute higher revenue margin. So we're really continuing to push that in both brands, actually, not just FCM. So if that works, revenue margin will continue to creep up. But we are happy with that. Actually, we think our revenue lasted at a really good level now. And what we're focusing on is decreasing gross margin through productivity gains while standing volume. But there is saying that an opportunity to improve if we get those first two things right.

And the second bit sort of follows on from that is all of that work that our friend Melissa is doing in relation to the automation, AI, all of that improving in the processing. Just a bit of an update on how that's all going. Are you happy with the sort of run rate numbers you're seeing? And how we should think about that in terms of the impact on FY '25 costs?

Sure. I'm glad Melissa is your friend, too, John. That's good. She's doing a great job. And it's not just her. She's leading a fantastic global team working on this initiative. And to remind you, one of the key thing we're productive operations is us transforming the operating model to a single operator, global operating system without customers noticing. That's the aim. So we're swapping out all bits of software processes introducing automation. It is improving things already, even though the project and Melon very clear stressing this. It's very early days in the project. But as you can see from our results, we've already seen pretty good productivity gains this year, and we expect that to continue into the new '25 financial year and into '26. So our aim is to get more automation customers self-serving more on both Melon and FCM platform. And in making access to content, particularly on things like NDC, much more streamlined for our customers and our people. So yes, we do see productivity continuing to improve both next 2 years certainly.

And final one from me. JK, I just thought I'd better ask you a question, mate. The bricks and mortar -- trend of bricks and mortar versus online. Anything you've seen there in terms of trends globally across the business that you think is worthy of comment or no real change or anything there that you wanted to throw in there?

In what sense related to customer engagement, customer is still accessing our...

Just general transistor whether you've seen people moving towards online versus bricks and mortar or any general trends that you think have changed there in any way?

Nothing significant to report, John, but there's definitely probably one thing to note is that as we increase our investment in technology solutions, our customers are engaging across a lot more channels. And you can probably see in the pack that we've got a nice growth in our app downloads as well. Customers are really working across multiple channels, and it's really choosing what channel they use for certain types of bookings. So a lot of the low-value stuff is generally done online but a lot of complex travel is still in person, in store.

John, just further to what JK is saying. Some of the growth in Leisure is coming from a lot of different channels, but they're not all online channels either. Someone like Ignite has grown really strongly. Cruise & Touring sales, as JK said, grew at about 25% year-on-year, and most of those are done through the shops. Travel Money has grown really well, and that's obviously an off-line offering predominantly. So it's a bit of a mix.

Yes. And actually, it's interesting now. You can see that when a customer crosses the brand and they've got history with them, they're more prepared to book a higher value transaction online. And since we've released more capabilities such as the booking of cruises online, we started to see the average basket size go a lot more in that space. And that's just where customers have the confidence about spending a fair amount in a certain channel.

Your next question will come from Wei-Weng Chen with RBC Capital Markets.

Yes, just a couple for me, too. So you had some pretty big seasonality this year. How do we think about seasonality in FY '25? Will it be less extreme than this year?

No, I think I don't think so. I think we're still trying to work that out in fairness coming out of the COVID era. But I think we certainly had a, from a profit perspective, I think we had about 1/3, 2/3 weighting. And from a TTV perspective, obviously, the weighting wasn't quite as strong. But my guess is that we're probably seeing the sort of seasonality in FY '24 that we're likely to see in '25. So I'm not aware of anything that's going to fundamentally change. I don't know, Chris or JK, if you guys are sitting in there.

No. The only thing we've noticed, which seems to be setting as a trend is for business travel, people finishing their business travel earlier in December, which used to get probably another week, but in it, we tend to get more in November and January. So the actual travel happens for the seasonality has changed ever so slightly. And that's happened 2 years in a row now. So we think that might stay but who knows. But overall, we have seen a massive change.

And on the Leisure front, I think we are pretty much back into normal seasonal behavior from a customer standpoint. And you'll also see a lot more things with the supply chain coming out with a lot more early bird deals and everything, which is pretty much representative of seasonal behavior, and that will be coming out in the next few weeks.

And then I guess the other question from me was you guys took a few one-offs and closures this year. Is there anything to be aware of that's maybe on watch for FY '25?

Look, I think the promising, I'd call out there, as you look ahead to next year, the convertibles, obviously, the amortization will continue to be stripped out of the underlying. If we do any more buybacks, which is our stated intent, then there will be some gains and losses on those buybacks as there was this year. And again, that will be taken below the line out about our normalized results. So from a convertible, you'll see that, I'm sure, heading into '25. The only other one that you will continue to see there, at least for '25 will be some of those productive ops costs that we strip out. That should be less than $10 million in '25, and again, it will be a mixture of things, but there'll be a bit of system decommissioning and those sort of things that flow into that as well. So they're the only ones that at this point in time, we're aware of that should flow through. There were a lot in the current year. But I actually look at that as a positive in some respects. It is an indicator of -- there's a lot of activity that we were going through in terms of reviewing a lot of businesses that were underperforming and actioning on those. So the closure of GOGO, the closure of Discova Central Americas, the restructure of StudentUniverse, they are all good outcomes for us. So I think that's what you're seeing in there at the moment. And you've also got in there a bit of lag in '24 that won't repeat for some of those employee retention plans that we had coming through COVID. So they'll disappear out of there going forward as well. So it should be a lot cleaner as we move forward.

And then just one clarification type question on revenue margins. So revenue margins have continued to improve, but there's still about 1.5 percentage points below pre-COVID. I think you've previously kind of said, look, margins will ultimately be below pre-COVID. Now that we're kind of somewhat near historical levels, I guess, what's the view on how much below pre-COVID should we be thinking?

I'll start with that, but I'll make it the other guys to talk about it. I think the reality is that we do still believe that those revenue margins will stay below pre-COVID. We're not sort of putting another per se on that at the moment. But I think what we're looking at now is there's been a fundamental shift in where the revenue margin is generated now versus pre-COVID. So when you look at our total available margin that Greg talked to, that's the important element for us rather than different components of it, and we are seeing a shift with that. And some of that is from customer rather than a supplier as well. So there's different mix there. And also the mix of business will impact and mean that we're going to have a lower margin versus pre-COVID. But again, our cost margin will be better, but that's a bit of an overview. But JK, from a Leisure perspective, any...

Look, I think pre-COVID is a very different way to look at our business because we are no longer that same business from a Leisure standpoint. If you look at the models that we have in the business, plus the diversity of categories that we play in, it's just not a comparable benchmark. Certainly, if you go into different brands and compare now versus pre-COVID, you could look at it like that, but the overall mix is completely different. So if you look at our slide -- one of the slides in there, about 40-odd percent of our sales is coming from new categories and business lines that just didn't exist. And then there's also a slide in the pack that speaks to the business model shift. So you can see channels like online growing rapidly to about 15%, 16% of our business plus the independent agent channel. And both of those channels have got significantly lower margins. But the most important message to note is that they've got much lower cost margins as well.

Wei-Weng, just also remember -- so pre-COVID, Corporate was more like 38%, 40% of TTV. It's now 50%, and it will be lower revenue margin. And as JK said, you might remember, we had the previous margin targets, we're expecting revenue to come down -- revenue margin to come down to the exact reason that JK was talking about because the business mix in Leisure was changing a little bit. So we weren't expecting it would ever get back to that sort of level. And we lost some commission, which Greg, Stock guys have done a pretty good job of replacing but not all of it, so there's a bit of movement there. But as I think Adam said at the start, cost margin is now materially different to what it was as well. I think we're 130 basis points better off now than we were pre-COVID, and we still think there's some opportunity to improve on that.

Your next question will come from Sophia Mulligan with Macquarie.

Congratulations on the result. Just a few quick ones around the balance sheet. You paid off quite a significant amount of debt this year. Maybe Adam, if you could just talk through the expectations between '25 and down the convertible or strong focus and how we should be thinking around that?

Sophia, certainly, we have been focused on the balance sheet. During the course of the year we paid down that debt, about $250 million. We paid off about $50 million of bank overdraft as well. I think at the end of the financial year, we still had $100 million in debt -- in that debt facility that was drawn. Subsequent to year-end, we've actually paid that down as well. As we look at the convertibles, we are certainly got a short-term as well as that medium-term focus on buying back some of those convertibles. As you know, we've got 2 lots of convertibles out there in the market, and we'll review both of those to make the best decision on how we approach that and which ones we target. But certainly, we'll be looking to be active in that capacity over the coming months.

And on the CapEx side of things, you quote out $100 million guidance for this year. Could you just speak through what portion of that would be growth versus maintenance? And how we should be looking at that longer term CapEx expectations?

Yes. So if you look over the last couple of years and certainly last year, and I think the year before, we were heading towards that $100 million or just under $100 million in CapEx. My expectations for the next couple of years, we'll be sitting at around that level. And you're likely to see around 75% of that, give or take, being technology-driven and that will be across both Corporate, Leisure and in our Supply division as well. And then there will be an element which is growth in physical shops for our physical shop network through Leisure. So my view would be, as you look out at least for the next couple of years, I'd be expecting similar levels of CapEx.

And last one for me. Just on the underlying profit before tax margin by division, you've previously spoken to the Leisure and Corporate divisions need to beat 2.5%, [ and obviously ] the debt is now about 2.3%. Is that the lowest difference you move to more optics from the other divisions than you're expecting?

Yes. We've done a lot of heavy lifting in that other division to take the pressure off JK and Chris. But yes, that's fundamentally it is. With the movement that we've seen in the other division, being able to hold our costs, getting our operating businesses back to a reasonable level of profitability, reducing the impact of TPConnects and in fact, putting some of that into the divisions as well, that does bring down that other segment from you saw last year, $100 million to -- we would hope that our next focus on that to get it to $60 million or below. So that then makes difference in the blended rate that we're looking for from Corporate and Leisure. So it's really -- that's really the driver behind it.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Haydn Long for any closing remarks. Please go ahead, sir.

Thanks, Jack. Thanks, everyone, for joining us. Hopefully, you catch up with a lot of you over the next few days. Give us a call if there's anything that you need, and we'll try and get back to you as quickly as we can. But thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.