lastminute.com N.V. (LMN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the lastminute.com's Investors and Media Conference Call and Live Webcast on the Half Year 2021 Results. I am Maria, the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Martin Meier-Pfister, Investor Relations. Please go ahead, sir.

Thank you, Maria. Good morning, everyone. Thank you for joining us for this call. The speakers today will be our CEO, Luca Concone; and Diego Fiorentini, our Chief Financial Officer. On the next slide -- [ 2 ] next slide, you see the agenda for the call. As for the Q&A session, you can post your questions during the presentation or during the Q&A session itself. Also, keep in mind that the session will be recorded and a replay provided on our web page. With that, I hand over to Luca for the presentation.

Thank you, Martin. Let me begin with a market update. As shown on the chart, the travel industry has not yet bounced back to 2019 levels, which is the benchmark for us, and flights in June are still down 5%. We expect the recovery to be fully completed next year. This trend is evident from the recent softer results reported by some airlines, for example, Ryanair or Air France-KLM Group. In the flight market, after a slow start of the summer, airlines are now compelled to adjust their pricing strategies to boost occupancy rates. This is beneficial for consumers who are flying at significantly lower prices than last year. Metasearch players are becoming increasingly competitive, resulting in strong pressure on this channel too. Overall, flights remain a low-margin category. As a group, you'll notice from our previous presentations, we have shifted away from flights to more profitable dynamic holiday packages. Since official studies on the DP segment do not exist, we still use market data on flights as a benchmark, as it is the closest available indicator for our business. Now let's focus on operational and strategic highlights. Ryanair agreement. As you know, in late 2023, Ryanair started imposing restrictions on all online travel agencies. This, of course, impacted our business, both flight and dynamic packages. We have resolved this situation, having secured a 3-year agreement with Ryanair at the beginning of July. So the first half of the year does not include any Ryanair agreement. The agreement allows us to seamlessly offer Ryanair flights, both to package holidays and flight customers. We have been working and negotiating heavily for several months, and the objective was always to safeguard consumer choice, at the same time, protect our company. This is a significant improvement compared to the past. Our partnership with Ryanair will allow us to improve our products, add further value and offer more options for all customers who come to us looking for the perfect holiday. The full benefits of this agreement will only be visible in 2025 after completing a technical integration phase, which is on track, and we expect to complete it by the end of the year. The growth of the DP business is still very important. The result of the first half confirm our strategic decision to focus on this core product and it counterbalanced a softer-than-expected first half in other products and in the market. In the first 6 months of the year, we continued to grow our geographical footprint, entering into new markets like Iceland, Mexico and Chile and further enriching the product with new services and features. In ancillaries, we continued to improve our offering to elevate the customer travel experience. Travel insurance protects our DP customers in case anything goes wrong and our advanced payment solution leveraging FinTech technology enhances travel packages and facilitate customer transaction. Our goal is clear, we want to offer our customers the most personalized and flexible travel experience through a safe and trusted one-stop-shop service. In terms of marketing, in the first half of the year, limited market growth led to reduced traffic on our commercial platform, but we have responded by adopting a new brand marketing strategy. To boost the traffic, we focused on a digital-first approach with a strong emphasis on social media engagement to future-proof our holiday packages for the next generation. Brand positioning has been strengthened, establishing lastminute.com as the home of the last-minute holiday deals, and we also made significant investments in performance marketing, specifically in search engine marketing. Moving on to Slide 7. If we look at the results for the first half of the year, it is evident that they were negatively impacted by Ryanair's restrictions on its ticket inventory. Let me remind you, it was imposed on all online travel agencies and that Ryanair has around 1/4 of all the traffic in European flights. Despite this, the DP business showed the resilience, maintaining our leading position in the fastest-growing segment of the European travel marketing. In detail, as you can see from the left-hand side, GTV, gross travel value, is down 22% compared to the first half of 2023. Nonetheless, DP are growing. Revenues are only down 9% compared to 22% of the GTV, and this tells you that we've been working on protecting our take rate. Gross profit is slightly above the first half of 2023; plus 2%. Despite lower revenues, we successfully maintained a stable adjusted EBITDA margin of approximately 14%, while adjusted EBITDA decreased by 8%. Net result increased by 35% to EUR 10 million, which is already higher than the 2023 full year profit, which I remind everyone was EUR 7 million for the year. If we only consider DP business, we can observe significantly more favorable results that partly counterbalance the first half of the year. Our CFO, Diego, will provide a greater detail into this shortly. It is important to highlight that if we exclude Ryanair-related business, our performance would have shown a positive trend, with revenues increasing 2% and gross profit up 11% compared to the first half of 2023. Let's talk about the actions that we took to enhance our DP proposition. As you know, enhancing our core product, Dynamic Packages, is one of the cornerstones of our strategy. This slide gives you an update. As the travel-tech leader in this sector, our mission is to personalize and simplify the travel experience, catering to customers who increasingly seek a safe and trusted one-stop-shop service. We have identified a growing trend in the travel industry. As you can see in the bottom left, 7 out of 10 travelers booked within 30 days of departures. We have significant opportunity to capitalize on this last-minute marketing, offering the most flexible and personal travel experience through our Dynamic Packages. In terms of strategy, in the middle, as previously mentioned, we focus our effort on enriching the product and relaunching our brand. All this has already led to important achievements in the first half of the year. We reinforced our telesales channel and launched a post-booking service to scale closer to our customers and strengthen the support we provide them across the entire travel journey. There is a relevant window of opportunity for additional sales after the booking process has been completed before the travel date. Tours and activities have a huge potential to become a vital component of the holiday package. So this year, we partnered with TUI Group to provide our customers in over 100 countries with a fantastic array of activities and experiences via a technology platform that is easy to access. We further developed our FinTech solution and our deferred payment option, offering our customers as much flexibility as possible. We allow customers either to pay a deposit and then the balance before traveling or, if they book early, to pay in installments before the travel date. This significantly simplifies their financial management. We launched a brand-new summer campaign, which I will show shortly, making the first step in our refreshed brand strategy, proudly embracing our identity as lastminute.com, the home of the last-minute holiday package deals. This is a snapshot from our summer campaign. The tag line is, "It's never too late to book", in line with our renewed brand identity and leveraging the great opportunity to own and dominate the last-minute space. Understanding how busy life can get, the campaign chiefly reminds people that it's never too late to book a holiday. So through numerous social-first assets, we encourage holiday goers to find the last-minute holiday package on our website and our app during an office break, a busy bus or, as shown here, at a school concert. This multimedia campaign has been launched successfully across our 5 core markets, which are the largest European economies, and it has already achieved more than promising results with over 30% direct and social media session in July 2024 compared to July 2023. Now, let me hand over the microphone to Diego Fiorentini, our CFO.

Thank you, Luca. Let me now walk you through the -- our half year results, starting with Dynamic Packages, which now represents 61% of the group total revenues and 64% of our gross profit. In terms of revenues, DP reached EUR 99.8 million, 16% increase versus the same period of the previous year, while gross profit improved 25% from EUR 36.3 million to EUR 45.3 million. DP key metrics also show positive development with a 1.4% increase of the take rate and 3.1% increase of the marginality. The continuous increase of the take rate, which, remember, is the ratio between revenues and GTV, remains a key element of our strategy through an expansion of our ancillary and post-sales offerings. If we now look at our products, it is clear that the result were disappointing for various reasons. The market was softer in the first half compared to the expectation. And Ryanair's restrictions on its ticket inventory had a severe impact on the flight performance. However, as we enter the second half of the year, we see an improving trend, which, together with the agreement with Ryanair, will make the comparison with 2023 easier. We are now on Slide 12, bringing attention to our B2B segment, which includes our OTA core products sold to long-term partnerships, like with white label affiliation, gift cards and corporate rewards, plus the media and the media business unit. This segment is growing compared to the first half of 2023, 5% in terms of revenue and 10% in terms of gross profit, proving that our B2B partners recognize the value of our DP technology. It is worth mentioning that the B2B segment allows us to enter new market through indirect investment before establishing a direct presence to serve the B2C segment. As Luca was anticipating, our B2C segment, which includes the traditional categories of an online travel agency, such as dynamic packages, flights, hotels and tour operator, suffered from decreasing primary traffic, which is visible in these figures. The decline in traffic, especially in the flight business is partially due to the unavailability of our full offering, which was affected by Ryanair's restriction. As mentioned before, we've seen improving trend at the beginning of the third quarter that should extend into the second half of the year. Moving to Slide 13. As you can see, our head count remained stable compared to 2023, but the cost increased due to the hiring of tech talent and the ongoing wage inflation. On the other hand, the increase of running cost reflects our strategic investment in technology as well as the ongoing inflation environment. One of the most important technology investments completed during the first half of the year is the dynamic pricing engine for DP, which improves the position of our offer with more competitive prices and consequently, increased the conversion rate. We also continued with the [ cloudification ] of our server from on-premise to on-cloud. Storing data in the cloud provides multiple benefits, including full disaster recovery, better backup, enhanced security, increased innovation and agility and a significant reduced environment impact. As a leading tech company, these investments are paramount to future of our business and fueling the [ goal ]. Slide 14 summarize the performance that we already shared in the previous slide. The key message here is that our group managed to protect the EBITDA marginality compared to the same period of the previous year at 14%. This is a significant achievement considering the various challenges the business has faced in the first half of the year and validates the shift towards Dynamic Packages. In the first half of 2024, reported EBITDA benefited from lower nonrecurring items compared to the same period of last year and the positive effect from the remeasurement of the incentive plans. The net financial result was positively impacted by lower interest expenses compared to the first half of 2023, thanks to the reduction on gross debt. This improvement will become more significant in the second half. Our adjusted tax charge, excluding taxes from previous years stands at approximately 25%, which is consistent with our long-term tax rate. As already seen, the net result for the first half already exceeded the total net results for the entire fiscal year 2023 and will provide the basis for the next year dividend distribution. As you can see, operating cash flow generation was very strong in the first half of the year, reaching EUR 137 million. The biggest contribution came from the change in the working capital, which contributed EUR 116 million compared to only EUR 30 million in 2023. This positive effect in the first half is mainly connected with the increase of the DP volumes, which have a longer net working capital cycle. This is because the value components of a dynamic package except for the flight are paid only after the customer return from holidays, which typically happens in the second half of the year. Slide 17 shows a significant improvement of our net financial position in the last 12 months, reaching almost EUR 143 million compared to EUR 102.5 million at the end of June 2023. During the first half of the year, we completed the implementation of the new group-wide cash [ pooling ] agreement that brings 2 positive developments. First of all, it enables the seamless allocation of our liquidity balances within the group, resulting in significant reduction of gross debt levels and interest expenses. This can already be seen as the gross debt decreased from EUR 61.4 million to EUR [ 18.8 ] million at the end of June 2024. It will also allow us to generate a positive return on liquidity that will contribute positively to the bottom line in the second half of the year. It is also worth mentioning that the renewed strength of the balance sheet supports the growing adoption of our deferred payment solution, which represents the key pillar of the DP value proposition. I now hand over the word to Luca.

Thank you, Diego. We are now in the guidance section. In terms of future outlook, in the first half of the year, we had to face a softer market, as we mentioned, and the absence of Ryanair's [ problem ]. In the second half of the year, we solved the Ryanair problem, though it will only be completed in terms of technical integration by the end of the year. But our initial Q3 numbers confirm that the trend has reversed, and we therefore expect a quarter 3, 2024, which will improve -- will be with a better performance compared to quarter 3, 2023. Overall, we expect to reach the revenues of last year and grow our EBITDA in the single-digit range. Here, we start looking a bit further away than half 1 and half 2 of 2024. The 3-year commercial agreement with Ryanair strengthened our outlook of midterm results and will be reflected in our strategic plan. Dynamic Packages represent the real engine of our business. As Diego has shown, they are now basically 2/3 of the company. The growth of our DP despite lower revenue at the group level shows the resilience of this category. We keep investing heavily to enhance the product and provide customers with an increasingly personalized and flexible travel experience. We provide ancillary services and FinTech solutions that represent a pillar, elevating the customer experience and boosting profitability. We have first-class technology in DP, which is recognized in the industry and leveraged by renowned international brands. This sets us apart from other online travel agencies and strengthens our leading position in the fastest-growing segment of the European travel market. We are following a comprehensive growth strategy, focused on priorities that drive profitable and sustainable growth with Dynamic Packages at its core. We plan to continue expanding our business, leveraging B2B partnership and our abilities in the B2C marketing space and our renewed iconic brands. I now hand over to Martin to manage the Q&A session.

Thank you very much, Luca. We actually have received quite a number of questions in the webcast form. Please note that we have consolidated some of the questions, those that are similar. So the question might be asked somewhat differently to what you have exactly posted in this window. I start with the first question. It's about returning cash to shareholders. Since the announcement of the dividend, the company's share price has declined almost 25%. You had more than EUR 100 million of corporate cash by midyear. So you're actually returning less than 10% of cash to shareholders. Why is the company not returning more capital to shareholders? Luca?

Well, the Board has made a decision to pay a dividend, and I think it strikes the right balance between returning cash to shareholders and retaining capital for future growth initiatives. We are considering launching a new share buyback program with different conditions. And let's not forget that after the pandemic, the company has faced losses that have reduced the group's equity. So as directors of the group, we need to balance the safeguard of our shareholders' equity and shareholder return interest.

Next question is for Diego. You are quoted in the press release saying that the company has started generating a return on the liquidity. How much of the company's cash can it earn interest income on? What is the interest rate? Historically, it appears that the company has not been earning interest income on its cash balance and why is this the case? Diego?

Yes. Thank you, Martin. First of all, we don't have any restriction on our cash activities, and we are free to invest all our cash balances. The return are consistent with current money market rates, which, as you know, are quite high at the moment. In the past, it was difficult to invest the cash actively because through the COVID period, the company was more focused on maintaining the cash level and financing the ongoing operation of the business. And now that we have put COVID behind us, we can be more proactive in utilizing our liquidity.

The impact of this will be shown only in the second half of the year. We used the first half of the year to complete this big cash pooling and treasury management project.

Okay. Next question is for Luca. Is the dynamic package geographic expansion in partnership with Booking.com?

Well, our B2B segment in general facilitates geographic expansion, it allows us to test new markets without any direct investments, so without taking risk onboard before we actually enter them. So we also leverage on Booking.com partnership to expand our geographical coverage. Once we are in the market, we then decide if it's worth for us going also direct with our B2C marketing experience.

Okay. Next question for Diego. How does the flight performance compare to the same period in '23? Are you committed to selling flights-only bookings in the long term? Or is it this being phased out due to the DP strategy?

As we saw in the presentation, the performance of the flight in the first half was disappointing mainly due to the restriction on the availability of the inventory with Ryanair. The outlook has improved as we started the third quarter, but it still remain below 2023 levels. We do remain committed to the flight on the business as -- even if we have seen a reduced profitability in the last few years as many players have entered the market.

Let me add that there are different situations in different geographical markets. There are some markets in which you can actually make money out of flight-only. And there are other markets in which flight-only is really a commodity with margins that are very much squeezed, but we will keep on selling flights-only because, a, we can make money out of it, though not as much as in the past; and b, it's a key component of Dynamic Packages, and this allows us to negotiate better deals and kickbacks for certain level of volumes from airlines or GDS.

Next question, with revenue down and negative trends at a corporate level, why has management increased head count and increased fixed costs? How is this increase consistent with the Chairman and CEO statement today that the group will continue to focus on cost base? Luca, please?

So we have increased head count marginally, to begin with. And we need to have our people at ready to exploit all the potential growth in the second half of the year and for next year. We have started important internal processes to boost our business that will require involvement of our tech force. What has not been shown is that our investment has been on the tech side and not on the corporate side. Other fixed costs have increased mainly due to [ cloudification ] of our services. You remember, we still had, in the past, some on-premises service, now everything is on cloud. And as Diego mentioned, storing on cloud has multiple benefits that we all know about. Tight cost management is an ongoing process, which we take very seriously. And compared to our projections, we have already been saving significant amount of costs. We continue to look at ways to better manage our cost base.

Why doesn't the company repay its remaining debt when it has ample cash to do so?

Well, not all debts can be repaid sooner than maturity. We have paid back all the uncommitted or revolving credit line and the remaining amounts are [indiscernible] committed credit lines. We also need to take account into the requirement of the cash during the low season in the winter.

On April 4, the CEO provided a commitment of 5% to 10% revenue growth and 20% adjusted EBITDA growth. That commitment was made assuming no agreement with Ryanair, which, if reached, should improve the performance. With an agreement you have now reached with Ryanair, how was the company's performance fallen so far short of the commitment made by the CEO?

So as many others, we expected a stronger market. Let me remind you the comment of Ryanair with minus 49% half year profits compared to the previous year, which did not materialize. Second, our numbers had baked Ryanair business like we did in the past without any agreement, while Ryanair ability to prevent us from selling their inventory has improved significantly, and so we could not access Ryanair inventory the way we did it in the past. And third, the Ryanair deal took much longer to negotiate. We think it was a good investment of our negotiating time in order to achieve a longer and stronger deal. Overall, as we mentioned many times, we are now in the best place possible to have a very good second half of the year and to jump-start our 2025.

Next question on Ryanair. Could you please provide any economic details related to the agreement?

So we are under strict confidentiality, so I can't comment on the specifics of the deal, but I can comment on how the agreement changes our margin profile. So on the positive side, we reduced the cost we had with intermediaries between us and Ryanair, which we're providing us Ryanair content, of course, for a fee. We reduced litigation costs, which had grown since we had many active legal cases in multiple jurisdictions. And there is no more discrimination of our customers, which, in the past, were forced to go through special ID processes that were harming and -- their experience. The negative impact is that we do not have any more the ability to add margins on certain ancillaries, and we have no more access to certain promotional fares. Overall, we think that in the DP, the impact is marginal because we can always add service fee. It is more relevant in flight, but it is coherent with our strategy of not selling money -- not money-making flights. So it is not really going to be impactful overall.

You have not announced a new date for your Capital Markets Day today. Why is that the case?

Well, we felt it is key to conclude the technical integration of Ryanair and better visibility for our midterm ambitions and plans. So there will be a date which will be announced in the second part of the year. But it is important for us to have a Capital Markets Day when we have a better visibility.

Do you think to appoint an internal IR manager?

Yes. We are confident we can announce the hiring very soon.

Next question for Diego. How much of the cash is related to customer deposits? How much of the cash is related to customer -- oh, it's the same question again, customer deposits, sorry.

Yes, Martin, it's not really a deposit because our customers are, one, when they book, they typically pay either the full amount or the portion of the value. Then we keep the cash until they return from the holidays and will pay these to the suppliers -- to the value suppliers later after they return. And of course, the majority of the cash now in the balance sheet relates to this payable that will be settled in the second half of the year.

Next question for Luca. The share price has dropped significantly over many periods now. So my take is that the market has no confidence in lastminute. Why should it remain listed? Why hasn't management engaged bankers to shop the business?

So first of all, the market is not showing confidence into lastminute because it does not know lastminute. And the complexity of our business is not so obvious. It should remain listed because we think that we are able to provide to a number of investors, from large to retail investors, a lot of value. And I am personally confident that the share price will increase significantly as soon as we will be able to show the results of our first half strategic interventions, which include, but are not limited to, the Ryanair agreement. As far as engaging bankers to shop the business around, we are a listed company. We have a number of shareholders with whom we engage regularly for strategic review. And in the strategic review, many elements are considering, including potentially engaging bankers.

Next question for Diego. Did you record a positive recovery trend in July '24 compared to June? If so, by how much compared to July '23? And what are the projections for the second half of '24? Can you provide more qualitative details beyond the summary single-digit growth of EBITDA?

Yes. As shared by Luca, the initial numbers of the Q3 confirm the trend has -- that the trend has reversed. We expect by the end of the third quarter to be closer to the 2023 levels and reach a positive growth in terms of EBITDA by the end of the year.

Next question also for Diego, what could be the net financial position at year-end?

Well, we expect to keep a strong financial position also in the low season. It would remain higher than last year. How much, will be seen according to the performance of the second half.

Next question for Luca. Do you expect Ryanair to reach an agreement with other OTAs? Or do you have insight that it won't? If that's the case, it should be communicated better more to the market.

We don't know Ryanair's plans. This is a Ryanair strategic decision. We know that Ryanair signed with one of the main OTA aggregator. So it is possible that it will stop there in terms of direct integration with the players. We are proud to be one of Ryanair partners, and we are happy that the conditions of our agreement is strong and gives us a competitive advantage, at least in terms of timings, for sure.

Also for Luca, next question. In which markets do you still see potential for growth?

So we see potential for growth in all the markets. We have categorized the markets in Tier 1, Tier 2 and Tier 3 markets. So we are going to have different strategies also because the regulatory environment is not the same in these various tiers markets. And as you probably remember, we are, in terms of geographic footprint, the largest dynamic package OTA in Europe. Most of our competitors are limited to 1 or 2 countries only, which makes them strategically in a more difficult position. So we will have different strategies in the 3 different tiers.

And we have 2 questions on TUI. First one, more details on that deal, please; which markets, sales and earnings contributions?

So let me be clear, with TUI Group, we are now having a direct agreement that covers activities on site at destination. We cover over 100 countries. So we offer diverse portfolio with excursion activities, attraction tickets, et cetera, et cetera. At the same time, we sell, and it's an important part of our business, tour operator's products of other tour operators, which are not just TUI, to our customers because from a customer point of view, buying a dynamic package holiday or buying a prepackaged holiday, makes no difference. That's the holiday they want. And in order to complete our product offering, we not only provide dynamic package products, but also prepackaged products from other suppliers.

So -- and one more question to TUI, you have partially answered it, but there might be an aspect and which you would like to discuss in addition. You mentioned the cooperation with TUI on DP, TUI also announced to focus more on DP. So your cooperation with TUI, does it mean TUI has no own DP offering technology by themselves?

So this is clearly a question that only TUI we can answer. We know that they offer some sort of dynamic package holidays, which is a small part of their business. As far as we understand, their distribution model is very different from ours. It's still very much based on physical locations, depending on the various brands. But I would say that this is a kind of conversation better taken on with TUI itself.

Next question for Diego, about the new marketing campaign. What are the expected marketing expenses for the full year '24, and after marketing expenses in the half, first half year were down by 11%?

Yes. The cost of the summer campaign will mainly materialize in July and August. On top of that, regarding performance marketing expenses, during the summer, we are investing on our SEM to boost our volumes and to penetrate in the Tier 2 markets in Europe, which are the markets outside our 5 core markets.

Okay. Next question for Luca. Softer market in the first half year '24, how did the travelers react? Trading down, shorter stays, et cetera?

So first of all, the consumers reacted with a more last-minute approach. So they are booking their holidays much closer to travel date, which benefits us. And we have seen a shortening in the sales or the number of nights rather than reconsidering choice of locations. So the locations tend to be similar, but the length of stay tends to be a bit shorter. Now that the airlines are reviewing downwards, their prices, this will be beneficial because it will allow more consumers to travel.

So we come to the last question, for Luca again. What does the process of renewing the Ryanair agreement look like? When will the negotiations begin again?

So the negotiations have been long and fruitful and the agreement is a 3-years agreement while most of our competitors have only 1-year agreement. So we will experiment on both sides, us and Ryanair, how things are going. After the technical integration is going to be completed, we are going to see how we can improve reducing cost and giving our consumers better service. I would expect that for the next 2 years, not to touch this, leaving aside minor improvements, and to start a negotiation a year before the expiration of the agreement.

So with that, we close the Q&A session. Thank you for your participation. If you feel that something was left unanswered, just drop us an e-mail, please. And with that, I hand over to Luca for any last words, please.

Yes. First of all, thank you for dedicating your time to us, especially in [ late ] beginning of August. We are now in a strong position to drive our results for the second half of the year and beyond. We look forward to showcasing the improvement in our trajectory with the publication of our quarter 3 results. As you can see on the slide, the appointment with all of you is the 13th of November. And as indicated in the financial calendar, we will soon announce the date for our Capital Markets Day. Thank you so much to everyone.

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