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

Good morning, everyone. My name is Pete Christiansen. I'm on Citi's equity research team covering business services, fintech, crypto, a bunch of things. Great to have Paul Abbott, CEO of Amex GBT on board, along with Karen Williams, the CFO. Great to have you guys back again this year for an interesting conversation. It's been quite a year for GBT. A little acquisition in there. We can talk about that in a little bit.

Sure.

But first, I think I always like to start off with the end market demand environment, what you're kind of seeing? It's almost diverge from what we're hearing on the consumer travel side. It seems like corporate travel is still seeing some pretty healthy trends. In 2Q, the company reached 4% transaction growth, 5% TTV growth, 6% in revenue despite some impact from the Olympics. I'm just curious, your view now, state of the union in terms of corporate travel. What are some of the key trends that you're seeing?

I think, Pete, when we've spoken before, we said that we think that this year really presented an opportunity for us to show, in a kind of normalized growth environment, how our business model and how our financial model really works. And we guided to 6% to 9% revenue growth, 18% to 32% adjusted EBITDA growth. And we're seeing growth rates in that range. We're seeing the revenues at the lower end of that range, primarily because of the macro environment, which is a little softer than perhaps we would all like. But it's played out pretty much as we expected. Business travel is growing at or slightly above GDP, plus then the share gains that we put on top of that. And as we've spoken about before, our business is not a business that needs 10%, 15%, 20% top line growth to deliver 10%, 15%, 20% bottom line growth. If we're in that 6% to 8% growth range, then we can deliver 15%, 20% bottom line growth, and that's, frankly, exactly how the year has played out so far, which is good.

One other things that I think is interesting this year is, it speaks to the diversity of the model between -- from the global multinationals and the SME, we've seen SME see some compressed growth a little bit of late. But we've seen GMN pick that up. Maybe you could talk about some of the dynamics that you're seeing across this vertical?

Yes, sure. I think the great thing about our business is the diversity of it is a strength. We're actually pretty evenly balanced now, 50% SME, 50% global multinational. So we're pretty balanced across geography and segment and industry sector. And you're always going to see some pluses and minuses in certain segments and certain geos. But I think the good news is for us, last year, SME was by far the fastest-growing segment for us. And this year, it's global multinational. And I would say, the diversity of our business, I think, enables us to manage through those different scenarios as well. But I think what we're seeing at the next level down is frankly what you see across all business services categories and what you see more broadly in the outstanding data from businesses as well. You've seen a sequential decline in sort of same-store sales growth from SMEs from around Q3 of last year. And we've certainly seen that. And when we go out and survey customers, and when we look at the data that's available more broadly across other categories, it's a pretty simple story. Interest rates have been at an elevated level now for a long period of time. So automatized businesses are more exposed to lending costs, and what we hear from small to midsized businesses is, look, we are having to tighten our belts in this environment. So what we are hoping for is some interest rate cuts in the second half of the year and that, that gives a little bit more confidence to the SME sector. And as we get into 2025, we'll start to hopefully see a little bit more activity from the SME sector. On global multinational, that's actually been a lot more resilient, a lot more robust. And I think what's, again, pleasing is within that global multinational growth, we're seeing strong growth rates across multiple industry sectors. Technology sector is up 9% for us, and we had double-digit growth in pharma and health care and professional services and financial services. So broad-based solid growth rates across multiple industry categories in global multinational.

I do want to hit on the vertical thing in a bit, but I want to talk a little bit about the impact of inflation. Obviously, GMN, it makes sense. Budgets were recalibrated to handle the cumulative inflation that you've seen in travel over the last couple of years. It's tougher for SMEs. What are you seeing in terms of the inflation front for corporate travel now? And I hate to put you on the spot, but like how do you think that's going to fold into budget decisioning for a lot of these companies?

Yes. The average U.S. domestic airfare for us is up 24% versus 2 years ago. So if you're a small to midsized business, and your interest expense has gone up, and you're having to pay 20% more for the average trip, then that is going to put economic pressure on your business, and it is going to have some impact on demand, right? There's no doubt about that, and that's certainly what we're seeing. But to your earlier point, businesses do have to recalibrate and reset those budgets. And I think that broadly speaking, that's what happened in global multinational segment. We went out and did a survey of the top 100 global multinational customers in Q2. They predicted 10% spend growth this year for the full year, which would imply 6%, 7% growth from that segment in the second half of this year. When we went out to the top 100 SME customers, there was also actually an increase in positive sentiment in spend for the second half of this year and into 2025. So I think both of those data points are encouraging.

Beyond capturing inflationary effects, so it's really ticketing that transaction growth. That's solid. Okay. Well, that's encouraging. And I think you're right, when we do see a more favorable interest rate environment, perhaps that will be good for SME. But despite some of the leveling off in activity there, the new bookings and the wins that you're seeing there has still been pretty strong. Can you talk about maybe has the value proposition changed from onboarding those who are not using a managed service, or is it balance of trade versus competitors? Can you just give us a little bit of that dynamic on the SME side and how new bookings continue to be strong?

Yes, sure. Well, a lot has changed over the last 3 or 4 years. I mean, we had 25% of our business coming from SME customers. We now have 50% coming from SME customers. And we've made changes in, I'd say, 2 key areas. The first 1 is in the product set. So we built out a much, much broader product set for SMEs. We launched a product called Neo1, which is a spend management platform for small to mid-sized businesses, and that effectively does procurement of all indirect expenses, manages all of your travel and your travel-related expenses. So it's a turnkey solution for companies to essentially manage their expenses end-to-end. And within that, they have the ability to, in partnership with American Express, issue virtual cards to their employees for a whole bunch of different use cases. We also, of course, brought Egencia into Amex GBT, which is the leading B2B SaaS platform in travel. And that's a turnkey solution for companies that are using a SaaS solution for managing a whole series of other categories, why not have a turnkey SaaS solution for travel. And then we obviously added that to our existing Amex GBT Select solutions. So we've broadened out the product set, so that we're relevant to more and more SME customers. And we've also spent a lot of time and investment dollars building out the channels. So more investment in digital acquisition, more investment in our lead qualification channels, in our telesales channel, in our field sales channel. So I would say the majority of that is now behind us. We feel really good about the product set and the channels. So really, really focused now in SME is making sure that we're investing in both of those things. We're investing in a product set to keep it more and more differentiated, and investing more and more in optimizing the sales channels and getting more productivity out of the sales channels. So it's really -- we're in this period now, I would think, characterized as being more about scale and productivity. The product set and the channels are in really good shape.

How do we think about Neo as like a real needle mover on the SME booking side? Is that a real -- fills a really big gap for the SMEs that you're targeting to onboard? I mean, is it big?

It definitely helps in the unmanaged segment. I mean, the SME opportunity for us is $900 billion. And of that $900 billion, $600 billion of it is unmanaged. And what we mean by unmanaged is customers that are going to OTAs and suppliers direct. We have no professionally managed program at all. In that unmanaged segment, some of those customers may be not spending enough on travel to make it their primary focus. So if you're going out and just selling a travel solution, you might be relevant to this percentage of customers. But if you're going out and saying, "Look, I can help you manage all of your indirect procurement. I can help you manage the purchasing of your office supplies. I can help you manage the posting of all of your indirect expenses". And within that platform, you can issue virtual cards to employees to buy whatever spend the categories you want and you can control the spend on those different and the limits on those spend calories. And it gives you access to a travel and expense portal for managing your travel and your expenses. Every company needs to manage indirect expenses. So we become relevant to a much, much larger set of SME customers. And that's important, especially as you move more and more into the unmanaged space. You've got to have a broader value proposition that resonates with a larger set of customers. So that's really what Neo1 does for us.

And I imagine also the relationship with Amex itself being...

Absolutely. I mean, integration of payment is so important to us. A lot of midsized businesses, they don't want to issue corporate cards to every individual. They have temporary employees. They have people that are flying in for interviews. But if you can issue a virtual card for a specific purpose and with specific limits, you can fund the procurement of pretty much all of your activities. So it is a game changer. It takes time also just, frankly, to explain the use cases and to educate customers on how powerful it can be and how it can be used. But this is a very important year. We've launched that in the U.S. and the U.K., and we expect to more than double the number of customers on the Neo1 platform this year. So...

And what does that spell for usage of the virtual card solution as well?

Yes. Like I said, early days. I mean, the campaigns with Amex really started at the beginning of Q2 to go out to the Amex card member base and sell Neo1 into that base. So we're at the beginning of that journey. Now the product is operating exactly as we wanted with the virtual card integration. So I'd say more to come on that in terms of actual volumes and results as we get through this year.

No, it's an exciting part. It's an area that we focus a lot on the fintech side. And obviously, travel. It's a great use case for that type of product. That's great to hear. I do want to dig in a little bit on some of the vertical call outs that you just had, specifically from tech, because to my understanding that was 1 of the hardest hit or the hardest to recover following COVID. So it's great to see upper single-digit growth there in the tech area. Any thoughts on -- I mean, there's still a lot of work from home that's going on particularly in that industry as they try to source adequate labor, all that. What some boots on the ground observations would you say about that particular vertical and how that could contribute to growth over the next year or so?

Yes. I think that growth rate back in Q3 and Q4 was like 30% to 50%, because the tech sector was obviously a little bit slower in terms of recovery from the pandemic, but also they had, had their own sort of mini recession, so to speak, in terms of the pressures that were on in that tech sector. So we're now starting to lap those very, very strong growth rates. So I would say that we're seeing more normalized growth now. So I would expect those growth rates to continue. And I think it's very well recognized publicly. Many of those big tech companies have now started to encourage more return to office. Where they're not encouraging return to office, they are absolutely encouraging, bringing teams together on a regular basis. And that's obviously very positive for both our business travel volumes, but also our meetings and events business.

That was a big theory years ago. Certainly, around the time of the IPO, I remember, discussing that at length is, yes, there's this big work-from-home element, but they will need to actually travel more to meetings and all that stuff. Are you seeing that?

Yes, we're absolutely seeing that. You actually see a new generation of business travelers. These are people who are used to commute. And when you commute, it's not business travel. But when you're based at home and the company then asks you to come in for training or asks you to come in for team meetings, that becomes business travel. So you've got a new sort of generation of business travelers that maybe didn't travel before, but now are, which is obviously very positive for us.

And then other areas that are still kind of recovering. APAC, obviously, that's been a big comeback story here certainly versus the maturation of the recovery in the Americas and EMEA as well. How are you thinking about that specific geography and their performance lately, and how should investors kind of gauge their expectations you think?

Yes. Look, I think that we're starting to see that gap narrow a bit. And APAC is still the fastest performing region. It was growing at 17% versus the Americas at 5% in the second quarter. I do think we're going to see that gap narrow, but we still expect Asia Pacific to grow significantly ahead of the other regions over the next 3 to 5 years. We do think that trend is absolutely going to continue.

That's great. Very encouraging to hear that. I do want to pivot or I want to talk about CWT and how transformational that can be for the company as it scales. $570 million cash/debt-free basis -- funded with cash and shares, I'm sorry. What updates can you give us on how the transaction is going forward? Any updates to share with anybody?

Well, we're going through the regulatory process at the moment, going through the appropriate approvals with the regulators. We expect the transaction to close in the first quarter of 2025, which would be a great way to start next year. It is a very exciting opportunity for us. It will grow our revenues by 34%, grow our sales by about 40%, give us the opportunity to welcome over 3,000 new customers onto the Amex GBT platform and give them access to the value and choice that we can provide. And also, it's a very attractive financial transaction that's going to add around $230 million of profits to the bottom line when you look at the run rate profitability and the $155 million of synergies that we have. And that's a post-synergy multiple of around 2.5x. So hope to close in, in Q1. Hope to then start the important business of creating more value and choice for the CWT customers that are coming across and then delivering on the financial returns, which, as I said, we see as very attractive.

Now the marketplace obviously knows that this deal is happening. I'm sure a lot of enterprise users who are using CWT or maybe even another competitor are seeing that. Has that stalled their decision process at all, perhaps say, "You know what, I don't need to switch to GBT this year. I'll go along with the merger," that kind of thing. Are you seeing any of that type of activity?

No, we haven't seen that kind of activity. I think big companies that initiate procurement processes continue as usual. It's a very competitive segment, very competitive space. I think there are many, many other competitors out there that will just get added to the procurement list. So we have not seen any change in customers' buying behavior, no.

Any updates on particularly, GMN, RFP activity? I guess, historically, how do you think it's stacking up currently versus previous periods?

Well, I would say, pretty consistent. I mean, we've consistently gained share in global multinational segment because of, I think, the investments we've made in both software and services. And I would say we expect that to continue. We feel good about the value proposition that we have in that segment. But I would say the activity itself is pretty consistent. And you see that in the new wins volume. I think new wins last 12 months were $3.3 billion and about $1.3 billion of that was coming from global multinational and $2 billion of that from SME. So around 2/3 of the wins from SME, 1/3 from global multinational, which is kind of the mix that we've been at really for the last 12 months or so?

Has the sales -- I guess, the sales motions or at least the client priorities from the GMN side, has that changed at all? What's the #1 focus? Is it more of these tech-enabled solutions, these add-ons, that kind of thing? Is it service reliability? Is it pricing that you get through your partners? Like has that ranking of their pecking list, has that changed at all?

It's all of the above, right? It's companies with very sophisticated buyers. There's no 1 silver bullet. They're looking for excellence across a range of different categories. But the way we think about it is in 4 areas, right? Number 1 is really about value. And for us, that's content, giving the access to a marketplace with the best content, the best fares, the best rates, the most comprehensive content in the marketplace. That's extremely important. The second area is choice. I think these are big sophisticated buyers that are looking for -- not for a one-size-fits-all solution, but looking to be able to configure what's right for them, and to be able to select their choice of technology. That's definitely important. Then experience for both the travel buyer and the traveler is always really important. What's really dialed up there is the technology solutions within that experience. But it's still about bringing the best people and the best technology together. It's about blending software and services. And we think that's our sweet spot. We have market-leading software solutions and services. And I think for global customers, increasingly, it's about making sure you integrate those really, really well, and that you deliver them on a consistent basis around the world. So those really are the key areas. And then, of course, for big companies, privacy, service, security, safety, these remain very, very, very important areas of focus. So for big companies, you got to tick all those boxes, a lot of boxes.

Yes. I would imagine like as you get more scale, particularly post this transaction, it gives you a little bit more leverage across the supplier base. Maybe you can drive improved rates for your underlying clients, drive some more efficiencies for them. That could make the platform even more attractive. Is that part of the calculus that do you think is rational?

Yes, look, efficiency definitely. I mean, the synergies from the potential CWT acquisition, we have $155 million of net cost synergies. And obviously, that's a very important underlying part of the transaction. Scale definitely brings efficiencies and customers are looking for us to improve our efficiency and our cost performance. And obviously, suppliers continue to look for us to deliver efficiencies as well. So yes, scale definitely helps in terms of delivering efficiencies and efficiencies are very important.

I know it's early, and obviously, the deal is yet to be closed, but how should we think about and at least a sketch of what that integration cycle could look like?

Karen, you should pick up on this one.

Yes. So as we've talked previously in terms of those synergies and as we think about the realization, we really see that over a 3-year period, but 35% will be in the first year. We've got confidence in terms of that. And then a meaningful amount in that second year with just a small portion in that third year. So think about it as really those first 2 years as being the critical times as we think about bringing them in, integrating them into the business.

Right. And that pitch to onboard that former CWT client, do you envision that, that being a challenging transition? Like what are some of the challenges and opportunities that you see in transitioning some of those enterprise clients to the GBT platform?

Well, we've got a fair amount of experience at integrating businesses. And we know that ultimately, you have to work very, very closely with each and every customer to make sure that you manage that process and manage it successfully. And customers are going to want to know how are they going to get more value from us? How are they going to get access to better content? How are they going to get access to better technology? How are they going to make sure they're on a platform that is not just ready for today's distribution environment, but for tomorrow's, including new content and NDC? Customers want to make sure that we're delivering the service levels that they're expecting. And we're absolutely ready to take on that challenge and make sure that we're delivering all of those areas for the customers. Ultimately, it's a very, very strong partnership with each customer to make sure that process works well. And they'll want to know what's in it for them and how they're going to benefit from it, as they should.

I think it's almost like -- glad you touched upon NDC. I think it's almost as an operating system, right? So it's largely your operating system. That's where the developers are going to flock, right? And I would imagine, post your integration, even existing right now that you're a really important partner for the airlines as they get behind new content distribution, trying to drive more ancillary sales, that kind of thing. How would you characterize where we are in that evolution right now in your partnership with the airlines there and how are you driving value across the ecosystem?

Look, you're right. We are an important distribution channel for the airlines, and it's our job to create value for customers, but also to create value for our suppliers, our distribution partners. And we want to make sure that we have a marketplace that customers have access to the most comprehensive, most competitive content in the industry. But we also want to have a marketplace that airlines and other suppliers say this is the most sophisticated modern retailing marketplace. This enables me to retail my products the way I want to, which is why we've been making investments in Neo, in Egencia, in our marketplace, so that we are NDC ready. We're already operating with 20 different airlines on NDC. We are seeing really good increases in NDC volumes going through our platforms. And that's because we want to work with suppliers in a way that they see our marketplace as the most efficient and the most effective distribution channel for them.

I do want to talk a little bit, Karen, on the second half financial playbook. Right now, I guess, you're targeting 6% to 7% growth in the second half, adjusted operating expense growth of 2% to 3% growth there. If you could walk us through some of the scenarios, what could change as macro headwinds versus potential upside if we get a Fed pivot, SME kind of comes in. If you can walk through some scenarios there that could potentially arise and how did you come to your second half outlook?

Yes, sure. And I guess, yes, we're always looking at bookends and everyone is now scenario planning on the what-if. And if you go back to Q2, when a month ago, we talked about our outlook, as we talk about our full year guidance, and Paul has already alluded to this, the 6% to 9% in terms of revenue growth, 18% to 32% in terms of adjusted EBITDA, and we reiterated that. The point we made though was that we expect to be at the lower end of the revenue guide, but confidence in terms of the midpoint of adjusted EBITDA, which really comes back to the actions that we have taken during '23 actually and '24, because there was some carryover in terms of $100 million of cost saves. We're still investing. So it's net of that. But that's what gives us confidence in terms of the outlook. And from a volume perspective, as I say, there are scenarios, but the 1 piece that we do expect to see is really that impact that we saw from the Olympics that we will cycle over that kind of come September. And September is a big month in business travel. And so it's very important. And it's certainly me traveling in this week, it was incredibly busy. And so it feels like, as we have seen in prior years, that business travel was back in September.

I would wholeheartedly agree with you. But one thing you kind of glanced over a little bit there was you raised your free cash flow guidance by $30 million, which was quite impressive. And targeting over $130 million for the full year. A lot of what happens is the result of refinancing the debt stack a little bit. How should we think about the progression of free cash flow generation for now? It seems to be, obviously, pivoting off of last year, turning positive last year, now $130 million. It's quite attractive. It's getting more and more attractive. How should investors think about that progression, at least from the pieces -- I won't hold you to tell an absolute number, but like what are some of the pieces that could contribute to that continued growth?

Yes, sure. And as you said, we raised our guidance during Q2, and that was primarily driven by the refinancing, which we were incredibly happy with that result. But also the continuation of the working capital initiative that we've had for the last 18 months that continues to perform above our expectations. So we feel really confident. As we think about the future, we already see getting to 45% to 50% in terms of free cash flow conversion on adjusted EBITDA, and so continuing the momentum that we have seen over the last few quarters.

That is encouraging. That's a really important part of the story, certainly that we hear from investors. So it's great.

One point actually, Pete, that I would take this opportunity to call out. As a result of kind of the refinancing and that cash generation, yesterday, we did announce an $8 million share buyback. And that was really with a legacy shareholder approaching us in terms of their desire to sell. And we feel really good in terms of where we are in terms of -- as you think about capital allocation and really ticking through those priorities, and this felt like a great opportunity. It really signals management's confidence in terms of us. And also, given it was at a discount, we also felt that it took away that risk in terms of the overhang. And so that's another step in terms of our journey that we're feeling really good about.

That's great. Good to hear that. We do have a little bit of time here left. I'm happy to open the floor to questions, if there are any. I do want to touch a little bit upon some of the blockchain stuff, as we talked about last of my particular interest. I think that's fascinating. And if we can at least give an overview of the interest that you're seeing for this product. It's enabling end users to attribute sustainable fuel usage for airlines and for them to capture that, moving past all the partners that are in between there. If you could just walk through that product and some interest that you're hearing?

Yes, what Pete's referring to is a product called Avelia, which is actually a partnership between us and Shell Aviation and Accenture. Maybe start with the problem that we're trying to solve. We want to aggregate the demand for sustainable aviation fuel for obvious reasons. So it's a single most important thing we can do to reduce carbon emissions in our industry. But we also want to do that in a way that we can aggregate that demand, make it easy for customers to purchase sustainable aviation fuel, but also do it in a way that the customers can track and record the usage of that sustainable aviation fuel, so that they can counter towards their sustainability targets. And what Avelia does specifically is aggregates the demand, but also the blockchain is used to ensure that the purchase of the SAF and the utilization of the SAF is tracked and is recorded in the blockchain and enables customers to then receive certification and to claim credit for the procurement of that SAF irrespective of whether it was used in the actual aircraft you go on, right? Trying to get it used on the aircraft you go in is not a good idea. You don't want SAF produced in California that then is put on a tanker, is brought to London, and injected into my aircraft. It's going to burn more CO2 getting it. So you need a system that enables you to be able to buy the SAF and claim credit for it, even if it's used in the most intelligent place. You want it used as close to where it's produced as possible. Otherwise, you're just adding to the problem, right? So the blockchain, yes, plays an important role in making sure that you can actually track and claim credit for the sustainable aviation fuel usage.

I think that's fascinating. I love hearing stories about that. I do want to wrap up, though, on everyone's favorite topic, AI. It was a big topic last year. And GBT did talk about a lot of initiatives there, particularly on cost of delivery, cost of service, that kind of thing. Maybe you can talk about the investment you've seen and maybe any results? And how are you thinking about investment spend towards AI initiatives going forward?

Yes, sure. I would say that automation, machine learning, AI, generative AI, we've been doing some of this. This is not new. But certainly, as we think about -- we've talked about our margins getting to the mid-20s, which is net of investment. And what will become more and more critical is that investment in terms of AI. And David obviously joined the call in Q2 to talk a little bit more about it. But certainly, as we think about those areas, there's really 4 areas that we've carved out from an organization perspective that sit within tech around the opportunity, which is, it's looking at the servicing side. It's looking at finance, the end-to-end process, and then our product engineers. And so we see a huge opportunity in it. It will continue to grow. But I guess we're being very thoughtful in terms of the way that we approach this and making sure that we have the use cases and then drive the momentum from that. And so it's always test and learn in this space.

I mean, you're seeing all that grow, which is return on investment. And understanding that, and that's, I think, what a lot of corporates are grappling with now, some seeing some frustration, obviously, but I think it makes sense from the chatbot and the service area is seeing a lot of progress there. But that's good to hear that you're taking that approach. Should investors think that there's any particular areas that really should be the focus on that AI machine learning front, maybe outside of just delivery cost side, maybe on revenue-generating side, maybe sales...

There are so many applications, and I have to say, our primary focus with the AI initiatives is cost. It is efficiency and productivity. And that's why, as Karen said, we've got a team looking at the servicing productivity gains, the team looking at finance processes and particularly FP&A processes, where there's some really good proven use cases. Then we have a team looking at our kind of end-to-end business processes like customer implementations. And then you've got actually a team looking at how do we improve the productivity of our software engineers. You can use AI, obviously, to do the more simple coding. So that's the primary focus. But the point Karen made earlier, we've been using AI within Neo and Egencia for actually several years to improve the way that we actually personalize the content that we display to customers. And machine learning and AI is embedded into both Neo and Egencia. It's the way the software platforms work. So getting better and better at using data and AI to improve the customer experience within the software platforms is also very important.

That's great. Good to see that you are starting to see the fruits of your labor in that area that will help free cash flow. Definitely should keep that going. And that's certainly some great progress here. We're excited for a good second half, and best of luck with CWT.

Thanks very much, Pete.

Thank you again for coming this year. Always great to have you.

Thanks, Pete.

Thanks, Pete. See you soon.

Yes.