Saga plc (SAGA) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Saga Plc Analyst and Investor Q&A for the Year Ended 31st of January 2021. And my name is Bethany, and I'll be coordinating your call for you today. [Operator Instructions] I will now hand the call over to your host, Euan Sutherland, Group Chief Executive Officer at Saga to begin. Euan, over to you.

Thank you, and good morning, everybody. I hope you've had an opportunity to look through our update first thing this morning. I'm joined here today by James Quin, our group CFO, and I'll make a few opening comments before opening up to the main body of the meeting, which is Q&A. Saga has made significant progress in a year of unprecedented challenges, during which our key focus has been on serving our customers and keeping our colleagues safe. At the same time, we have continued to strengthen our financial position and have launched our new strategy. This strategy is underpinned by 5 pillars and designed to drive growth in revenues, profit and cash over the long term, driving sustainable returns for our investors. I'm pleased to say that we've started the detailed work to deliver against this plan and have made good progress this year against each pillar. As a business, we are determined to drive strong results out of the last 12 months and emerge stronger from the COVID-19 crisis. And I'm very proud of how we have responded to the challenges and upheaval caused by the pandemic. I want to thank all of my Saga colleagues for their hard work and dedication to our customers throughout it all. Our focus on customer care has demonstrated strong loyalty and retention in all of our businesses. Despite the headwinds, we delivered an underlying profit before tax of $17.1 million. Insurance has continued to perform well throughout. Motor and home policies returned to growth in the year with sales volumes up 1.1% and following several years of decline. Our 3-year fixed price product continues to drive strong positive performance with motor and home retention at 80.5%, up 5 percentage points on the prior year, with over 1/3 of our customers choosing the 3-year product. We've continued our progress in updating our insurance offer. This included the launch of our new online motor comparison website product, offering customers greater flexibility. We also are one of the first insurers to offer COVID-19-inclusive travel insurance. In the travel businesses, our disciplined approach ensured we kept cash burn at the lower end of the GBP 6 million to GBP 8 million per month guidance range. Customer retention across both businesses remains high, despite the hibernation of the business, which demonstrates clear loyalty to our differentiated boutique travel offering. Across our travel businesses, we are very ready to start operations as soon as the government restrictions allow us to do so. Following our new ship arriving last September, Saga Cruise comprises the newest, most technologically advanced ships on the seas. One of the key benefits of this is that it allows us to offer our guests the highest levels of health and safety standards in the industry. We know there is significant pent-up demand for travel among our customer group. Cruise is 78% booked for the 2021 season and holidays are 83% booked for this year, too. Our commitment to having vaccines before you travel was met with huge comfort by our customers and has attracted customers from other travel operators who have been less clear. We have also moved swiftly to strengthen our financial position and our balance sheet. We disposed the businesses that we deemed noncore such as Bennetts, Destinology and our healthcare businesses. And in September 2020, we completed the successful GBP 150 million capital raise. More recently, the latest step in reinforcing Saga's financial position, we announced last month that Saga had reached further agreement with our funding partners to increase financial flexibility. We kept a tight grip on operations at all times through the year and maintained a sharp focus on managing our levels of debt and maintained sufficient liquidity and cash throughout the period of travel disruption. Following the actions taken to provide further flexibility, the group is in a robust position with available cash on hand of GBP 75 million at the end of the year, excluding the GBP 100 million of RCF facility, which remained undrawn. In terms of our important work on transforming our approach to data, digital and brands, we relaunched a series of improvements on our mobile app, our websites and adding web chat functionality amongst other things and launched the Saga Magazine app to go digital. The detailed work on brand relaunch is continuing, and we plan for that to be unveiled later in the year. Looking ahead, we are mindful of the economic headwinds and the potential ongoing impacts of the COVID-19 pandemic, but we remain extremely confident in our plans. Our core market remains attractive and in growth, and we see plenty of pent-up demand from our customers. Saga is a great British business with a strong brand, loyal customers and engaged colleagues, and we're excited about the opportunities ahead. We look forward to relaunching our brand in the second half of 2021, which will enhance our ability to unlock the potential in Saga, returning the business to sustainable growth and creating significant long-term value for our investors and wider stakeholders. So with those opening comments, I wanted to go to the main business of this meeting, which is the Q&A session based on our video results update earlier this morning and that introduction. So I'll open the floor to questions. Thank you.

[Operator Instructions] The first question comes from Ben Cohen from Investec.

I had 2 questions, please. The first, on the insurance business, on motor and home, I guess, specifically, probably more so on motor. Just given the competition that others have talked about in the market, how much do you think you're going to be able to grow in those businesses this year? I guess maybe you could give some indication in terms of your expectation, both from a policy and from a sort of average premium kind of viewpoint. And the second question was, I just hope you could update on the guidance that you gave, I think, some time ago now in terms of a sort of a normalized view of EBITDA or PBT per share. Just to give us some sense in terms of in this kind of new post COVID environment, the sort of -- the kind of the key drivers of the profit building blocks there, please?

Great. Thanks, Ben. Let me do the last question first and then come back to the first question last. So we are confident to recommit to the original business case on the EBITDA for both ships, which was GBP 40 million. We are seeing, as we've said in the release and in the presentation, strong early demand. So, I guess, what we would cite as the highest focus cruises for us in early '21. We are cleared to cruise from the end of June with the first ship, the end of July for the second ship, both in U.K. waters. So that is already signed off by the government. So we have the green light to that. And we've transferred a number of customers across onto those cruise itineraries. Those ships are filling up actually very fast. So it gives us extra confidence in the first couple of months. If I look forward into the second half of '21, with a more normalized itinerary, so down into Europe, et cetera, we're seeing strong demand there. And then as we look into 2022, '23, we're actually significantly ahead of where we would normally be in this point in a year in advance. So that gives us confidence on the load factors. As we put into the presentation, the per diems are exactly on plan. So we have not had to discount our offer at all. And we're actually seeing, given strong load factors, the ability for us to adjust our prices positively from a profit maximization point of view. So confidence in the GBP 40 million EBITDA long-term goal, we will phase that up relatively quickly now. We believe, once we get the government green light, so we should be back on track as we go into the second half of this year. In terms of the motor and home policy growth, really good to see the business stabilize last year, full year of positive growth after several years of decline. So that was the first step for us. If you go back to our September presentation, we committed to low single-digit policy growth as being our long-term goal. We still stick to that. So that's still our intent. There is a bit more competition in the market that we see in the first couple of months of this financial year. However, we've got a significant level of self-help, if you like, or new initiatives which we're landing across the Saga business, particularly in data, digital and brand, which will enhance the insurance offer. So that will underpin the growth as we go through, specifically, in the second half of this year. Noting that in the very short term, we had a couple of one-off wins coming into the beginning of last year, where we were able to maintain our customer offer where others were not. So we picked up, I guess, a bit more of market share in the March-April time last year because our operations were largely uninterrupted were others weren't. So slightly lumpy in the kind of first couple of months of this year, but our commitment remains to low single digits policy growth from motor and home going forward. If that helps.

The next question comes from Nick Johnson of Numis.

A couple of questions from me. Firstly, on tours. I think I'm right in saying the bookings sort of currently are down 39% against the same point last year. I know July and August are traditionally quiet months for Saga. But how confident are you that bookings will accelerate later in the year? Just wondering if there's a risk customers may have booked with other providers for July and August to avoid the risk of third wave of COVID perhaps later this year, who knows? And then perhaps those customers won't necessarily return to Saga later in the year. Just curious to know what your understanding or senses of customer behavior around the bookings for this year on tours? And then secondly, motor and home insurance and the FCA rules coming into effect later this year. How do you see higher retention rates impacting your positioning going into that? There obviously is a school of thought that new business rate increases perhaps won't fully offset renewal price decreases when the rules come into effect. Could your high retention rates potentially mean that you see a bigger net margin impact than the market average? So that's the question on the FCA rules.

Great. Thanks, Nick. If I pick up the tours and I might bring James in on the retention rates and the market study as well. So I think if we stand back from the tours business, this is a business that we have reset completely over the last 12 months. It was not in a great shape, to be honest, at the beginning of 2020, prepandemic. So we had declines in revenue and profitability out of our tours business. We believe that, that is fully reset now and ready to relaunch. The response from customers to our new products and our new proposition has been strong. We've reported today that 83% of our capacity for 2021 has already been booked. You're right the fact that we don't tend to send a lot of customers on holiday in the peak holiday months of July and August; our customers tend to avoid those months. So that, in effect, gives us a longer window and a kind of greater margin of error and to be cautious around the pandemic settling down into September. We're not seeing any risk at the moment for our customers changing their long-term behavior and moving into a holiday in July and August. We've had great support on our 2-vaccine policy, which is said to customers that they want to be comforted and cautious, and they want extra support and peace of mind around the tours and cruise business. We've seen a bit of a move away from long-haul in the second half of this year, as customers choose U.K. staycations and book short haul. The river cruise business as part of the tours has had strong bookings in Europe, both for our new river cruise ship and for our third party carriers. So we're confident, a, in the long-term guidance that we've given, which is a consistent 4% growth, which we believe we can beat. And for that growth to be significantly ahead of that clearly in the second half, off a low base. It's a reset business there. So there could be a few customers that opt to go on holiday in July and August because of the pandemic and pent-up demand. We probably would get those customers that would go out with other tour operators in that period of time anyway. So we don't particularly think that's a big threat to us. And in terms of market study, we think that we're well set for that. We've been working incredibly hard since last September to reset the product proposition. Longer term, we believe this is good news for the Saga direct offer, and it's a branded offer, which we believe is differentiated, high retention, driven by 3-year fixed. We think there's a strength going into that. But we remain cautious around what's going to happen and kind of how rational the market is going to be over the second half of the year. But James, do you want to add a bit to that?

Yes. So I think on the market study, I mean, I think first, I think we are supportive what the FCA is trying to do in equalizing new business and renewal pricing, it does make a little of sense. I think we also do think that new business pricing will increase. But obviously, at the moment, it's impossible to predict how much. And where the sort of equilibrium will go. I don't think it's going to have much impact this year either way, simply because this will be implemented pretty much starting from the beginning of 2022. You do make a good point that because we have 3x as many renewal customers as new business customers that essentially if pricing meets in the middle, then in the short term, you would see some impact on profitability because we just have a more of a weighting towards renewal business versus new business. Now that impact should start to reduce over a sort of 2-, 3-year period because one of the flip sides, if you like, from price equalization will be an improvement to retention. Now -- and I think probably particularly on motor, and even to some extent, on home as well. So I think what you may see is some impact in the first year, and we've talked a bit about that in the annual report. And then you start to see that diminish over time because you have a higher weighting towards renewals versus new business. And then in the longer term, it should be a positive because it will help us and others compete more on proposition and loyalty as well as just on price. So I think fundamentally, you make a good point around the renewal, having a higher weighting of renewal customers versus new business. It probably does have some impact in the short-term, but that starts to diminish in the longer term. It should be helpful in terms of focusing on customer care and loyalty.

That's great. Excellent. Can I just follow-up quickly on the tour side of things? Could you just perhaps give us some color on expected shortfall margins relative to long haul? But I think in the past, short-haul were a lot lower than the long-haul margins. I just wondered if there's been any expected change in that given the reset in terms of the offering?

Not so much. I think that there was -- the tours business is probably not so much between short haul and long haul, it's probably more between the stays and tours. So tours should have a higher-margin than stays. But fundamentally, I think that we -- stays can still be profitable and can still make a positive contribution. So it's not that the stays business is somehow less -- is sort of inferior. I think clearly, where we want to go is to build up value in all of the propositions and that would include stays. So it's more stay and explore than just fly-and-flock types of holidays. But fundamentally, both of those should be good margin businesses to be in.

And I think -- and the point I was making just on the long-haul, short-haul mix was a very short-term point around just the immediate few months in the autumn, that's what we're seeing, just to give you a bit of flavor of that just in response to your question about the summer months versus the autumn. We send lots of customers in the spring, long haul is a very popular product going to Japan to see that cherry blossom, all that kind of stuff is still being booked for next year. So we're starting to see that. It's just a shame we're missing it this year because apparently, the cherry blossom in Japan is the greatest it's been in 1,200 years. So I'm not quite sure how far back their records go. But anyway, so there's still a lot of demand for that kind of product. It's just that in the very short term, we're seeing a bit of a mix change, which seems sensible from a customer behavior.

The next question comes from Alexander Evans of Crédit Suisse.

Firstly, just on the insurance business. Reserve releases is obviously a significant driver there and still quite strong from positive large bodily injury claims experience. I'm just wondering on the outlook for that, and how long that can keep going forward? And then secondly, you mentioned on the noncore disposals, which have generated significant cash proceeds this year. I just wondered if there are any other parts of the business that you class as noncore?

Let me just take the second one first, then James, perhaps you can comment on the first one. So look, we're comfortable with where we are today with our businesses. We will always continue to look to maximize value wherever we can. But principally, we were really pleased with the noncore disposals that we executed at the beginning of the pandemic. We were already in that process, if you remember, before COVID hit in March last year. So we were really pleased to have executed those deals throughout that. And actually, a further success of the year was to dispose of our older ships, so the Sapphire within the pandemic to the value that we wanted to get for that ship, too. So we're comfortable with where we are today. We are building the businesses that are in the group, and we're positive about the long-term growth prospects of those remain open to any form of value creation that makes sense in the long term. James, do you want to pick up the reserve releases point?

Yes. I mean, 2 years ago, when we had the business and financial reset, I mean one of the things we said then was that we expected to have 2 more good years of reserve releases, after which we'd be down to a sort of a steady state where the amount that we were adding in terms of margin in the current year would be pretty consistent with the reserve releases that we would see coming off the older years. I think it's probably fair to say 2 years on that we are in better shape than we thought we would be. So I think we probably have a stronger margin position than we'd anticipated a couple of years ago. And I think that, that is -- that gives us some confidence that in the shorter term, for sure, that we will continue to see a sort of an above run rate level of reserve releases. So certainly through 2021, for example. I think also on large bodily injury, we have probably been quite cautious in how we price and reserve for that. And I think there's -- that's something that we're constantly reviewing to understand whether there's probably more in that than we had anticipated as well. Having said that, I think one thing I would say, though, is that the -- while in the short term, I think we can be very confident that the combined ratio will be better than 97% over the midterm, that's probably still where we're going. So we've probably got another 12, 18 months compared to where we thought we would be, but it doesn't change so much the destination.

[Operator Instructions] The next question comes from Andreas van Embden from Peel Hunt.

I had a question around Slide 49, which is, I think, quite an interesting slide, which shows the cash support you provide to the travel business over the last year. I just wondered, looking forward, obviously, you've got the burn cost, which was, I think, GBP 38 million in the second half of last year. If I think about the next 12 months, is there any way you could sort of help me with 2 things: one, what is your central assumption of burn costs? I mean, when exactly do you think you can realistically restart? Is that sort of this summer or later in the autumn? And secondly, ahead of a restart, how much more cash do you think you need to inject into the travel business in the next 12 months?

Yes. So thank you for that. So if I give you some headlines, and then James can come in as well on this one. So we are seeing that the first point is that we believe that the cash burn cost was well controlled through last year, GBP 6.3 million on average each month at the bottom end of that guidance. As we ramp up again in anticipation of cruise restarting in June, we are incurring slightly higher burn costs as we commit to more marketing principally, and we also invest in bringing the cruise crew back into the U.K. for their training period prior to departure. We are taking a safety-first view on that. So we are providing a longer period of, a, isolation for those crews coming back in given the COVID pandemic; and, b, given the extra training and development that we want to put into the crews, given that they have been stood down for the last 12 months, and we've got a new higher bar on our health and safety provision. So that will probably move our burn cost in the short-term up to around GBP 7 million to GBP 9 million. But as we've said today, we feel confident that we are going to restart cruising from the end of June with one ship, end of July for the second ship. So in effect, the cash inflow will start imminently as we collect the full balance from the passengers that are going on board. As we said earlier on this call, we really expect to pick up the tours business from the autumn, so September onwards, that's our peak season. Our peak season is not in the summer. So we're less pressurized with those months. But James, probably a bit more detail you want to drop down into?

Yes. So I think one thing we want to do on this slide is actually show how do we calculate the burn cost because there are a few different ways you can look at this. And I think, hopefully, this gives you some clues as to how this will evolve in the next 12 months as well. So basically, when we talk about the GBP 7 million to GBP 9 million, what are we including in that? Well, we're including, first and foremost, the cost of running the tour operations business. And that essentially should be the only real cash going into the tour ops business because the GBP 25.3 million of cash that we have at the end of January is actually higher than the customer advance receipt. So the customer advance receipts are effectively fully ring-fenced, and so the money that we would have to provide is really there to support the operating expenses only. And that's included in the cash burn rate. Then on the cruise side of things, there's a few more moving parts here. What you can see is that the trading cost and the interest costs are included in burn. So when we talk about GBP 7 million to GBP 9 million a month, that should take account of all moving parts in tour operations and then the crews trading costs and interest costs. That then really just leads 2 other moving pieces. One is CapEx. We don't expect much CapEx in cruise anytime soon. There's always a little bit of maintenance, but certainly nothing of any great significance. And then the only other moving piece is then net customer receipts. Now customer receipts have gone up a bit since the end of January. So we've seen a cash inflow in February. And I think as we get closer to trading, that will then start turning quite positive. So at the moment, the advanced receipts are about GBP 45 million. And once we get back to fully operational, that will probably go up to somewhere around GBP 65 million to GBP 70 million. And it starts turning positive about 2 months before we start travel. Obviously, when we've modeled through different restart scenarios, we've then considered different outcomes around the net customer receipts number. But if we look at the last 12 months, it has been incredibly resilient, to be honest, I mean far more resilient than we were assuming. So the total advance receipts have gone from -- they've only gone down from GBP 51 million to GBP 45 million, which given we've got even now, no trading for another 3 months, it is really a testament to the resilience. So I think, first and foremost, it's all about the GBP 7 million to GBP 9 million of burn costs as I say, on top of that, you really then have the moving pieces in net customer receipts. But as we get closer to trading, that should start to turn positive.

So by definition, does that mean no further cash injections into the travel business?

Well, you've got the cash injection, which is the GBP 7 million to GBP 9 million a month because that's the money that we would need to support the monthly burn costs.

So that goes down from the GBP 75 million cash on the group balance sheet?

Yes. So that's -- exactly. So that's -- we have the cash there to fund all of that already. And then as -- when we get back to probably about 2 months before resuming trading in cruise, you should then start to see the net customer receipts turning positive. And at that point, we actually get cash coming back the other way.

There are no further questions registered, so I'll hand the call back to yourself, Euan.

Thank you. And thank you, everybody, for joining the call. We are happy to take any further follow-up calls or answer any more details if you have them during the day, just give us a call, and we'd be happy to take your call. But thank you for joining the conference call this morning. Thank you.

Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for joining. You may now disconnect your lines.