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

So I think we're going to go ahead and get started. I'm Stephen Ju with the UBS Internet Equity Research team. I'm joined on the stage by Paul Abbott, who is the CEO of Amex Global Business Travel and sitting next to him is Karen Williams, who is the Chief Financial Officer. So welcome, guys, and thanks for joining us again here in Arizona.

Yes, nice to be here.

Awesome. Awesome. So I guess kind of starting off, at the very top, I mean, in terms of the bigger thesis points for GBT, I think the transition from unmanaged to managed travel services, particularly for the SMBs out there has always been a key part of the overall thesis for the stock. So what do you think is driving the client wins for you in this segment?

Yes, sure. Well, look, you're right it's very much important part of our growth story. SME, as you know, is a $900 billion opportunity for us and $300 billion of that sits in what we call managed SME, so either with us or one of our managed travel competitors but $600 billion of that is what we call unmanaged. So customers that are using OTAs or going to airlines direct. And look, overall, we feel really good about the progress that we're making. And if you go back to 2019, roughly 25% of our business was SME. It's now over 50%. Over 50% of our revenue, it's over 50% is our profits. And you look at our net new wins for the last 12 months, 2/3 of our wins are coming from SME and then actually 30% of those are coming from that unmanaged kind of segment. So really good momentum in SME, good momentum and managed and unmanaged. In terms of what's driving the wins, I think the #1 factor is that we are both a leader in software and services. And midsized companies don't want to necessarily complicate the procurement of traveler expense. They want to go to one provider to get the software and services they need to manage travel and expense on a global basis. And we can provide that. We can provide both the software and the service proven at scale globally. The next thing that's really important is that huge segment, $900 billion. There's a lot of different customers with different needs. And so what we've done is set up a range of solutions that target different needs. We have a turnkey spend management platform, as we call it, for much smaller customers, that's pure digital acquisition, and that's Neo1. Then we have in Egencia, we have the leading B2B SaaS platform for managing travel. And that's a fantastic way of getting customers to move from unmanaged to managed in a fantastic solution that has got great intuitive customer experience. And then, of course, we have more targeted solutions like VIP, white glove service in Ovation or the ability for people to design their own travel programs with GBT Select. So if you really want to scale in that segment, you've got to offer a choice because there's a range of different needs out there.

Got it. Now $900 billion, that's a pretty large TAM. So that's, of course, going to invite lots of competition as well. So what do you think is setting you apart from whatever the competitors might be doing, so you can go out and win that business.

I mean it essentially depends who we're competing against. And as I said, it starts with our market position as a leader in both software and services. When we're competing with some of our sort of traditional established travel management companies, we tend to have a really big advantage from a product and technology perspective. Many of those competitors, they don't even own their own software platforms. And it's so important, I mean 77% of the time our transactions are coming through digital channels. So if you don't control the software, you don't develop the software, you don't manage the software. You're not actually running the customer experience 77% of the time. So we made it a very clear decision back in 2019 that we really want to scale our own software platforms, both Egencia and Neo and now 60% of the transactions are on our own software. And so that gives us a serious competitive advantage against those established travel management companies. Then you have some newer entrants that do own and develop their own technology. But they just don't have anywhere near the depth and breadth that we have in services. And frankly, they're not proven at scale on a global basis. So we occupy this really, I think, unique position with leadership in both software and services. And it puts, I think, real distance between us and the competition.

Yes. And in terms of the content as well, do you feel like you have really differentiated content in terms availability of -- I guess, inventory, et cetera.

Yes. I mean if you look at SME customers, 40% of the time, they're using our negotiated content, our negotiated rates. So obviously, those are savings that they just wouldn't be able to get if they were going to an OTA or an airline direct. So that's a very important part of the story.

Understood. Understood. Now switching to the larger corporate travel partners in terms of the demand environment. I think fourth quarter is typically a little bit of a lull for you guys, a seasonally slower period. But what are you seeing in terms of the overall transactions or trends or like observable factors for October as well as November?

Yes, you're right. Q4 is a lower volume quarter for us with the holiday season. There have been some industry data points out there that there was a slowdown in October. We did see our year-over-year growth rate come down in October. But honestly, it is a complicated month to dissect October because we did see a pretty significant step-up last year in the recovery rate with the pent-up demand that came back in October. So we know we're growing off a higher base. We also did see an impact certainly in those first 2 or 3 weeks of October from the conflict in Israel. We saw that impact in international travel. There are also some other isolated issues. There was the auto workers strike and the strike in the film industry, and we have customers in both of those industries. So it's kind of complicated month to dissect. We did see it actually pick back up again in early part of November, which is encouraging. I think when we announced Q3 earnings, we said that our revenues, we guided to the higher end of the revenue range we put out there, which is 23% year-over-year growth. We still feel very good about delivering on that number. And on the adjusted EBITDA, we guided to closer to the midpoint, which is $375 million. And again, we feel very good about delivering on that number. So -- well, I think we just need a few more weeks to play out to see what the outlook looks like for '24.

Yes. Well, I almost don't want to ask you about '24 because I mean, there's not enough data points out there. But I guess you must have had some amount of conversations with your larger clients, maybe some of the smaller clients as well. And in terms of what their spend intentions are for next year. What are those conversations yield for you?

Yes. Every quarter, we go out to our top 100 customers, and we ask them about their spend predictions for next year. Coincidentally, there were 2 other surveys done at a similar time. There was actually one from GBTA and actually one from Morgan Stanley. And all 3 surveys are in almost exactly the same range. Ours was 88% of customers said their budget for next year for travel would be the same or higher. So actually, the customer data is quite robust for next year in all 3 of those surveys. I think -- and that's encouraging, given the macro political and economic situation is still -- a fair amount of uncertainty out there. But yes, the customer data actually remains pretty robust.

Right. I mean, just to throw a bit of a curveball in there, I think in terms of exogenous factors that you can't control, right? I guess, in the news, there are some alarming data points about potential volcanic activity in Iceland. And I think the last time a major eruption happened, there were some air travel impact. So is that like a larger corridor for your clients? And I don't know if you saw a lot of impact back then in terms of any sort of like exogenous like force majeure type activity. But just wondering like if that's a potential thing that we should be worrying about.

Last time there was a volcanic eruption in Iceland, I was actually stuck here in Phoenix for a week. There are worst places to be stuck. It was actually pretty nice. But now look, travel is clearly a complex global industry, and it has a degree of volatility. But that actually, when that incident did happen, it really only impacted volumes for 7 to 10 days, if you remember. So that's not something that I'd be concerned about as I look out to 2024. The way we look at 2024 is to focus on the things we can control. And for us, net new wins is the most important factor. And so we're confident next year, we'll get 4 or 5 points of growth just from the wins that we've already got in the bag this year. And then on top of that, I think what you'll see is the market grow at or above GDP. If you go back over decades, business travel pretty much grows slightly above GDP. Where GDP will land next year? I'll leave that up to you and the experts that you see as, but that's how we think about the growth algorithm for '24.

Understood. Understood. So reduction of accounts receivable days and favorable working capital changes have been a big part of how you got to being free cash flow positive during the third quarter. So just wondering if the lower DSOs are sustainable? And is any of this driven by mix, larger versus smaller clients in terms of their payment terms?

Yes, sure. So the first thing I would say is absolutely sustainable. And really what this comes down to is the Egencia working capital initiatives. And so we talked about those on the last couple of earnings calls. But essentially, as you think about Egencia coming into GBT and as we're integrating into the business, there is opportunity there from a payment term perspective. But one of the bigger areas that we're focused on is form of payment. And so [indiscernible] GBT, many of the payments or the majority of payments have been on card, which you would expect, obviously, coming from a payments company. But with Egencia, what we saw as we started to integrate was that much more of the payments were on invoice that's really created an opportunity for us. And you saw in Q2 that there was $20 million that came from these initiatives with a further $50 million in Q3, and we've guided to a further $50 million to $70 million in the fourth quarter. And I would expect as we go into 2024, that you could probably assume 40% to 50% of that benefit will carry over as we continue to integrate and take those opportunities.

Got you. Now as an eternal optimist, I always want to think about through-putting more gross profit dollars on effectively flat or similar OpEx dollars and driving leverage. So a lot of your -- the cost for you are humans and dealing from a customer service perspective, et cetera. So I think you've done some cost reduction initiatives throughout the course of this year. How do you think you're positioned in terms of being able to support the incremental transactional dollar? How much more do you think you can support with your current OpEx levels?

So productivity is a big focus, as you say, for us. And certainly, as you say, 50% of our cost base is cost of sales. And so as you think about that, as we drive more volume, we drive more revenue, but there will need to be more costs to support that. Where we've already focused is back to this mindset around the productivity and efficiency. And so we are very focused in terms of the adjusted EBITDA margin. And in Q3, you saw us report a 9 point improvement year-over-year. Another data point as you think about our full year guidance, we're expecting, as Paul said, 23% revenue growth but single-digit OpEx growth. There is a real focus around that. And as we've talked previously about getting to a margin of 20% adjusted EBITDA, and we would expect a 1 point improvement every year. Really taking us to mid-20s adjusted EBITDA over time. And that is already balanced with also us investing in terms of the long-term growth and so there are huge opportunities for us from an investment perspective. As we think about our software platforms, Neo and Egencia. And as we think about SME and the opportunity and the sales and marketing engine there. And so we're balancing that, but because of that productivity mindset and focus, we expect to see that improvement.

Got you. Speaking of productivity -- it's impossible to avoid headlines around AI these days, right? So can you talk about what kind of efforts that you have within GBT. And particularly in regards to the cost of sales that you brought up earlier, especially being customer service and needing to, I guess, deal with your customers on the voice channel. So is there an opportunity there to realize some efficiencies there?

Yes. I mean we've been using machine learning and AI for several years in both in the Neo and Egencia teams, the engineering teams. That's how we've got to 92% of our volume that's on Egencia goes through the digital platform. So working with machine learning and data and AI is something that the teams have been doing very well. We also acquired a small AI company about 18, 24 months ago, specializes in travel AI. The point that we're at now is very, very interesting because we have the capability, but now with generative AI and large language models, the speed and scale of change is radically changing. And the use cases that we can execute are just becoming far more powerful. And so we think that actually it's companies like us that are uniquely positioned to really benefit here because we've got the software and engineering capabilities in-house to develop and execute AI. But we've also got a large services business, as you said, 40% of our cost is people in the servicing channel, and it can radically improve the productivity in that channel. So we've actually expanded the AI team now and put in 3 verticals. So we have an AI team with 3 teams. One focuses on servicing and automating different parts of the service experience, whether that's automating chat, whether it's automating e-mail, whether it's improving functionality at the point of sale for the travel counselors. The second vertical is finance with some really interesting use cases in terms of improving the productivity, particularly within FP&A. And then the third is actually product and tech because AI can actually write simple and even sometimes not so simple code for you. So those are the 3 areas that we're set up really to transform with AI, and it's very much part of our cost transformation plan for '24 and '25 is to use that to drive the kind of efficiencies that Karen was talking about.

Yes. You were free cash flow positive in the third quarter and I know we're not guiding to 2024 quite yet, but you've dropped some bread crumbs along the way in terms of what we should expect into next year. Like I said, an eternal optimist, I want to believe in free cash flow positive next year for the entirety of the year also. And your cash balance continues to build, right? So from a pure sort of capital allocation perspective, is it safe to assume that your priority will remain the repayment of debt? Or should we be thinking about opportunities to add more assets to the portfolio and keep Eric really busy.

So short term, our focus is Egencia. And so in '24, we will complete the integration of Egencia into the business. And then it's investing for the longer-term growth, as I talked about earlier in terms of our own software platforms but also in the sales and marketing engine. And then M&A as and when the opportunities arise that are appropriate. But then to your point around debt, absolutely. And we, again, looking at the level of debt and focused in terms of our leverage, you've seen back in end of '22, we were above 8x net leverage ratio and in Q3 below 3x, and we expect to continue to see that step down. So that is an important focus for us.

Yes. I mean, you've been fairly acquisitive, I guess, without -- obviously, you can't name specific names, but what is the typical profile of a company that you will be looking for? Is it technology? Is it a particular vertical because some of the acquisitions you've done in the past have been targeting certain verticals as well. So if you had infinite capital, like what would you be looking for in terms of potential businesses to bolt on to your current portfolio?

Yes, well, the way we look at M&A is that it -- M&A is not a strategy in its own right, M&A is a way of accelerating the strategy that we put in place. And we've actually just developed a new 5-year strategy for the business. And we took a step back and said, what is it we really want to achieve between now and 2028. We are a B2B software and services company. And we want to be a top quartile performing B2B software and services company. And so if you look at all of our peers, other B2B software and services companies, in order to be in that top quartile, we need to be delivering in excess of 15% TSR. And so we have a base plan on average and over time to deliver in excess of 15% TSR. That's our base organic plan without M&A. And so the most important thing for us is focus on executing that plan, deliver top quartile returns. And then we have M&A as an overlay to that to accelerate that plan. And so as you said, we've done 9 transactions since the creation of the joint venture in 2014. We've got a proven track record of executing on M&A. We, I think, shared $106 million of synergies on Egencia, $60 million of that was this year. We've already said we're going to exceed the $60 million number that we communicated for this year. So I feel very good about the execution of the synergies on Egencia. I feel very good about the integration of Egencia. So I think we have a proven track record. We know we can deliver synergies. And I think if you look, as Karen mentioned, into 2024, by the end of Q1, we'll have really completed the vast majority of that integration. So as you get into the second half of '24, we definitely would have the capacity to look at further M&A and we have the proven track record of delivering on the synergies, so it's definitely an important part of the plan. I think the profile of the targets is changing a little bit because we feel really good about the product and technology set that we now have in place. With Neo1 with Neo with Egencia or in GBT Select, we've got a really, really strong product offer in the marketplace. And so I think there may well be some small tuck-in capability acquisitions. But it really is now more about building scale on the platform that we have and with the solutions that we have. And so I think looking at businesses that can increase scale and generate significant synergies and help us accelerate that TSR plan is really what we'd be looking for.

Got you. Bringing it back to questions on Egencia. And I guess, the overall sort of bake up of where the travel transactions are coming from. Of course, internationally, of course, when you land a multinational corporation, UBS or any of your larger clients, there's going to be regional volume there. But I'm just wondering for Egencia, which has always -- back when it was part of Expedia, it's been -- might have been more U.S.-centric. But I'm just wondering if there is low-hanging international opportunities that you are observing in terms of driving adoption, particularly for Egencia or any other products that you have?

Yes, absolutely. I mean Egencia operates in nearly 30 countries. More broadly, we can supplement that and service customers in 80, 90 countries. And one of the things that the client management teams do is that they obviously look at the customers. They look at the markets that they're in. They look at the markets where we have the business and the markets where we don't, and we have a pretty systematic approach to consolidating that volume onto the platform. And most of the customers want that as well. They want to be able to have global control and global visibility over their travel spend. So it's a win for us and it's a win for the clients.

Got you. Now let's fast forward a year from now and we're sitting here once again at the technology conference and it's '24. What do you think we'll be talking about in terms of what you've accomplished over the trailing 12 months? And what do you think we'll be talking about in terms of what you're optimistic about for '25?

Yes. Look, I think for us, it's about executing on the plan that we put in place, and that means delivering continued share gains. It means continuing to drive strong growth in the SME segment in both managed and unmanaged. It means continuing to drive more and more of our volume onto our software platforms that creates a better experience for clients, but also helps improve margins. It's very important for us to continue to deliver on the free cash flow and the margin expansion objectives that Karen mentioned. I think what you'll also see next year is a significant improvement to our underlying EBITDA, not just the adjusted EBITDA because you're going to see a big reduction in the level of adjustments and a reduction in interest expense, a reduction in restructuring and integration costs. So I think when we come back here in a year's time, we'll not just be talking about strong adjusted EBITDA growth, we'll be talking about even stronger EBITDA growth and even stronger free cash flow.

Sounds great to me. All right.

That's the plan.

That's the plan. Awesome. Well, thanks Paul, thanks Karen, for joining us, and we'll wrap it there.

Thanks a lot.

Thank you.

Cheers.

Cheers.