Sabre Corporation (SABR) Earnings Call Transcript & Summary

Good afternoon, everyone, and thank you for joining our Leveraged Finance Conference. My name is Marlane Pereiro, and I am the services analyst for Bank of America covering Sabre. I am excited to have Doug Barnett, Chief Financial Officer of Sabre with us, who will be presenting today. We encourage investors to type in questions, and we will try to include those in the presentation. With that, I'll turn it over to you, Doug.

All right. Thanks, Marlane. Appreciate it. Good afternoon, everyone. Thanks for joining Sabre at the BofA Securities 2020 Leveraged Finance Virtual Conference. I'm sure like me, I'd love the day when we can all get together again. This is Doug. I'm CFO of Sabre. With that, let's go to Page 4, if you don't mind. During today's presentation, I will focus on the following: the ongoing response to the COVID-19 pandemic, the continued progress with our technology transformation and product enhancements and an update on our financial and balance sheet focus. Please note that the slides accompanying today's remarks were filed in an 8-K yesterday available at investors.sabre.com. Okay. With regards to Q3 booking trends, showed signs of improvement over the second quarter. Booking trends in October and November showed further signs of improvement. Despite this, it's clear that COVID-19 pandemic continues to suppress travel demand and impact our customers. We continue to win new business and lock in long-term commitments with some of our largest customers, even in these tough times. Our value in the travel industry continues to be growing, despite the 1,400 airline and agency deals we signed year-to-date through Q3. As many of you are aware, we took decisive actions to reduce our cost structure, manage cash burn, extend our debt maturities and add to our liquidity position. Early on, we took swift actions to protect our balance sheet and give us additional runway to weather this pandemic, obviously because we had no idea how long it would take. Now we are focused on controlling what we can and positioning Sabre for the future, and we're going to continue to focus on our cost structure and we have really no way of knowing what -- how this recovery will take place. We also continue to invest in our technology transformation and our migration to Google Cloud, which will further reduce our costs. Our partnership with Google extends well beyond just a cloud deal, I think it's important for everyone to understand. First, we are pioneering artificial intelligent technology for travel with Sabre Travel AI, powered by Google AI and machine learning capabilities; second, in partnership with Google, we expect to launch the Sabre Smart Retail Engine early next year. It's the industry's first smart, scalable retail engine and will be powered by Sabre Travel AI. These are the next steps in our Google innovation framework. So pulling it all together, we have taken decisive actions to manage through the COVID-19 pandemic while continuing to execute and deliver on our technology transformation and new innovations for our customers. Now turning to Page 5. In the third quarter, industry air net bookings improved slowly but steadily. GDS industry net air bookings were down 94%, 88% and 82% in July, August and September. We've seen continued modest improvement since then. As you can see, October and November month-to-date industry net air bookings are down 80%. Improvement in the recovery has been pronounced in the Americas, where we are the leader. The relative strength of our regional mix help Sabre's gross and net air bookings outperformed the industry in the third quarter. In our largest region of North America, bookings growth demonstrated a 20% -- 20 percentage point recovery from July to October. However, we have seen this trend reverse slightly in November as COVID-19 rates have increased and more restrictions have been put in place. Latin America has shown continued signs of improvement. The improvement in booking trends stalled in EMEA in October, and this largely remains the case in November. Asia Pacific has been the slowest to recover, but does remain trending in the right direction. Now on Slide 6. You can see all the key metrics that Sabre looks at and the improvement we've seen since the record declines driven by COVID-19 pandemic. In April, all metrics were down 90% or greater. But exit in October, gross bookings were down approximately 80%, passengers boarded down 70% and gross CRS transactions down 50%. November month-to-date gross bookings remained largely consistent with October at down approximately 80%. Passengers board has shown further improvement with November month-to-date, down [ 65% ]. Although gross CRM transactions still show signs of largest improvement, we have seen a big aggregation in November with grow CRS transactions down approximately 60%. So obviously, what you're seeing is the effect of leisure travel. It's been -- we've seen a shift away from corporate trail into leisure, which is why you see the GDS bookings down further than you'll see the passengers boarded. And obviously, people are a little more willing to drive to hotels and stay than they are to get on airplanes. So that's kind of the trend that we're seeing in this slide. If we now turn to Slide 7. Okay. This is air bookings recovery by region. The negative impact from cancellations moderated in the third quarter and cancellations have begun to stabilize in the past few months. Looking at the GDS industry data on a weekly basis through November 21, you can see net booking trends have continued to improve. As I previously mentioned, this improvement is most pronounced in North America and Latin America. However, we have seen the improvement in North America tick down a bit as I mentioned before, as we've seen the COVID-19 cases increase and some lockdowns begin to take place. We now turn to Page 8. And this is a look at passengers boarded. Passengers boarded have shown continued signs of improvement. Excluding airlines, it remain significantly impacted by government travel restrictions, passengers boarded for our top 20 carriers are at approximately 40% recovery in November. This is versus an effectively 0 volume environment in April. Now taking a look at hospitality on Slide 9. You can see hotel transactions continue to outpace improvements in air bookings and passengers boarded. Hospitality industry bookings were down about 50% in the third quarter. The positive trend we were beginning to see in EMEA region flattened and reversed due to the new resurgence of COVID-19 cases and reimplementation of travel restrictions in the region. We have seen this trend in North America and Asia Pacific as well, but to a much smaller extent. Now if we take a look at Slide 10, which is a little look at the historical trends of bookings. Here, we're going to provide a perspective of how unprecedented COVID-19 pandemic has been. Over the last 50 years, global travel has shown -- has grown at a multiple of GDP. There have only been 6 calendar years in which global passenger volume declined, and the maximum decline was less than 2%. Over the last 5 decades, average annual growth has been at 3.8% at its lowest and 8.6% at its highest. We have directly benefited from this steady growth in global travel volume. Our resilient volume-based business model filters out noise and fluctuations in the price of air tickets or hotel room nights. So remember, while our customers may have to put a $500 ticket on sale for $200 to stimulate demand, we enjoy a transaction-based revenue stream. Because of this, the recovery data we have shared, we feel we will be well positioned as an early COVID-19 recovery company. We strongly believe there is pent-up demand for travel and that the industry will continue to recover from this extraordinary time. Now we take a look at Slide 11. I continue to be pleased with the progress we are making in our technology transformation. I think the team is doing a fantastic job, particularly in these very difficult times. We already have approximately 65% of our workloads in the cloud. As I will explain in more detail later, by the end of 2023, we expect to move to the Google Cloud and our new DXC contract to reduce our operating costs by more than $100 million per year. The move to the Google Cloud has many advantages, including: greater stability, higher availability, faster recovery and industry-leading security, all at a reduced unit operating costs and the ability to scale up and down quickly as needed. We have discussed other important parts of our partnership with Google, specifically, we have a co-innovation to transform the future of travel. We're now beginning to execute on this aspect of the partnership. Remember, this partnership just began in January. In October, we introduced Sabre Travel AI. This advancement is part of our Google innovation framework and is the industry first and travel. Sabre Travel AI capitalizes on Google Cloud AI solutions and automated machine learning tools to sense, analyze and predict consumer behaviors using real-time shop information and sophisticated travel-specific business insights. We expect Sabre Travel AI can enrich products across all businesses we support, meaning airlines, hotels and agencies, using next-generation technology advancements. We are integrating Sabre Travel AI into certain products in our existing portfolio, with plans to bring these to market in 2021. Also in partnership with Google, we unveiled Sabre Smart Retail Engine. This is the first product powered by Sabre Travel AI technology. Launch is planned for the first quarter of 2021. This smart, scalable retail engine will be the first of its kind in travel. It's powered by state-of-the-art AI technology and advanced machine learning capabilities, and will be available to current and future airline customers regardless of their business model, their PSS system or their GDS. It integrates Sabre's dynamic offer management and custom segmentation capabilities with Google's proven and powerful merchandising solution and uses real-time shopping data, available content and AI and ML-based decision support models to test and learn and generate the most optimal offers available. Personalized offer bundles are dynamically priced using customer segmentation techniques, can include ancillaries such as seats, baggage and will eventually include third-party content, such as rental cars and hotel stays. Ultimately, we will be bringing together the brightest minds from Google and Sabre to build and connect the right offer to the right traveler at the right time, which is what our customers need, to increase the travel satisfaction and provide airlines the opportunity to drive new and creative business opportunities, these are examples of how we are thinking about the future. We are making these investments now that we expect will best position us for success in a post-COVID recovery. Now we turn to Slide 12. As I mentioned earlier, we took swift actions to try and get under control when the pandemic first hit. We are on track to achieve $275 million of nonvolume-related cost savings in 2020 versus 2019. Remember, this is primarily headcount-related expense and partial savings from our renegotiated DXC contract. Natural savings in incentives and technology hosting expenses caused by the lower volume environments are incremental to this $275 million. Going forward, we expect a minimum of $200 million of nonvolume-related cost savings per year compared to 2019. Of this $200 million, approximately $175 million in savings is driven by lower headcount expenses for reductions that have already been executed. To be clear, these cost savings are not driven by temporary factors like furloughs, salary reductions, et cetera, which we did do this year and is why the $275 million that we'll recognize this year does not roll over and I'll go over into 2021. Approximately $25 million impacts the fixed portion of our technology costs, driven by savings from our new DXC contract. While the cost-saving actions implemented this year, and the financial benefits of the technology transformation work, we expect a total of $275 million in annual cost savings starting in 2024 versus 2019. So in other words, the $200 million that carries over from 2020 to '21 will grow to $275 million. This incorporates an incremental $75 million per year of fixed technology cost savings once we largely complete the technology -- our technology transformation and our migration to the Google Cloud platform. These expected savings are already in place, supported by our strategic partnership with Google and our new contract with DXC. As we execute the tech transformation, some of these incremental cost savings may be realized prior to 2024, this is hard to estimate when they will come about. However, we expect the majority to be realized in 2024 and beyond. Incremental to these figures are anticipated savings from lower unit costs on transaction volumes as we migrate to the cloud, which has favorable economics. Page -- going now to Slide 13. As you are no doubt aware, we took quick action to raise additional liquidity in the event that COVID-19 pandemic persists longer than expected. Although I hope this isn't the case and we continue to see signs of modest improvement in bookings. We closed on 3 significant offerings in the third quarter. This is after the actions we already took in April. We generated $598 million in net proceeds from our common stock and mandatory convertible preferred offerings. We also pushed out our debt maturity schedule. We issued $850 million in new senior secured notes due in 2025 and used the proceeds to pay down earlier maturing debt, and we extended the maturity on a portion of our bank facility. We do not have a material debt maturity until the fourth quarter of '23. And majority does not mature until 2024 and beyond, subject to springing maturity conditions. For ease of presentation on this slide here, we have excluded the immaterial mandatory debt repayments. Importantly, the material travel event disruption leverage ratio covenant waiver language remains consequently, our leverage ratio covenant under our amended and restated credit agreement has been suspended. We expect this to continue through at least the end of 2020 and possibly through 2021 based on current IATA volume projections. And for those of you who are not familiar with this, what this basically says is that on a monthly basis if domestic bookings are down more than 10% year-over-year and the year basis will always be 2019, then the covenant is waived. To summarize, we have strengthened our liquidity position, reduced our cost, extended our debt maturities and are seeing improving booking trends. Finally, we ended the quarter with a cash balance of $1.7 billion, and have no significant near-term uses of cash. We remain focused on the future and are confident travel will rebound and feel competitively well positioned post-COVID-19. With that, we can turn to Slide 14. I thank you for your time today. We will now open it up for Q&A. And before I do that, I'd like to welcome Kevin Crissey, our Head of HR; and Brian Evans, our Treasurer, who'll be available to answer questions with me as well.

Great. Well, thank you, Doug, for that. Starting with the question, does your relationship with Google make you beholding to Google? Or can you dual source AI capabilities from Amazon or Microsoft, for example?

We are not beholden to Google for their technology. But obviously, given the relationship we have, more likely than not we'll end up using their technology and not using one of the other service providers.

Got it. And can you talk about your customer mix? What it looked like pre-COVID? What it looks like now? And do you expect any permanent shifts in the mix?

Sure. We've talked about this on other conference calls, and I'll round it off to keep it simple. But -- so we look at our customer mix from -- particularly from the GDS side 2 ways. One would be corporate and leisure and the other would be domestic and international. And in regards to what we've seen, traditionally, kind of the corporate and leisure is somewhat plus or minus 50-50. Obviously, what we're seeing is corporate not recover very strongly and leisure being the more dominant booking patterns right now. So that 50-50 has shifted more to a 75-25 range. And then likewise, if you take a look at international and take a look at international and domestic, we've seen kind of again, it was plus or minus 50-50. And we've seen that shift also go more towards 75-25, more domestic and less international. The importance of that to the company is that, from a margin standpoint, the shift between corporate and leisure isn't really that material from a margin standpoint because incentives change. But on international, we do get a higher booking fee on international flights than we do on domestic, and there is a lower margin associated with domestic international. So that's why it's important to know the difference.

Got it. And with the current cost structure and the booking mix that you just discussed, what percent of 2019 volumes do you need to achieve to get cash flow breakeven?

Yes. So with the mix we're seeing right now, meaning basically the 75 leisure, 25 corporate and 75 domestic, 25 international, we would need to get back to a 70% recovery off of 2019 bookings to get to cash flow breakeven, and that's on a fully levered basis.

Got it. And then just going back, can you expand the explanation of the difference between passenger boardings and gross bookings? And what it would take for gross bookings to catch up with passenger boardings?

Yes. So when -- traditionally, when we reported bookings, okay, that's going to be airline tickets that have been booked. We typically do that net, meaning net of cancellations because in any given period of time, irrespective of the pandemic, there are always cancellations. There are typically a lot of cancellations and rebooks and whatnot. I would tell you right now, with what we're seeing from a gross and net basis, they're really not that materially different than what we've seen historically, meaning before the pandemic. So we've basically worked our way through the cancellations. Obviously, when you -- when we came in to March and April, there was a number of bookings that have already been taking place, which we've been paid for. And for -- and obviously, those all got canceled. And think of this they got canceled permanently, they weren't rebooked. Those have all worked -- they basically have all worked their way through the system. So the 70% bookings number that I gave you would still be now relative to what we're seeing from a cancellation standpoint. PBs, basically, those are passengers boarded. Obviously, the GDS is mainly an indirect channel. Obviously, PBs is just anybody who gets on a flight and kind of the same kind of thing that you'd have to get back to the 60% to 70% of passengers boarded to get the cash flow breakeven for the company as well.

Great. And given the more comfortable balance sheet position that you have versus earlier this year, when do you expect to resume your hotel IT developments?

Well, we are continuing to invest in the hotel IT space. That really hasn't slowed down, and we'll continue to focus on that. Well, the areas that we see the big benefit coming out of all this. And it's been more, quite honestly, prevalent in the hotel space than it has been in the airline space is people decide that you know what, it makes more sense to have some of these core reservation systems that are variable in cost and not fixed in cost, meaning that they're not our own in-house system. So we're having a lot of conversations with enterprise hotels right now. And obviously, we're making investments to support that. And I think you'll see more hotels move to a variable cost structure, meaning an outsourcing of the reservation systems than their current pattern right now, which is to do it in-house.

Got it. And once we get back to a more normal environment, what will your capital allocation priorities look like? I know it's kind of a longer-term view, but...

Yes. I mean, look -- sure. Yes. I mean, look, on a near-term basis, I think our capital allocation is going to have to be -- first and foremost, we're going to continue on the tech transformation. I hope everyone understands how valuable that is for the operations of the organization that we complete this technology transformation. I think secondly then, look, it's going to be incumbent upon the company to make sure we've always had a targeted leverage ratio of 2.5 to 3.5x, and it's going to be important for us to get back to that level particularly to be able to run the company most effectively. So I think: one, we'll continue the tech transformation; second, we'll continue to look to delever the company.

Got it. And just to clarify, on the hotel IT development, that was specifically with Accor.

Yes. Accor -- basically, what happened with Accor was, as you can appreciate, they basically have had to put -- they're going through the same thing we are, and they've had to put some of their investments on hold. And so that's the only reason why it slowed down is we're waiting for them to come back to be full steam and right now, that hasn't happened. So that part of the investment has been just put on hold just given their situation.

Got it. And how does Sabre stack against Amadeus from a technology standpoint?

We feel very good about where we stack up. Obviously, one of the key things that we've done at a much faster pace than they have is we have a lot more of our computing right now going through the cloud. I mean, obviously, they went through a tech transformation, but they basically went from a kind of a closed system to an open system, but still on main trains. So I think from a technology standpoint given the work that the team has done in the last couple of years, we feel great about where we stand technologically against Amadeus.

Great. And do you think enough of the population will be vaccinated to have an impact on your business in 2021?

I'm sorry, could you ask that question again? I got most of it, but...

Yes. Do you think enough of the population will be vaccinated to have an impact on the business in 2021?

Yes. Look, we haven't given any forecasts, but I can tell you, I just -- I'll go with a third party. IATA doesn't think that volumes will be anywhere near back to 2019 levels by the end of '21. I think they're something like 60% to 65%. So I'll give you a point of reference of what a third party. We've not given any guidance with regards to 2021.

Got it. Great. So with that, Doug, that is all that I have for questions. It has been a pleasure having you and the team join us today.

Great Thank you, and I thank everyone who joined the call with us today. Thank you for doing that. I appreciate it. Have a good day, everyone.

Great. Thank you so much. Take care.

Bye-bye.