Saga plc (SAGA) Earnings Call Transcript & Summary

Good morning, and welcome to the Saga plc interim results investor presentation. [Operator Instructions] Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Euan Sutherland, CEO. Good morning, sir.

Good morning, and thank you, everybody, for joining us today. We have a slightly shorter version of the presentation that we gave yesterday in the city. The aim of this morning is to take you through that overview and then allow plenty of time for your questions. We will try and answer every question that comes to us if we do run out of time, clearly, we're very happy to take questions out of the meeting and afterwards. So let me just move you on to the overview of the first half and our forecast for full year earnings. The first half came in ahead of analyst expectations with underlying PBT broadly in line with the prior year when we take it on an IFRS 4 basis. We're obviously transferring across IFRS 17 as the regulation gets implemented this year. At headline level, the full year earnings are expected to be significantly ahead of market estimates by the end of the year with a strong double-digit revenue and profit growth. That is driven by a combination of cruise, travel and money. Strong performances from Ocean Cruise, underlying profit before tax, cash flow load factor per diems and customer Net Promoter Score, all significantly ahead of the prior year. and looking very positive as we go into FY '24 and '25, and I'll cover more of that detail later. River Cruise now mirroring Ocean Cruise. So we're very confident that we've got the proposition right too. And in travel, again, we are seeing strong growth in both customer numbers, revenue and profitability this year with a good outlook into next year. Saga Money has had lots of innovation work in the first half and has just launched 2 new products in September with 2 further new products to be launched in October and more to come in November and into 2024 and '25. In insurance broking, still a significant part of our business. If you look at the home travel and PMI products, we have all seen strong growth. However, Motor is weighing on our earnings, which has led to a GBP 68 million impairment reflecting the latest projections as we look forward in that marketplace. Quick update on the sale of the insurance underwriter. We did secure a deal, but we have paused that for now. We believe that there's more value to be had when looking at the impact of that sale and the impact on the broker as we move into 2024. So there is a deal there. It's effectively on AICL and we have enough available cash to be able to repay our 2024 bond when it falls due in May next year. Net debt reduced in the half to GBP 657 million, down GBP 54 million, which was lower than January 2023, and we had available cash of GBP 180 million. So just to reiterate, this is a profit upgrade for the year as we are forecasting full year PBT well ahead of current estimates. Moving on to a little bit more detail in our core businesses, and I'll come back and give you an up-to-date set of numbers after James has run through the financials, but just the headlines here across cruise, travel, money and insurance. Cruise, as we said, very strong performance in the half, 83% load factor, up from 66% to the same half last year. Per diems again moving forward significantly, up from GBP 318 to GBP 333 for the half. River cruise back in profitability, mirroring the load factors and per diem numbers that we've seen in Ocean. And again, the Net Promoter Score growing significantly in rivers. Travel, again, the same story, growth in passenger numbers up from 20,000 to almost 26,000 in the half, lots of innovation on top later about the private jet touring, which each of those products are worth significant margin contribution to the bottom line. Revenue up from GBP 44 million to GBP 70 million, and we are launching internationally with our operations. Clearly, we already send our guests everywhere in the world but launching internationally with some of our touring operations in Australia. In money, 2 major products in the first half savings and equity release, savings benefited from the interest rate hikes equity release held back. We've gained share in equity release, but the results have been below where we wanted them to be because of the wider market impacts. As I said, new products launching, I'll cover those later and very strong Net Promoter stores, our customers are really trusting Saga money with their money. And insurance, 1.6 million policies in force across all of our insurance products, slightly down year-on-year. The area of concern for us is motor, which is -- has been widely trailed in the marketplace. That's good margins under pressure, slightly below our target of GBP 60 per policy at 56%, but we do aim to get back to GBP 60 by the end of the year. Travel revenue and PMI revenue showing strong double-digit growth. So I'm going to pause at that point, hand over to James just to run you through the highlights of the financials, and I'll come back and give you the update numbers on the core business units after that, James.

So I'll just say a few words on the half year results and on the outlook for the second half as well. Just turning to the first slide here. Revenue is up 15% year-on-year. That's entirely due to the recovery of cruise and travel where we are pretty much back to normal and in some cases, ahead of where we were pre-pandemic. In terms of the profit before tax, on the previous basis reporting, which was IFRS 4 for insurance, we are more or less flat. Under an IFRS 17 basis, profits are down and the impact of IFRS 17 on the first half was about GBP 5.4 million negative. This, however, is for a variety of quite technical reasons. It doesn't change our view of the longer-term outlook. It doesn't change our view of the economics of the business. And indeed, there is a pretty good chance that some of the factors that were holding us back in terms of IFRS 17 in the first half will either be neutral or positive in the second half. So I would not read too much into that. In terms of the loss before tax, an improvement year-on-year, but still obviously a loss. There is a goodwill impairment in the first half numbers, as Euan mentioned, and that reflects a more challenging outlook for the broking business as we look into next year and beyond. There is, however, one very clear price not in these numbers, and that operating cash flow in the first half. So we almost tripled compared to the first half of last year. That is entirely due to the cruise and travel business where we went from about cash breakeven in the first half of last year to a GBP 73 million positive cash inflow in the first half. And that has enabled us to reduce our net debt by 9% in the first half, which is ahead of the expectations we had at the beginning of the year. Turning to the next slide. This shows a little bit more of the breakdown of the underlying profit before tax. As you can see here, cruise and travel almost a perfect reversion from an GBP 11.6 million loss in the first half of last year to an GBP 11.8 million profit in the first half of this year. We will see a much stronger result in the second half, and that's due to seasonality. So 2 business seasonality really. The first one is in relation to the travel business, where about 60% of our revenues are booked in the second half of the year. That's just due to the timing of when customers go holiday for the most part. And then similarly, in Cruise, we had a load factor of 83% in the first half of this year, and we would expect the low factor in the second half of somewhere above 87%. Cruise results are extremely sensitive to small changes in load factors. So again, you'll see a much better result from cruise and travel in the second half of this year. And that is what gives us confidence that the underlying profit before tax overall, we'll be well ahead of what we reported last year. The challenge in these results is obviously the insurance business. This was something that we flagged back in April when we reported our full year results. It's probably fair to say that the broking business is under further pressure compared to what we had anticipated and that is a function of very high levels of inflation, which is squeezing the margin of the broking business. So if I put it simply, the input price here, which is the price charged by panel insurers, is going up faster and the price we can charge to the consumer. That is partly a function of the 3-year fixed product that we have. It's also just partly a fact of a very competitive marketplace as well. And obviously, what we're constantly doing there is evaluating the trade-off between margin and volume. Nonetheless, still a very positive contribution to the cash flows of the business. In terms then of other businesses, this went from GBP 0.4 million profit to a GBP 2.2 million loss. That is mainly due to investments in new businesses. And then in terms of central costs, we are keeping a tight lid on central expenses, and that's certainly in relation to property costs, and we're also getting a bit more income on our cash deposits as well. So overall, those are the main driving factors behind underlying PBT. Obviously, no presentation would be complete with a view on how we look at net debt. Obviously, this is a very high priority for the company, and there's no change to that. Net debt did fall in the first half of the year by 8%, as I mentioned before, a little bit ahead of expectations. There are a couple of one-off factors within that, that have helped us. And therefore, we expect a net debt for the full year to be a touch higher than it was at the half year. But nonetheless, the trajectory here is still for further debt reduction over the next few years. In that respect, we absolutely will repay the May 2024 bonds from available cash. And that is supported partly from the cash that's on the balance sheet as well as our key facilities. And we have an increased facility with Roger De Haan, which has been increased from GBP 50 million to GBP 85 million and with the maturity extended to 31 December 2025. And we also have the RCF in place, which is a further GBP 50 million. The anticipation here is that we will probably draw on RDH loan facility for working capital purposes. And we will then keep the RCF in reserve. Quick word then on what we expect for the full year. So as Euan mentioned, we are expecting double-digit growth -- significant double-digit growth in revenue and underlying PBT. And that is the case, whether you look at this under IFRS 4 or under IFRS 17. That is backed up by Ocean Cruise, where we think we will exceed the GBP 40 million trading EBITDA target per ship and with further growth next year given the very strong bookings profile. And similarly, we expect River Cruise and travel together to generate at least the level of earnings that we are making before the pandemic probably higher. So the money will probably be around breakeven, given that we are investing in new products. Insurance and motor is probably going to be a similar picture in the second half to the first, but we are looking to compensate for those pressures by improving efficiency and reducing central operating expenses by at least GBP 15 million per annum. And last but definitely not least, we will repay the GBP 150 million bond due in May 2024 from available cash, and that's backed up by the Roger De Haan facility and then, of course, the RCF as a further backdrop. With that, I'll hand it back to you.

Thanks, James. So just to cover a little bit more detail, bring you up to date with where we are with our core businesses and their results. These numbers are largely up to the end of September last week. So Ocean Cruise, first, again, as James has said, and I outlined at the start ahead of our expectations for this year and for next year, load match are now at 86%, strong second half, 87%, still some opportunity for us to book and to move that number forward, strong per diems in line with first half and very strong customer feedback in terms of 82 is a very strong Net Promoter Score. We're reconfirming our commitment to now beat the GBP 40 million EBITDA per ship original target for Ocean Cruise. And if you look forward into '24, '25, the numbers are even stronger. So trading ahead of where we were to get the numbers in '23, '24 with load factors so far booked of just under 50% and GBP 359 per diem, and we're already at GBP 359 with a lot of the itineraries that we have in the back end of '23, '24. River Cruise, again, a very similar position. Really pleased that the improvements in River Cruise now matched the service proposition that we have on Ocean. Load factor in this year at 85%, so almost mirroring where we've got to so far with cruise, per diems, 285, just so that you understand that difference. That does not include the cost to the guest of getting to the river. So if you add in the cost of either train or air travel to get to the cruise and you get up to a fairly equivalent number to the ocean cruise value is back in profit in the first half. We'll continue to make profit now and grow that profitability through the next 5 years. And looking forward to 2024, again, strong load factor of 30% and 321 per diem significant move forward in our monetization of that proposition. Moving on to travel, similar stories. So if you look at '23, '24 on the left-hand side first and then '24, '25, revenue up 46% on last year and passengers up 27%. That's reflective of higher average selling prices per passenger and a stronger margin base. We've lowered our costs, went digital, and we have more interesting itineraries, which are monetizing the brand much better. That growth continues into '24, '25 with revenue already at this stage in the year up 15% before the major booking period and number of passengers up 7% on the numbers that you see on '23, '24. Lots of innovation in there touched on briefly our private jet touring. It's a very premium product between GBP 29,000 and GBP 49,000 per person depending on the itinerary. Each one of those tours were significant bottom line margin. So even though they may well be smaller numbers, they are very big in terms of their impacts. Touring continues to grow very significantly, and our customers getting more confident about traveling worldwide, and we've opened up an operation in Australia that would be a precursor to testing and opening up an operation in North America at some point in the next 18 months. And I think it's a consistently growing business. We're back to the levels of profitability pre-pandemic. And we have a key objective to drive double-digit profit growth from travel each year in the next 5 years. Moving on to Insurance. Still a significant part of our business under better pressure, as we've said, in motor -- the other lines operating well and showing growth. We announced in the last couple of months a new private medical partnership with Bupa, which kicks in, in January 2024. That opens up digital health and well-being opportunities as well as helping us to grow the core PMI product within Saga insurance. The team there have identified a number of efficiencies to offset some of the margin pressures that they're seeing in motor, which should deliver between GBP 5 million and GBP 10 million per annum as we go through into 2024. And we keep our minds open in terms of when is the right time to dispose of the underwriter. In money, lots of new products coming through. I think I've covered the kind of purple bar on the left-hand side already in terms of our core savings products. But this month, we launched fixed rate savings, accounts and also legal services, including wills, probates and lasting powers of attorney, which have both started well. In October, we are launching an investment ISA and in November, we're launching later life mortgages, and there is a good and strong pipeline of new product development set for 2024 and into 2025, all wrapped up in a new website with a new customer, new letter, which will reach over a million people. So in conclusion, there's been strong progress across the first half, particularly strong in cruise travel money and in media. We have identified the final chunk of our 2-year program of central cost savings and also identified some insurance efficiencies to offset the margin pressure that, that business is under. We will continue to look at the options for insurance underwriting, and we are committed to repaying GBP 150 million bond in May 2024. And final point, which is the point I started with, which is that we're on track for significant full year double-digit growth in both revenue and underlying profit before tax and we believe and are confident that is ahead of market estimates. So with that, I think we'll pause and go to your questions.

[Operator Instructions] I'd like to remind you that a recording of this presentation, along with company slides and the public Q&A can be accessed by our investor dashboard. As you can see, we have received a number of questions throughout today's presentation. please ask you to read out the questions and give responses to our appropriate to do so, and I'll pick up for you at the end.

No problem. So firstly, we've had a series of questions from Tim El in relation to the facility with Roger De Haan. The first of those is will the De Haan facility only be drawn down in May 2024. If not, why not?

James, do you want to pick up those ones? We might have lost James. So I think as -- let me...

Sorry, I was just -- the -- yes, so the Roger facility enables us to draw down on loan ahead of the repayment of the May 2024 bonds, and that is almost certainly what we would do.

Thanks, James. The next one on the facility is given that this facility was presented at the time of the full year results of the backstop in case the sale of April did not proceed, what has changed since then such that the facility, sorry, needed increasing by GBP 35 million, especially in light of the release of the GBP 26 million from the travel escrow monies in H1?

I'll take that one as well. So I mean the first thing obviously is that we had said before that, I think, in effect, if we were not to sell the underwriting business than we would draw down on the Roger lines. And I think as we announced yesterday, right now, we're not planning to sell the underwriting business ahead of the May 2024 bond repayment, albeit that we may well sell it thereafter, maybe shortly thereafter. In terms of the increase in the facility, this was really just giving us a further level of headroom and the extension of the facility again, just gives us a company significantly more breathing space over the next at least 2 years now in order to see that the cash generation of the business, including the expense savings and the performance of the travel business in particular start to come through and net debt starts to reduce.

Thanks, James. The next one from Tim on this is how would this facility be repaid, if not from the sale of AICL? In other words, is Saga leaving itself as a hostage to fortune by delaying the sale?

So I think what we're trying to avoid is exactly that hostage to fortune outcomes in the sense that obviously, if we had to, for example, repay the Roger facility in next June or next September or something, then clearly, we would need to be in a position where we would be having completed the sale of the underwriting business. So basically, this then gives us a much longer time horizon to do that. It also means that you could look at other actions as well. So one of the things that we've evaluated for the underwriting business is, would it make sense to sell it or would it make sense to effectively run off the liabilities ourselves and release the capital that way? And obviously, the longer that we have to do that, the more cash you would get out. And certainly, if you look at it over a 2-year view, there's actually not much difference between the cash you get out from a runoff and the cash you would get from a sale. So the point here, I think, is it just gives the company a bit more flexibility and time to work out the plan for the underwriting business.

The next question from Tim is in what circumstances with more than GBP 50 million of the facility needs to be drawn?

Well, I think this comes back to the cash position of the company next May when the bonds are due to repayments. I mean we can pay them a little quicker than that. So whenever we pay the bonds. In terms of the -- the overall circumstances, I mean, we need to hold a certain amount of liquidity on the balance sheet for working capital purposes. So I mentioned yesterday that typically, we would need around GBP 50 million of cash after the repayment of the bonds just a normal everyday working capital purposes, mainly relating to the travel business. And so it's really a question of how much do we need to draw on Roger's facility in order to meet that GBP 50 million minimum requirement.

The next one from Tim is given that the facility would cost GBP 8.5 million in annual interest costs of GBP 5.1 million in fees is fully drawn, how confident is the Board that delaying the sale will create shareholder value?

Yes. I mean these are obviously considerations that we've put together. And I think that -- I mean the simple answer here is, I think, if we were to rush into the sale of the underwriting business or I mean, rush into it's probably the wrong word, but if we were to execute the sales today, we would definitely have a margin squeeze in the broking business that would be a counterproductive place to be. And the reason for that is because what we've been looking at in conjunction with the sale of the underwriting business is a piece of work to transfer the underwriting that is undertaken by AICL to other people. And given the pressures on motor profitability right now, the only way we would be able to do that today would be by essentially accepting higher net rates from a new partner. And therefore, we think it makes more sense to hold off on that to look at a wider range of options for the panel. And once you've done that, then you can complete the sale of the underwriting business. And we do have a deal on the table which we would have signed. We -- and we've also spoken to the buyer who would be willing, we believe to essentially restart the sale process once there is a solution to the panel in place next year.

Thank you, James. We've had a series of questions from Matthew T. The first is the runoff from AICL likely to fully cover the GBP 85 million loan from Roger.

Well, it's -- I mean, I think, I'm not sure if we'll get all the way to the GBP 85 million, and we'll probably close a significant gap of it over time. But obviously, we are generating cash in the business as well.

The next one from Matthew is you mentioned that central costs are being reduced by GBP 15 million. The city brokers seem to be predicting central costs are likely to rise next year by GBP 5 million. What would be the reason for that?

Well, that's a good question. I mean, we weren't anticipating that costs centrally were going to increase. And I think we can now say that we would expect total costs to be lower. There's also an element of how much of that ends up in the businesses in the form of lower recharges for the services that provided to them. So maybe or not the full GBP 15 million is seen within central costs or whether some of that is in businesses, is that still something we would work through. But either way, you should see GBP 15 million reduction in costs.

I think that is more a part of the timing. I think you'll see notes coming out in the next week or so, which will more accurately reflect what we updated yesterday, which is the reduction in central costs.

The next question from Matthew is, is there any guidance on the timing of the GBP 30 million available for sale properties actually being sold?

So we're very close to the finalization of that. As you know, the commercial property market has been incredibly tough place to be over the last 6 months. All of the properties in hence are closing in on their final exchange and completion. So we should be able to update in the weeks ahead.

The next one from Matthew is in the city presentation yesterday, you mentioned that debt to EBITDA would need to be sub 3x to 3.5x to refinance the bonds in 2026. Assume this is net of ship debt and what is the current ratio on that basis?

So yes, I mean, I think this would be all of our debt, whether it's ship debt or any other debt. On that basis, in the first half, it's 7x, so there's still a long way to go. But I think that the -- I think what you see in the first half is certainly not reflective of where we expect earnings to be on a full year basis in the next couple of years.

Just a follow-up from Matthew T on the central cost point. He said this no re central cost was from Numis as of yesterday, so it's up to date. Could it be a clarification issue?

I mean, yes, I mean we can talk to Nick Johnson at Numis and make sure that he understands all of the moving pieces. I think whether -- I don't think, Nick, at this point has necessarily updated his [ heeds ]. I mean he obviously put out a note yesterday. I'm not sure he's updated these numbers though. So I think that would typically come in the next few days.

The next one for Matthew is oil seems to be back on the rise. Are you currently hedging?

Yes. So we're hedged for next year, and we're hedged for part of the year after. That's typically the way we would do it. So we typically start to hedge at the point at which the business goes on sale. So we're obviously on sale for next year, and we would plan to be well hedged for the year after by the time we get to the end of the year.

Thank you. Related to that, [ AM&S ] has a question who asked how would the increased oil prices affect margins going forward?

Yes. So as I said for next year, so we locked in oil prices for next year some time ago, in fact, when the oil price was at a lower level. So I mean, that ought to be a positive for profitability in cruise next year on the basis that we were certainly hedging for next year at a lower level than we're paying for this year. Beyond that, to be honest, it's a bit of a hard question to answer and typically, obviously, we would -- I mean, look to -- if there's a need for us to put up prices in cruise to reflect the fact that oil prices are higher, then that is what we would do, and that is indeed what we've been doing in the last few years.

Thank you. [ AM&S ] also had another question, but it was in relation to the property sales, I believe we covered that. Matthew T. asks when do you expect cruise ship debt repayment to normalize back to original debt amortization schedules?

We've got an agreed repayment schedule for the bits of the ship debt that were deferred during COVID. And those payments are being paid off over 4 and 5 years, depending on which year they relate to. So basically, we've got GBP 62 million of debt repayments this year, GBP 62 million next year. I think it's GBP 56 million the year after that and fairly soon after that, we get back down to a more normal run rate, which would be around GBP 45 million.

Thank you. Zonda M asks, thank you for the update on the 2024 bonds. Are you able to say anything about the 2026 bonds and how you plan to refinance those?

So it's a bit hard to be too prescriptive on something that's 3 years away. So I think without being flippant about this, I mean, I think that obviously, we're very aware of that refinancing needs, but there is quite a long way to go. And clearly, the priority at the moment is to get the net debt to EBITDA or including Cruise down to that 3x level because at that point, refinancing should not be an especially onerous job, I mean, certainly, we would be paying more than the 5.5% we're paying today. But I think at that level, it wouldn't be a particularly difficult exercise for us to do. So that's really where the company focus is. Get the net debt to EBITDA down. And that's a combination obviously partly of disposals. So for example, sale of AICL partly also improving the economics of the business because that not only helps us to reduce debt, it also helps us to reduce the net debt-to-EBITDA ratio.

Thank you. Zonda also asks in reference to the 26 bonds, what do you think the level of leverage will be at that point? And how do you anticipate avoiding a bump up in the coupon?

So I mean I'd love to say that we would be able to refinance at 5.5%, but I think that's probably a little unlikely. And so we are going to have to pay more. The question is just obviously how much more. It is 3 years away. It does mean that we've got time to improve the economics of the business and to reduce net debt. And I'd say the goal would be to get net debt to EBITDA down somewhere below 3x. I mean, ideally, you'd go below that further. So that's obviously the priority. I say. So we will end up paying more in terms of the coupon, almost certainly, I would imagine how much more really depends on, obviously, the credit rating of the company and the other factors at the time.

Thank you. There are no further questions.

Euan and James, thank you. And I think you addressed all those questions you hear from investors. And of course, the company can review all questions submitted today, and we'll publish those responses on the Investment Company platform. Before directing investors to provide you with their feedback, which are now is particularly important to yourself and the company, Euan Could I please just ask you for a few closing comments.

Thank you. Thank you, everybody, for joining the call. I'm very pleased to have answered everybody's questions. We look forward to updating you next in January where we should be able to confirm more details of the progress that we've made on revenue and profitability as we've guided. Thank you very much, and see you there.

You and James, thank you for updating Investors Day. Can I please ask investors not to close this session and you will now be automatically redirected to provide your feedback. In order that our management team can better understand your views and expectations. This may take a few moments to conclude, and I'm sure will be greatly valued by the company. On behalf of the management team at Saga plc, we'd like to thank you for attending today's presentation. Good morning to you all.