Trainline plc (TRN) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining us for our half year results presentation. I'm Clare Gilmartin, our CEO. I'm joined this morning by Shaun McCabe, our CFO, and Jody Ford, our COO and future CEO. Let's first get through the disclaimer. And now on to the agenda for today. As an introduction, I'll give a quick summary of performance in the first half, the progress we've made against our strategic priorities and our long-term opportunity; Shaun will then run you through our financial performance in more detail; after which Jody will provide further detail on our strategic priorities for growth and how we've delivered against each of them in the half. We'll then hand back to the operator for questions. So to kick us off, let's recap on our aim at Trainline, to make rail and coach travel easier. For our travelers and our travel company partners, we do that by combining all carriers into one app. On top of which, we have created a simple, consistent and friction-free experience. No paper, no ticket machines, no queuing at stations, which is especially relevant in the COVID era. Beyond that, we use our scale and data to create smart, real-time and AI-driven information. And then for our carrier partners, we help them drive revenue by offering access to a much bigger pool of customers at a lower cost to serve than their alternatives. Taking all of this together, we champion a much greener way to travel. So as everybody knows, it has been a challenging environment across our markets so far this year, and we've seen significant impact from COVID restrictions. In response, we acted quickly and decisively, significantly reducing our costs and ensuring we have sufficient liquidity for the long term, whilst also protecting our investment in our strategic priorities. As lockdowns were gradually lifted, we saw encouraging signs of recovery in Q2 and over the summer months, reflecting a greater shift to online and mobile as anticipated. We made good progress in the half against our strategic growth priorities and although COVID disruption is ongoing, we continue to have strong confidence in the long-term tailwinds and our growth opportunity ahead. So let's look in a bit more detail at Q2. As you can see from the chart, the impact from lockdowns across our markets was felt most acutely in Q1, and I should state that's our Q1 from March. Lockdowns were then gradually lifted throughout Q2, against which we saw encouraging signs of recovery across all of our markets. This recovery was most pronounced in our largest international markets, where restrictions lifted earlier than in the U.K. And in our top 3 international markets, we saw a return to growth over the summer months. This was against the backdrop of some continued supply restrictions, such as seat capacity restrictions and lower-than-normal booking horizons, which, of course, we believe, will unwind in the long run. As you can see, continued regional and national restrictions are impacting Q3, albeit not as severe as Q1 to date. In the U.K., where restrictions lifted later than Europe, our U.K. consumer business also saw some recovery in Q2, albeit more gradual than elsewhere in Europe. Within that, our relative position in the market strengthened, meaning our recovery considerably outpaced the market. As anticipated, this reflected an accelerated shift to online and to mobile, as travelers sought out contactless ticketing and wanted to avoid queuing at stations. Over the half, we continue to make progress against our strategic priorities, and as I said, we maintained our investment in those throughout the period. We enhanced our customer experience, launching new innovations like digital railcard and delay repay, while helping to drive up industry eticket penetration further to 29%. We drove a strong rebound in new customers across our markets, taking advantage of considerably lower customer acquisition costs over the half. And in Trainline for business, we took further steps to scale our global API platform with 15 B2B clients now signed up, including 3 of the top 5 largest global travel management companies. Looking longer-term and past COVID, the long-term structural tailwinds for our business will endure. We operate in a large and expanding market set to benefit from significant investment and capacity expansion across Europe, particularly in high speed rail. Awareness of the environmental benefits of switching to rail and coach continues to grow, while governments face stretching targets to bring transport emissions down. To give some recent examples, the German government recently announced plans to increase its investment in rail by almost 60% per annum, and pledged to double rail passenger numbers by 2030. And the U.K. government has committed to GBP 48 billion to maximize the shift to rail from more polluting forms of transport. There remains significant digital migration opportunity in our market also. Having stepped through COVID, the shift to online and digital ticketing still has more room to run. Finally, the liberalization trends of the European rail industry continue, leading in turn to a more fragmented supply landscape. From December this year, the EU's fourth railway package will open up domestic passenger services to commercial competition. In response, several major European rail carriers are preparing to enter new markets. For example, SNCF are due to enter Spain next year, and as we've seen elsewhere, greater competition like this brings an increased customer need for an aggregator like Trainline. We firmly believe that these structural tailwinds represent significant and long-term growth opportunities for Trainline. I'll now hand over to Shaun to talk through our financial performance in more detail.

Thanks, Clare and good morning, everyone. So as expected, COVID has had a significant impact on our financial performance in the first half. Group net ticket sales reduced to GBP 358 million, 19% of the prior year. Revenue declined to GBP 31 million, 24% of the prior year and gross profit reduced to GBP 22 million, 22% of the prior year. However, as Clare highlighted, when the lockdown restrictions began to ease and trading conditions improved into Q2, our net ticket sales also began to recover quickly. U.K. consumer net ticket sales increased from 13% of prior year in Q1 to 30% in Q2, exiting the quarter at 46%. International stepped up even more substantially from 10% of prior year sales in Q1 to 74% in Q2. Although our T4B's recovery was slower, reflecting a more subdued business travel market, it improved from 1% of prior year sales in Q1 to 7% in Q2 and exiting the quarter at 15%. As COVID impacted all of our markets, we took quick and decisive steps to mitigate its impact. Reported marketing spend and discretionary spend re-furloughed certain teams, particularly teams most impacted by the drop in demand. We introduced a recruitment freeze. We paused annual pay reviews, and we implemented executive and Board voluntary salary reductions to protect the business. Back in April, we said that our multi cash outflow would be in the range of GBP 8 million to GBP 9 million a month. A combination of better revenue than expected and the rapid and decisive actions to reduce costs, meant that we were able to reduce monthly cash burn to an average of GBP 5 million a month during Q2. Looking ahead, we'll obviously continue to monitor lockdown development closely and we'll adapt our response accordingly, whether that's investment in marketing to support the recovery or further cost mitigation actions as required. While scaling our cost, we also ensured that we had sufficient liquidity to withstand even the most extended downturn. At the end of August, we had GBP 162 million of available liquidity through a combination of cash and undrawn RCF, again, better than our previous expectations, given the lower-than-expected operating costs and the improved trading in Q2. Given the strength of our liquidity position, we remain very confident we have sufficient liquidity to operate for the long term. As a result of our operational cost management, we reduced our cost base by 1/3 from GBP 57 million last year to GBP 38 million this year, helping mitigate the impact of COVID on profitability. And we reported an adjusted EBITDA loss of GBP 16 million in the period compared to a profit of GBP 42 million last year. Net debt increased from GBP 71 million to GBP 166 million in the half. This is mainly driven by the GBP 90 million working capital outflow in the first quarter as lockdown resulted in a sharp drop-off in sales and an unprecedented number of refunds. However, as expected, we saw a partial reversal of the working capital as trading improved into Q2, resulting in a GBP 41 million cash inflow, and this, of course, will fully reverse when ticket sales recover further. The increase in net debt also reflects our cash burn over the period, including our EBITDA loss and our CapEx investments. As we said we'd do, we maintained our CapEx investment in the period as we continue to invest in our strategic priorities to drive long-term growth, to create value for our customers and our shareholders and position the business for recovery when the market improves. And with that, I'll hand over to Jody.

Thanks, Shaun, and good morning, everyone. It's great to be here. And whilst clearly, these are unusual times, as COO over the last couple of months, it's been very encouraging to see the opportunities in front of Trainline to get to know the strong team that Clare has assembled. And I'm very much looking forward to meeting you as I transition over the coming months to CEO. Today, I'll be discussing our progress against our strategic priorities before we take your questions. We have a clear strategy to drive long-term growth and create value for our customers and shareholders. As a reminder, our 4 stated strategic priorities are to: enhance the customer experience, continually improving and optimizing app and web; build customer demand, scaling up customer acquisition and increasing their engagement with us; optimize the revenues we generate from net ticket sales; and grow Trainline for business serving the B2B and white label markets. As Clare and Shaun have mentioned, we are continuing to invest in these long-term priorities, which we believe will position us well to drive growth as conditions recover. Let's step through some of these. We focused heavily on enhancing the customer experience in the first half. We drove the further adoption of etickets in the U.K., leveraging the strength of our 4.9 star rated mobile app. Industry penetration is up more than a third since last year at 29%, with Trainline making up around 70% of all eticket sales in the first half. We continue to see significant runway for further eticket adoption with customers having a greater preference for contactless solutions given the COVID backdrop. We are lowering the cost of travel for customers and recently launched digital railcards. This provides customers a seamless, in-app solution that gives them up to 1/3 of rail ticket fares. For context, railcards are used in more than 40% of all Trainline transactions in the U.K. Customers can now store their railcard in the app, making it far easier for them to apply a discount when booking and far harder to forget their railcard when traveling. Digital railcards follows our launch of SplitSave earlier in the year, a feature that allows customers to make significant savings by splitting net tickets and which can be used on 2/3 of U.K. journeys. We've made the smart travel companion features on app even smarter, launching Crowd Alerts in the first half to help customers identify busy trains. This adds to the broad suite of features of customer apps customers use every day like live times, journey planning and disruption alerts, using our scale in data to give them real-time insights and reassurance on the go. We improved our self-serve functionality with the recent launch of Delay Repay notifications in France. The feature notifies customers when they're entitled to compensation as a result of a delayed train, solving for what is 1 of the top 2 customer pain points there. And this is something we can roll out to other markets beyond France. COVID lockdowns hit in first quarter, we quickly enhanced our automated change in refund functionality, allowing us to process the significant number of inbound requests. As a result, 99% of all refunds are now self-served, improving the customer experience and reducing our customer service costs. Looking ahead, we'll keep up the pace with our innovation. We have a number of products due to launch over the next year, designed to meet the needs of our customers and enhance their travel experience. Having paused marketing in Q1, we resumed investment in the second quarter as COVID restrictions lifted and passenger demand began to recover. At this point, we leaned into the customer acquisition opportunity, predicting and optimizing for post-lockdown demand while benefiting from reduced bidding competition for paid marketing channels. With customer acquisition costs down by more than 50% in International and 30% in the U.K., we drove a strong rebound in new customers. New app customer acquisition in International surpassed pre-COVID levels, while the U.K. rebounded to more than 80%. We drove a recovery in customer engagement in the second quarter, increasing monthly active users to around 3/4 of pre-COVID levels. And we continue to make strong progress in shifting customers to our mobile app, with its share of transactions increasing further to 81%. Finally, we are making good progress in positioning Trainline for business for future growth. As a reminder, we developed and built a global API platform to scale B2B distribution internationally, increasing our addressable B2B market from GBP 1 billion to GBP 6 billion. The global API offers B2B clients one-stop shop access to our European rail supply, meeting the growing demand from travel management companies and other travel platforms. Our good momentum has continued in the first half. We now have 15 European B2B clients, signing 12 since the end of last year, including 3 of the top 5 global travel management companies. And this is just the start. We're in contract discussion with a strong pipeline of travel platforms and other European carriers. At the same time, we're continuing to build and deliver innovative solutions for our white label carrier partners, helping them solve for COVID-related ticketing and refund issues and prepare for industry recovery. Before we take questions, let me briefly recap on our key takeaways. COVID has had a significant impact but we responded quickly and decisively and have sufficient liquidity for the long term. When conditions improved in Q2, we saw the business recover strongly. Our international business led to recovery with net ticket sales across the top 3 European domestic markets returning to growth. Our U.K. consumer business followed where we made a faster recovery than the wider industry. And we delivered a strong rebound in new customers while acquisition costs remain low. By continuing to invest in our growth priorities, we are building our customer base and positioning ourselves to benefit when consumer demand returns. And finally, as the future CEO of the business, I can say I'm very excited about the huge headroom for growth as well as the structural tailwinds this business enjoys, and we remain confident these will play out over the medium term. Thank you very much for listening. We'll now hand over to the operator for questions.

[Operator Instructions] And your first question comes from the line of Marcus Diebel of JPMorgan.

I have 2 questions. The first one, maybe for Shaun. If you could tell us a bit more about working capital developments, how should we think about it now for the rest of the calendar year, given the increase in lockdown matters? Where do you think the kind of like monthly cash goals are going to go from here? And then the second question, maybe more broader for Jody or Clare. If you could talk a bit more about the online or the shift towards online. You gave us the metrics on etickets. But more broadly, where would you say the shift has -- or how much has the shift accelerated over the last few months? I think pre-COVID, the online share was about 40%. So where do you think -- where do you see this right now tracking?

Marcus, let me just pick up the working capital question first. So as you saw in Q1, we would expect a working capital outflow as we go into the second lockdown because the sales in Q1, we have -- we paid down our rail partners. And those ticket sales are not replaced in the short term. So we expect a working capital outflow, but of course, as we saw in Q2, that will recover and we'll get an inflow once ticket sales start to recover. What we don't expect is it will be as severe as we saw in Q1, simply because the business has been lower through the COVID period. So there aren't -- there isn't as much working capital outflow to go out. I will also say on the cash burn question, we've done a lot of work, as you know, to manage our cost base and manage our operating costs. And our monthly cash burn during Q2 reduced to GBP 5 million a month. Now during lockdown, we would expect that to go up a little because we'd expect there to be less revenue for the next few weeks, but it's going to be in the range of -- from GBP 5 million in Q2 to maybe GBP 7 million. And after that, as ticket sales start to recover, again, cash burn will start to reduce. So if you look at our total liquidity position, we feel very comfortable. We have GBP 162 million liquidity at the end of the first half, but our cash burn has reduced to somewhere in the range of, let's call it, GBP 5 million to GBP 7 million. So we feel very comfortable. We've got sufficient liquidity for the long term, even in a very extended lockdown, which we don't expect to be the case.

And just to pick up on the online question. Over Q2 -- I mean, as anticipated, we expected the online would grow in share. Whilst there isn't necessarily market-wide online data, I'll just point you to a few of the numbers we can share. So eticket share of total sales went from 21% to 29%, which is, I think, as Jody mentioned, a significant jump over the half. Our sales -- our net ticket sales grew 46% year-over-year in August, and that compares to the market growth of 35% in the U.K. So I guess, Marcus, that also underlines the shift to online. And then in International, our net ticket sales were 74% of prior year. And this rate of recovery clearly implies a significant market share gain. And all of which is to say, obviously, buying online and buying etickets afford customers a contactless ticketing option and allows them to avoid either touching ticket machines or queuing in stations. And I think that effect persists over time.

And your next question comes from the line of Shaked Atia of Morgan Stanley.

Three for me. So one related to the online question, but more specifically, on the eticket rollout. So you mentioned there are further rollouts of eticket availability, which has supported adoption. So on an industry level, can you share where we are now versus the 70% eticket availability we saw pre-COVID? Second, on the base case scenario that you outlined in the release, you mentioned that in that base case scenario, revenues will recover to 2019 levels by June 2021. Does that assume the underlying industry returns to those levels? Or are you also taking into account online share increasing or remaining stable from where we are today? And lastly, I was wondering if you can speak a bit maybe on broader industry changes. How should we think about the impact on Trainline from the shift to the concession model and the increased government involvement overall? Anything you can share about how maybe decision making in the industry will change maybe at the RDG level? And any change in your view to the commission risk?

Okay. I think the first 1 was around eticket availability, is that right? eticket availability sits at around 71%, I think, across the up to 72%. It has grown by a few percentage points over the half. And interestingly, in October, one of the large rail operating groups, GTR, have announced further eticket infrastructure rollout on their Southern network. So we expect that availability to grow. And look, over time, we believe that eticket availability will trend towards 100%. And as we said, meaning today, there is both headroom in further availability but also headroom in uptake because uptake, of course, always lags availability. And so today, 29% of tickets are sold as an eticket. We see no reason why that doesn't get to 4 and 5 over time.

And Clare, perhaps I'll take the base case scenario question. So Shaked, the -- as we think about it, we think about June '21 and the recovery in the market into the middle of next year, we look at 2019 and think that '21 looks more like '19 at that point. But we think the overall market at that point will still be smaller and there's a couple of things going on there. So I think the -- if you break the market into component parts, I think the consumer market recovers fastest. That's what we saw coming out of the first lockdown, and we saw that in every market, France, Italy and Germany, where we're in growth year-on-year in the summer months and even in the U.K. as well. But if you look at the B2B market, the white label business has been slower to recover than our consumer business, which is the point Clare made about we have seen share gain. And the B2B market has been slow to recover because business travel has just been slow to recover, as you would expect. And then finally, I would just point at the inbound market, which I think has been slowest to recover. And there's no surprise there, right? This is U.S. customers coming to Europe, Chinese customers coming to Europe. And that market just doesn't exist right now. Of course, we expect it to recover in time, but I think it will be the slowest market to recover. So overall, the market will be smaller even by the middle of next year. The overall market will be smaller, but we will see share gain. We are seeing share gain right now, where our recovery is faster than the market, and we expect that to persist. This shift online that we've talked about and shift to mobile and eticket, it's happening. It happened throughout the COVID period, and we expect it to continue.

And just picking up on the -- I think the third question was about the industry structure. Let me pick up that. So broadly speaking, as we've shared before, we work very closely with the DfT, with our rail operating companies and government overall. I think we have a very shared goal across all to continue to grow rail and reduce more polluting forms of travel. Over the half, of course, you saw the rail operating companies move to emergency recovery measure agreements, a form of concession. But of course, the concession theme, really is a theme that's been in and around in the rail industry for a long time and was one of the expected recommendations from the Williams review. So I think we see this somewhat as a continuation. And with the concession model, there's always intended to be a number of train-operating companies running the U.K.'s rail services with distinctive brands. And I don't envisage -- we don't envisage our role within that stakeholder group changing. Our job is to continue to innovate, to push some of the innovations like we've talked about today. Customers vote with their feet. We have a 4.9 star app. And ultimately, through this innovation, the driving of the eticket innovation and other such things, we're encouraging more people to take the train. And I don't see that role changing over time. On commissions, very particularly, you'll know that commission is set by the industry overall. And the commission we are in is the same commission as the train companies pay each other, and it's the same for all retailers in the market. And it has been consistent for some time, and we don't envisage that changing. And in fact, put against other sales channels, it points to the fact that selling online is, in fact, a very cost-efficient means of selling tickets.

Your next question comes from the line of Andrew Ross of Barclays.

I have got 3 questions. The first one, in the statement, you mentioned 3 scenarios you've looked at in terms of liquidity and covenants. And the third most bear scenario might test your covenants in August of next year. So could you give us a bit more color about exactly...

Andrew, sorry, we cut out for the last 15 seconds. Can you just rewind 15 seconds and replay? We heard 3 scenarios, and that's all we heard.

Can you hear me okay now?

Yes.

Yes.

Great. So just on the third scenario, where you say you might test the covenants in August. It would be helpful just to get a bit more granularity as to exactly what is in that scenario and how things -- how bad things would need to be in the end markets for you to get to that point. That's the first question. Second question is on the global API on the B2B side, which sounds like it's going very well. Is there anything more you can give us in terms of how the pricing there is working? I mean any numbers around ARPU would be great and kind of the pace at which you might sign up more customers. And then the third question is on -- back to follow-up on Marcus' question on working capital and just thinking of how your negative working capital position might look in a world where net ticket sales are back at kind of pre-COVID levels. From your standpoint, is anything going to change then? And I guess I'm thinking particularly in terms of payment terms with the industry. Is there anything we need to be aware of in terms of where that negative net working capital position should rebuild to in a steady state?

Okay. So let me take the first and third of those, Andrew. The first one was about the 3 scenarios. So look, as you're aware, we require -- the accounting standards require us to look forward 12 months and comment on any material uncertainties. And of course, the whole world is materially uncertain right now. So what we do is we look forward, we take our forecast and then we stress test that forecast with a number of different scenarios. And in each of those scenarios -- we did 3 different scenarios. In 2 of those scenarios, we're fine and our forecast says that we won't breach our covenants. And remember, our covenant test -- we've deferred that covenant test until August '21, next half year, so a year from now. And then the third scenario, the most severe downside case would have us breach the covenants. Now and that's -- remember how the covenant works. It's a function of trailing 12 months EBITDA and our net debt position. It has to be within a ratio of 3.75 to 1. We don't think that's a very likely outcome. And the scenario, that most severe but plausible scenario is we take out -- the base case is at current lockdown, the one we've started today. And we extend that lockdown to go through the whole of December. And then we segue into next year, and then we see another lockdown for another 2 months, and then we see a slower recovery throughout the rest of what is our first half of running through to August. So that is a plausible but pretty unlikely scenario, I would suggest. But it is that most severe scenario 3 that we've reflected here. And I feel okay about that, right? I feel okay about the fact that our liquidity is strong. We have a lot of headroom. Our cash burn is well managed, and we feel good about our position. So I think if we thought that was a likely scenario, we would approach our lenders and our lenders have been super supportive. We'd approach our lenders, and we'd have that conversation. And the reason we haven't done that is simply because we don't think it's a very likely scenario.

And then the second question, I think, was around the global API opportunity and pricing in particular. So pricing clearly is commercially sensitive. It's not something that we can disclose. But the global API is really leveraging the scale of connections and supply and feature breadth that we have to offer a product to the B2B market. And as Jody mentioned, I think, it allows us to expand the addressable B2B opportunity from circa GBP 1 billion market size to circa GBP 6 billion. And for those travel management or travel company partners, it affords them a one-stop shop for European rail. It allows them access a broad set of inventory and a broad set features. And as we said, we have now signed 15 clients, 3 of the top 5 global travel management companies, and the pipeline is strong. I'm not sure there's that much more we can share today on that.

Andrew, your third question is working capital related. So I mean – much, as I said earlier, we saw a big outflow in Q1, as you'd expect. And we saw the recovery into Q2 as ticket sales began to recover. We do expect some outflow from the second lockdown and equally, we'll expect to see that recovery once we get through lockdown and out the other side. And then as ticket sales recover, once ticket sales recover to pre-COVID levels, I mean our working capital position is going to go back to the strength that it was pre-COVID, right? It is an advantage for us, of course, because we are taking money from customers before we pay our carriers. So we have that negative working capital cycle. In terms of -- you asked specifically about payment terms. So we agreed revised payment terms with our U.K. -- with RDG, with our U.K. rail carriers for the period of COVID and that will revert to the normal payment terms once we are beyond COVID. So again, I think the working capital position, it's bumpy, in line with lockdowns and travel restrictions, as you'd expect. But we feel very confident that it's going to bounce back to where it was once we start to see ticket sales recover again.

So just to follow up on that. Is there a specific data that's been outlined by the RDG when those payment terms get revised back to normal or not?