Global Business Travel Group, Inc. (GBTG) Earnings Call Transcript & Summary

All right. I think we're going to go ahead and get started. I'm Stephen Ju of the Credit Suisse Internet equity research team. To my left is Mr. Paul Abbott, who is the CEO of Global Business Travel; and to his immediate left is also Martine Gerow, who is the Chief Financial Officer. So welcome to the both of you, and thank for joining for us. Awesome. All right. So I guess for employees of Credit Suisse we are well familiar with Global Business Travel. We use it all the time. But for those folks in the audience as well as the webcast, I think they might be a little bit newer to the story or they haven't had a chance to interact with the product. So if you can give us a brief overview of the business and why now is sort of an interesting time for the company and its business cycle.

Well, look, first of all, thank you, Stephen. Thanks for being a great customer as well and everybody at Credit Suisse. So yes, we are the leading business-to-business travel platform in the world. We provide software and professional services to companies of all sizes around the world to manage their travel and travel-related expenses. We have operated now as an independent company for 8 years since the separation of the business from American Express in 2014, and we had the opportunity to become a public company in May of this year. Really marking the beginning of this next chapter of growth for the company. Amex remains our largest single shareholder, along with we have other strategic investors like Expedia and Sabre and Zoom and of course, a range of financial institutions as well. We have established a leadership position in both serving global and multinational customers and SME customers. And we do that through a platform of solutions, including American Express Global Business Travel, Egencia and Ovation. And we've essentially put ourselves in a position where we have the market-leading solutions for each of the segments that we serve, and that has enabled us to achieve that leadership position that I shared with you earlier. In terms of why it's an interesting time. I think I'd say 2 reasons. First of all, we have a significant runway for growth ahead of us. And secondly, we've got some really important levers to drive margin expansion and value creation. And so from a growth perspective, I mentioned we're the market leader in a $1.4 trillion market, but we have just $40 billion of that $1.4 trillion. So it's a very large, a very fragmented market. So it's a huge opportunity to drive organic growth. And secondly, we are doing exactly that. We are delivering consistent share gains. In our third quarter results we shared $4.2 billion of new wins, roughly 11% of our annualized sales. We have a 2.5:1 win-loss ratio. So for every dollar of business we lose, we win 2.5%. So from a growth perspective, massive market opportunity, consistently gaining share. We also said that we would accelerate growth in the SME segment. And again, we've been really, I think, demonstrating that we're delivering on that commitment. We had $2.5 billion of wins in the SME segment in the third quarter. And within that, we said we're going to start to really convert this unmanaged spend to manage business travel spend, and I'm sure we'll talk about that a little bit later. But again, we're starting to see some real traction in that conversion of our managed to manage spend. So I think we've got a really strong story in terms of the growth opportunity. But equally important are these levers for margin expansion and value creation. And the first one is the $109 million of synergies that we have associated with the Egencia acquisition, and we are going to exceed the $25 million of synergies that we put into the '23 plan. We have a very positive outlook for 2023 as well. And we've already executed on 70% of that full $109 million of synergies. So that's one very important lever for margin expansion. The second margin expansion lever is the permanent cost savings, and we identified $235 million of permanent cost actions. We have executed all of those, 80% of the savings have been realized. 20% of it is productivity related. So it will come back as volumes return. And then the last kind of margin expansion lever is one that we have a real proven track record on executing against, which is accretive M&A, and we have a very healthy pipeline of M&A opportunities ahead of us. So that's why it's such an interesting time for us. I mean, we have this fantastic growth opportunity ahead of us and real tangible opportunities to drive margin expansion as well.

Yes. So $1.4 trillion in terms of the addressable market. I think when we think about Amex Global Business Travel, it's primarily been for the larger enterprise customers, so that's managed travel, right? And you touched on this earlier. So a lot of the business travel to date has been unmanaged and people just kind of going on, whether it's booking or Expedia, Egencia. So is there a way for you to contextualize the, out of the $1.4 trillion. I would imagine the managed piece at the well tapped or better tapped. Whereas on managed tapped by very definition, nobody's really service that. So can you help contextualize the white space opportunity in each of the buckets.

Of the $1.4 trillion, $900 billion of it is SME. And we're the market leader in SME, but with just 6% share. So that gives you a sense for how fragmented the market is. Now of the $900 billion opportunity in SME, we estimate about 30% of that is managed. So let's just call it $300 billion. So $600 billion is the white space to directly answer your question. That's really the unmanaged travel people using OTAs, airlines, directs. And there's opportunity in all the segments. Clearly, the unmanaged segment is huge, and there's a massive opportunity as is SME. But we still believe there's opportunity for us to gain share in global multinational as well. But that's the composition of the market opportunity.

Okay. Got it. Now you touched on the competitive landscape, and you still have single-digit market share. And so everybody else has some smaller share than that, it's probably lower single digits of registering, right? So for somebody who's trying to gain share within business travel, like who are the main competitors? And how do they -- after you try to compete with you? Is it on price? Is it on service? Or I guess like do they try to provide a differentiated service offering? Like how would they actually try to tackle the market? Is it differentiated versus what you guys are looking to do?

Yes. I mean, as you'd expect, with $1.4 trillion of spend, it's not a homogeneous market. There are different subsegments with different needs. And we actually did some research at the end of 2019. And we reviewed the entire $1.4 trillion opportunity, and we came up with 6 subsegments and different buying personas, if you like. And what we actually found was that we were doing pretty well in around 4 of the 6 of those buying personas. But we had a couple of gaps that we really wanted to close. One was around that digital first segment, which is not the largest segment, but it actually is the fastest growing. And that's what led to the acquisition of Egencia because Egencia is, by far, the market-leading SaaS solution for managed travel. And then we also had an opportunity to improve in this kind of high-touch white-glove service area, which is why we acquired Ovation. Some customers really are just looking for that really high-touch white-glove service, business travel and premium leisure combined. And that's why, as I said, we went out and acquired the Ovation platform. So that's why we've now set up the business we have today. We have the market-leading solutions now targeted at different segments. And the reason I mentioned that is because it reflects the competitive environment. Amex GBT does tend to compete more with the larger, more sophisticated travel management companies. Obviously, Egencia would be competing across a very broad range of competitors, but including some of the new entrants, whether it's TripActions or TravelPerk, and Ovation, again, has quite a distinct competitive set. Other companies that operate more in that boutique high-touch, white glove service, focused on certain market segments like private equity, hedge funds, media, entertainment, industry segments who tend to have a much higher touch proposition. So it's such a broad market that the competitive sets do differ by segment, which is why, as I said, we've set the company up the way that we have to compete across those different subsegments.

Got it. All right. So given the days that we're living in, it's impossible to avoid the macro question. So I know not that I'm asking you for a '23 guidance, I guess we'll get that a few months from now. But I guess key question for a lot of investors is what the world will look like next year, right? So can you address the strength of demand from the business traveler right now and corporations in the current climate? And are you seeing like any sort of early indications of dampening demand?

No. I mean at this stage, we're not. And in fact, when we announced our Q3 results, we showed, I think, that the recovery continued to build in the third quarter. September actually was our strongest month since the recovery started. Sometimes when we look at these recovery percentages, it doesn't tell the whole story. The absolute volume of transactions in September was 43% higher than the average for July and August. And of course, that was one of the key questions was are we going to see a strong post-Labor Day bounce for business travel, and we certainly did. And that recovery has continued through October. We also did a survey of our top 125 clients in mid-October. 95% of those customers said that their outlook for '23 was the same or higher spend. There was a similar study from Morgan Stanley that I think looked at the top 100, a top 100 set of travel buyers. And again, the outlook was positive for 2023. So we're not seeing signs in the numbers or in customer sentiment at this point. However, we have to acknowledge that macroeconomic conditions have become more of a headwind in the last few months. I think that's something that I referenced when we announced Q3 earnings. And so the way we look at 2023, as we say, yes, macroeconomic conditions is probably more of a headwind today than it was 3 or 6 months ago. But at the same time, we feel like we've got these 4 tailwinds. And the 4 tailwinds are, one, business travel recovery will continue. As companies normalize their operations and more and more routes open up, we think that will give additional momentum to the business travel recovery. We're also seeing real evidence of dispersed teams generating new demand for business travel. And we see this most clearly in our meetings and events business, where we're going to end this year at 90% in 2019. We're seeing the sort of need for collaborative coordinated travel is real. The third tailwind we see is increased capacity. And we know everybody knows there have been capacity constraints, particularly through the second and third quarter. And we do think those capacity constraints will start to ease as we go through 2023. And finally, we will continue to gain share as our recent sales results have indicated and we have a very positive pipeline through 2023. So what we tried to do is say, okay, how are these going to net off against each other? And we took our 72% revenue recovery in the third quarter. And we said we believe that the tailwinds will offset any macroeconomic headwinds, and we're going to continue to see moderate growth. And so what we advised was, essentially, let's take the 72% in Q3. And then we're saying, we think there'll be a couple of points, additional recovery every quarter through the end of 2023. So that essentially gets you to exiting 2023, about 82%. And that would suggest a 79% revenue recovery for the full year. So that was our view, and that is still our view of 2023. And I think what it indicates is that we believe that there will continue to be steady moderate growth as we go through 2023.

Yes. I think we all just kind of forget that the baseline for you is really 2019, it's not really 2022 because 2022 itself is a depressed number. So to anticipate, I guess, change from 2022, what is actually the press level. That's probably the wrong way to look at it.

Yes, I think it's absolutely the wrong way to look at it. I mean, forecasting is never easy, and we're in a unique set of circumstances. But our best assessment right now is that we'll continue to see that steady growth as we go through 2023.

Got it. Okay. Cool. So in terms of thinking about the operating leverage and deleverage whichever way the revenue goes, specifically, I think in your prior targets when you were initially coming public, I think you implied -- I think that was 85% revenue on a pro forma basis and with this now kind of in the high 70s, low 80s, that type of a range. How much of this should flow through to the EBITDA line? And how much of this do you think you can offset?

We have very strong operating leverage. I mean we reported a 67% flow-through, which basically means adjusted EBITDA growth, adjusted EBITDA versus growth in revenue in our third quarter. And we are very, very obviously confident that we'll maintain that level of fall through as we go into '23 and beyond. And if you think about 86% revenue recovery, therefore, gives us confidence that at that level, we will meet our pre-COVID earnings given that level of fall through.

Okay. All right. So let's dig in a little bit on the value proposition to the SMBs. So -- and of course, we touched on this earlier, unmanaged travel for the SMEs. So -- why should I sign up with Egencia, -- why should I sign up with GBT -- like what's the value proposition for the businesses?

Yes. I mean, look, if you're actually talking to an unmanaged customer and moving them across to a managed program. Honestly, Stephen, the value proposition is very simple and very powerful. If you're in a company where they essentially letting their employees go out there and just research their travel across multiple independent OTAs and airlines direct. First of all, as a company, you have no visibility over your spend, and you have no control of those buying decisions, and that's not a good thing. Secondly, you're assuming that these people that work for you are experienced travel buyers, and they're not, we are. And they're certainly not getting access to the most comprehensive and the most competitive content. And so they're not maximizing the level of savings. And third, from a service perspective, I think the experience of the last couple of years has actually reinforced the value of a professional managed travel program because the value of our 24/7 service, whether it's using our mobile app, whether it's using your tablet, whether it's using the voice channel, speaking to one of our experienced travel counselors, I don't think it's ever been stronger. In a more complex travel environment. I think people really appreciate the ease, the simplicity and the expertise and advice they get from their managed travel provider. And frankly, the last couple of years have highlighted the limitations from a service perspective of dealing direct with airlines and OTAs. I mean the service experience has generally been pretty poor. So speaking to unmanaged customers and saying, look, would you like visibility control of your travel spend? Yes. Would you like access to the most comprehensive and competitive savings in the entire industry. Yes. Would you like great 24/7 service multichannel around the world? Yes. I mean, obviously, it's not a difficult proposition. Obviously, not every SME customer gets up every morning thinking I really must transform my unmanaged program into a managed program. So -- but once you actually get the decision-makers attention, whether it's the head of procurement, the business owner, the CFO, it's a very, very simple and very powerful sell.

Yes. Not to mention the compliance angle of setting parameters around that booking for...

That's all part of control and savings.

Yes. Okay. Got it. Now, you previously touched on, I think, $2.5 billion of new SME wins over the last 12 months, right? So I'm just wondering if you can -- I think 50% of those customers is coming in from previously unmanaged. So they're buying into the overall product message. So I was wondering if you can kind of contextualize that data point? Is this accelerating? Is this decelerating? Are you getting, I guess, greater traction with the product, et cetera?

Yes. I mean let's maybe talk specifically about Egencia because that is a product that we are using to really target that unmanaged spend because it's such an easy conversion into a managed program with Egencia. If you go back 3 years, 35% of the Egencia signings were unmanaged to manage. And the most recent quarter, that was 50%. So that's the level of acceleration that we're seeing. And as we get better at targeting and we invest more in our marketing channels, and frankly, we leverage the lead gen partnerships that we have, particularly with American Express. We expect that number to increase.

Okay. Got it. And touching on that. So I think at the time of the Analyst Day, I think we asked a question of, all right, so you're now going on and acquiring these SMBs, SMEs as a customer, there's an underlying customer acquisition cost. And then as you continue to do more business with them, there's an underlying customer lifetime value that you expect. So is there like a sort of an LTV to CAC ratio that we should be thinking about? Are the economics of the business, especially on the SME side, do you think that's going to be from a margin perspective or whichever metric that you care to look at, do you think that is actually a superior business versus servicing of the larger clients?

Yes. Maybe Martine to comment on this as well in terms of the LTV and CAC and the margin, the way we look at profitability. But maybe just at a high level, we do have a model that looks at those factors. But as you quite rightly said, it's more relevant in the SME segment for global multinational because the retention rates are so high, sort of 98% plus. We have a, I would say, a more sort of bespoke model for looking at global multinational profitability. But generally speaking, if you look at the SME segment, it is accretive to margins. It's one of the key reasons that we're focused on scaling in that segment, it is the largest profit pool, it's the fastest growing, the fastest recovery. And on average, in the U.S., for example, it's 20% to 30% higher margin for us. So yes, it is absolutely accretive the more that we move our volumes to SME, the more that it improves margins. And you made a comment earlier about we were sort of primarily for large companies. Actually, when you look at our revenues today, over 50% of our revenues and a much higher percentage of our profits already come from the SME segment. So it's a very, very important part of the mix today. But Martine, I don't know if you want to just touch on LTV and CAC and our profit models and how we look at it.

Sure. So in terms of the LTV/CAC and it's probably best to think about it for the SMB business, right? Because it's less relevant for the variable and multinationals for our SME business, the LTV-to-CAC ratio is in the 4x, which is very good. And when we invest in sales resources it's about 18 months to 24 months, given the ramp-up of the salesperson to pay back on that investment.

Okay. Got you. Now let's put you on the spot a little bit more, Martine. Take the spotlight away from Paul for a little bit. So at the time you guys were going public, I think $345 million of combined synergies with $109 million from Egencia $235 million from just additional cost savings. So is this a gross synergy number? And I guess there are some indications, I think you guys talked about that there was a desire to invest to some degree. So is there a miss synergies, I guess, is there a net number we should be thinking about? And I guess as you unlock synergies, you're investing, so what are the more important areas where you're going to be investing in?

So the synergy number is yes, in some sense, a growth synergy numbers, we tend to think of it as a net synergy under -- there's about 2/3 of that is revenue driven. And as Paul commented on, we're actually performing above our '22 targets. So we're on track to reach that. About 1/3 is cost driven. And again, we're about 2/3 of the way there. In terms of the investment area, I think of it in 2 ways. You just commented on the LTV/CAC ratio. So one is obviously investing in accelerating the growth in SME and that will be more of a P&L investment with the kind of feedback that I just shared with you. And then the second area of investment would be product and tech, and that would be more of a CapEx type investment, although -- we think we have the right level of CapEx with about $100 million. We're not quite there yet. This is where we're pre-COVID. We don't think we need to invest more to sustain the right level of innovation, particularly in the SME space and the agency platform.

Okay. Got it. Now Paul, you touched on Egencia just sort of gathering momentum. So I think in terms of sort of recent product developments, right? So I think you recently updated the Egencia mobile app. And I guess, improving customer experience, you would expect that to follow. So how to have the download usage and or the engagement with the app improved since launch or changed this launch -- are there any sort of early learnings that you can call out there?

Yes, sure. That home screen redesign was the 1st of June, but we also implemented quite a few additional features since then, particularly in the area of being able to manage more complex changes, cancellations within the mobile app for air for hotel and actually particularly for rail in Europe. And so you have to take all of those kind of changes together. What we've seen is some really actually impressive results. Our sort of monthly downloads for the app were about 50,000. They've gone up to 85,000 a month, which is actually an all-time record for Egencia. We've actually seen a 40% increase in usage since the 1st of June when we had the first set of features launch. And the mobile app now is up to -- it was just below 25% of all the digital transactions now it's just up to 30. I think it was just above 30 actually in October. So yes, we're really seeing exactly honestly the kind of response that we were hoping to see from the investments that we're making. And it's a great win-win because these -- makes the experience so much better for customers, but it also takes demand and cost out of our travel channel. So a much better experience for the clients and a lower cost operating channel for us. And when Martine says, this is where the next dollar of investment goes from a product and tax perspective. It's all going into Egencia, Neo and making sure that we've got the very best software platforms for managed travel.

Okay. Got it. And can you give us an update on sort of any sort of early results that you might be seeing from the integration of preferred extras than Egencia?

Yes, sure. We're pretty advanced on that now. We have almost all of the GBT content in the Egencia platform. We've just got a couple of gaps in APAC that we want to close. But outside of that, we have content parity now across the group. And we've seen very strong pickup from the Egencia customers. It's one of the reasons why, as Martine just said, we're ahead of plan on the revenue synergies. We've been able to get that content in the platform faster, and the uptake from customers has been faster. In fact, in the Americas, for the last quarter, we had between 30% and 35% of transactions going through preferred extras on the Egencia platform. So generating significant savings for customers. This is content that they weren't previously able to access that they can now. Comes back to that point I made earlier about always having the most comprehensive, most competitive content and delivering savings.

Yes. I think we have a couple of minutes left. So this is now -- hypothetically, it's now December of 2023, right? And we're sitting here on stage once again, and we're talking about what we've been able to accomplish over the past 12 months or so. So what do you think we will be talking about a year from now in terms of what you've been able to accomplish.

Well, Stephen it's very clear for us to continue to focus on the things we can control and execute on the commitments we've made to shareholders over the last 18 months. We said we're going to lead the business travel recovery, and we are. The industry is somewhere between 60% and 65% recovered. We were 72% in the third quarter. We said that we would consistently gain share and drive organic growth, and we are 2.5:1 win loss ratio of $4.2 billion of new wins. We said that we're going to start to really scale in the SME segment, $2.5 billion of new wins. We are on track to deliver consistent double-digit growth in the SME segment. And we said we're going to start to unlock this unmanaged opportunity, and it's happening. 50% of our signings in the third quarter from the unmanaged segment. And we said we're going to deliver on $109 million of Egencia synergies, and we've already executed 70% of that, and we've exceeded the 22 Egencia synergy number. And we said we would deliver $235 million of permanent cost savings and obviously in December of 2023. All of these things need to be kicking in. And investors need to see the fall-through that we have committed to that shows that we're on track. Do we know precisely what the revenue recovery number is going to be here in December of 2023? No. But whatever it is, we need to show the margins that investors look at and say, I'm very confident at 86% revenue recovery, they're going to be delivering in excess of $500 million of adjusted EBITDA. That's the commitment we've made, and we are still absolutely fully behind that commitment.

Understood. All right. And with that, I think we will wrap. Thanks, Paul and Martine, for joining us.