Web Travel Group Limited (WEB) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Webjet Limited conference call. [Operator Instructions] I would now like to hand the conference over to Mr. John Guscic, Managing Director. Please go ahead.

Thank you, Jesse, and welcome everyone to an update on our successful convertible bond raised last night and -- overnight, and this morning, joining me on the call, albeit in different continents, is Tony Ristevski, our Chief Financial Officer. So what I'll do this morning is go through the rationale of why we undertook this particular endeavor and what we are attempting to achieve with it. Also I'd talk a little bit about the convertible bond and give a description. I know it's not a common investment vehicle used in Australia, and it's not a common way to raise capital. So we'll give you a little bit of color about that and what the advantages are in raising that. Then I'll talk very, very briefly as a business update without going into any specifics about trading because we'll be doing the AGM in a few short weeks from now. So let me start by saying the recent equity raise that we did in the 1st of April ensured that Web was in a position to survive an extended period of time, in the worst-case scenario of no revenue. Our equity raising relative to our forecast cash burn was materially larger than some of our competitors, and that was intentional, and it was done to ensure that we, Webjet, were well positioned for the uncertain times that we're facing. The convertible bond funding puts us in an even better position relative to our competitors. It allows us to take advantage of accretive opportunities in the future and provides additional comfort in that there's an extended delay in customer activity or a second wave. As we described, the convertible bond market, again, I know that it's just based on the feedback I've had in the last few hours, but not many people understand it. It's a deep global market. So it has seen significant activity in the last quarter. It has some unique and attractive features, mainly provides low cost, longer dated, flexible funding with no financial covenants and limited restrictions on the business. Number of Webjet global peers, both travel and tech have accessed this market over the last few months, including booking holdings and [ Dida ], 2 of the largest names in the global travel industry. And while it's not a common market for ASX listed issuers, the likes of [ 0 ] have successfully accessed this market in the past. Investment in this corporate bond are a discrete and specialized group that present a new source of capital for Web, and we are delighted to attract investments in the broad range of reputable global investors. While the instruments is linked to the Webjet share price, it is at a premium to the current share price at a significant premium to the equity raise 3 months ago. I keep thinking about what the destiny is of Webjet. In particular, in the context of where we found ourselves in March, where we were in an extremely perilous position. We were successful in raising capital. Then my thought was, is our destiny merely to replicate what we have done in the previous 7, 8, 10 years to that point? Or do we have a more defined or refined destiny than that. And one of the things that's been eye-opening for me over the course of the last 2 months, in particular, is the number of opportunities that have come our way from a broad array of travel businesses. And whilst I generally feel I've got the best job in the travel industry as the Managing Director of Webjet, I reckon the second best job at this point in time would be a private equity guy investing in travel assets because there are a number of them that are looking for recapitalization, and we're seeing some very interesting opportunities coming our way. So whilst we're in a strong position with significant runway just before this deal, we're now in an even stronger position. But not just to survive, but to take advantage of the potential acquisitions opportunistically. Our business so far for the last 3 months has performed to the expectations as we disclosed in April. Booking activity has started to return, and we'll say more about that in our results. We still do expect there will be ups and downs in -- over the next period of time, and we certainly want to be fully prepared for that. And again, the rationale for doing all this is not just to survive, but to come out of this unfortunate time stronger than ever. Let me move -- so that's why we did it. Let me move a little bit onto the instrument itself. The convertible bond is a low-cost, long-dated, flexible funding. The bond we have issued is EUR 100 million. It's a debt instrument repayable in 7 years' time. Bond investors have the right to put the bond to us in 4 years' time, i.e., asking their money back. The coupon is 2.5%. It's very attractive relative to other large, long-dated debt alternatives and the lack of financial covenants and limited restrictions on the business make it particularly appealing. At any time after July 1, 2021, bondholders can elect to convert the bond into a fixed number of shares. The number of shares is being based on the Australian dollar equivalent share price of $4.09, a 141% premium to the recent equity raising price. The number of shares of bond references is 39.7 million shares or 11.7% of our current share [ run ] issue. In the event of conversion, investors will receive a cash amount equivalent to the fixed number of shares at the then prevailing share price. The bond is cash settled only at Web, utilized [ as only Web utilized ] its available placement capacity for the reason equity raising. However, following the reflection of the placement capacity later this April '21, we have the number of options to risk manage this repayment, and that includes the issuance of equivalent number of shares if required. So that's the instrument itself, it has some material advantages and contributes to the liquidity of our business and contributes to strengthening the balance sheet that we have, and it gives us a little bit of firepower in the M&A space that we would have been lacking under the previous capital raise that we described -- that we issued in -- on April 1. So I'll move now to a business update. In particular, in the last 10 minutes before we went on this call, there was an offering circular that was released today. There was our ASX announcement from last night and another ASX announcement this morning, announcing the successful completion of the bond and the pricing associated with it. So you can read that at your leisure. If we talk about what's happened since we last caught up with most investors in the last 3 months, April -- March, April and May, revenue in TTV for those 3 months was nominal. In June, we are starting to see booking -- some increasing booking activities that's translating to modest revenue. The market that's leading the way for us at the moment is the Webjet OTA business and the B2B business, WebBeds is coming second, Online Republic is third in the recovery from where we were. Our April-May cash burn rate was in line with our operating and CapEx expenses that we called out in the capital raising of about $15 million a month. Clearly, with a little bit of revenue in June, it comes off that cash burn rate. And as we increased volumes into 2021, you'd expect that cash burn rate to lower from the $15 million. And I don't want to get into -- drawn into the trading update on a month basis because it's not indicative of any trends, but we certainly will give a lot more color and detail around how our business is and where we think it will end up during the course of financial year '21. As to the major items that were the drag on our sustainability back in March, the working capital unwind has occurred as expected and is actually complete. As evidenced by the data we provided in the update. And the receivable write-down is at the lower end of the range that we discussed in April, and it is consistent with what we said in March. And it's also probably lower than what most analysts would have us for -- on the back of the capital raised back in April. So as I said, the financial year is only a day and a few hours old. So we're finalizing our accounts, and we'll have a lot more to say about what occurred and what the prospects are for our business when we do our full year results update on the 20th of August. So with that, I'm happy to take questions across the rationale or any of the intricacies of the convertible bond itself or anything associated with what we've announced earlier this morning or late yesterday. So with that, Jesse, if there are any questions, I'd be happy to take them now.

[Operator Instructions] The first question comes from Quinn Pierson with Crédit Suisse.

John, I guess, firstly, if you could just maybe elaborate a little bit more on the reason for the -- raising the capital. I mean a good chunk of the release kind of talked about how strong liquidity position was beforehand, and then there's an additional EUR 100 million being raised. I guess if you could just split out to what degree is this capital that sits on the balance sheet ready to -- specifically ready to deploy for acquisitions versus you're stress testing the business and thinking that in a certain bear scenario that additional capital might be required? And I guess in particular, I'm just kind of keen to understand what kind of bear-type scenarios have you looked at this capital might be required kind of more for operating purposes?

Sure. So the total liquidity is over $300 million as of today. That comfortably sees us operating without duress in a 0 or low revenue environment well into 2021. To bifurcate the answer, in the context of the question you just asked, if you were then to use this additional EUR 100 million exclusively for the preservation of the business, and assuming the worst-case scenario of no revenue, then that just extends our runway well into 2022. So that's the Doctor Doomsday scenario, that is the worst-case scenario that we have modeled out. But it's not really the reason that we're doing this. There is a second element, which is, if I think about our existing liquidity and we've already discussed that being over AUD 300 million, the capital raise is gives us obviously a strengthened balance sheet and increased liquidity. That's obvious -- the most obvious compelling component, but if I think about our business and the way I've explained it to the Board and what the rationale is on this additional raising is that the existing $300 million remains untouched, and that's exclusively to the preserve of the business and ensure the longevity of Webjet through whatever happens over this next 18 months or so. The incremental capital through the convert con note is -- fulfills that in excess of that, that gives us the additional ability to make M&A acquisitions that we find attractive. And there have been some extraordinary opportunities that have come past our window over the course over the last 2 months. So it gives us strategic flexibility as the other rationale. And in light of that question, and it's no different to, as I was speaking to convertible bond investors over the last couple of days, we didn't have to do this. This wasn't -- we were under no compulsion to do this. This wasn't a knee-jerk reaction to something that was unforeseeable in the environment that we found ourselves in March, there's nothing untoward that's driving this decision. It's to do with strategic optionality and the ability to strengthen our position. And as I'm sure I'm not the only Managing Director in Australia to not be able to predict the future with the same degree of foresight that we would have historically, but it's unknowable how this plays out. This gives us great firepower in an unknowable scenario. So we're very comfortable that it achieves a number of strategic objectives for us.

That's helpful. Is this raise completely coincidental with I guess, some concerns about a second wave, whether it's in Australia, whether it's in the U.S.? Is this completely coincidental or somewhat related at all, timing wise?

The second wave -- the second wave scenario was one that we were thinking about back in March and April, the probability of it being stamped out in a 3-month time frame without any flare-ups occurring, it would have been sensible back then, and it's still sensible now. So not really. We've been thinking about this for a lot longer than the last week or so. This has been on the Board's agenda for the last 6 weeks or so.

And then just last for me. I guess, just kind of the classic question on what kinds of acquisitions are you looking at. Whether it's in Bedbank, consumer and regions? And then, I guess, to that, I guess there was some optimism to the degree you could take share certainly from now competing or to the extent competitors went under, I guess, kind of the rationale on why it makes sense to deploy capital rather than just trying to win that share organically. Any thoughts there, please?

Yes. It's a fair point. And so the -- and I'll use the M&A acquisitions that Webjet undertook the 2 most recent DOTW and Jac. If another business like DOTW and Jack came along, it's highly unlikely we will use these funds to make that acquisition primarily because the market has been so disrupted because of the pandemic, that the weaker competitors, and I would have put the Jac and the DOTW in that camp because they would have had a restrictive range of options to save them in this pandemic. And so they would have been weakened as a consequence. It's unlikely that we would want to buy those businesses just to bolster our existing arrangements. So I'll give you an illustrative example of why that no longer is as an attractive proposition. Since we entered into the changed trading conditions for our business, we have taken significant costs out of our business and one of the largest cost takeout was 400-odd people out of our business and the vast majority of those were out of the WebBeds business. It hasn't compromised our ability to maintain the 30,000 directly contracted hotels. We have and it hasn't compromised our ability to maintain a global sales force. So we still have all the characteristics that I think will be important in the rebound that will enable us to be successful, which is the core DNA is still intact. The business has its best employees, still available to be utilized. So all those things are to our advantage. And to your point, most of our competitors have been weakened. So I think I can outcompete them, that will be the primary focus. So that's an answer of what we're less likely to want to do. And there are always exceptions to that. But if it's the broad strokes as I just painted, it's less likely that we go down that path. The B2C piece is potentially interesting because we have a number of proposals that we've seen around B2C. But that always comes to me with a higher degree of -- I need a much higher degree of conviction, primarily because it's a brutal competitive environment in the B2C environment, but I want to make sure that whatever business that we were to look at had a sustainable competitive advantage or an ability to maintain that for a foreseeable period of time in the recovery. So that would be on the table, but a little bit higher hurdle to get over. And the third area, which is the one that we have been exploring for a couple of years now as -- and is still on the table is adjacencies in the digital travel business. We come back to our mission and our focus or a digital travel business. So technologies or ancillaries that are complementary to the global footprint we have with our WebBeds business or technologies that we can deploy and commercialize across our business enterprises. They're things that would be attractive to us at this point in time. But having said all of that, and here is the complete clarity, we talk about this in the ASX results -- release. We have lots of opportunities, but we're not in dialogue with anybody, and we're not on a term sheet phase with anybody. It's just that we are certainly aware of what those opportunities are, and we potentially could explore them with a little bit more vigor over the next 3 to 6 months than we have in the last 2 months.

The next question comes from Tim Plumbe with UBS.

Just 2 questions from me, if that's right. You touched on it just briefly in terms of some of the strategic initiatives that you've been focusing on during the lockdown period. Just wondering if you can go into any more detail in terms of the changes within the B2B business? Is that automating and streamlining the process there, is that getting rid of the manual aspect? And maybe if you can focus a little bit in terms of what you've been doing with your inventory exposure in the B2B business, given that the destinations are slightly changing over in Europe, et cetera?

Sure. The first 1 is worthy of at least an hour or 2 of presentation at some point in the new financial year. What Tim is referring to is that we as a business have thought about the weaknesses in our business model and the things that left us exposed as a consequence of the downturn courtesy of COVID. So we've been thinking about how do we compete in the recovery to minimize our [ AR ] risk going forward and to maximize margin and to obviously improve the efficiency of the business. Now we are the low-cost provider today in the B2B space. And that is -- that's evidenced by our public results, with the public results of our nearest competitor, our largest competitor and what we've seen of various other M&A activities that we've undertaken over the course of the last 3 or 4 years. And that's partly driven by the design of the business itself. And secondly, it's driven by the use of innovative technologies like blockchain, that we still are the only travel business in the world that I'm aware of that's got a work in blockchain solution, that contributes to a lower cost operating model. So it would be fair to say that over the last 2 to 3 months, we've got 8 different work streams within our global business working on a number of -- a range of initiatives to contribute to the maintaining of that fast-growing margin accretive business that we've delivered. And looking at the back end and ensuring that we minimize the touch points, lower the cost to serve and drive again, a better EBITDA margin. So all of that has been percolating away now and those work streams, one of them, in particular, has come to fruition already and been implemented. The other seven are continuing on their respective journeys, and we anticipate that, that will bolster our ability to recover. One of the things that's key to that, and I'm about to contravene what I've just said I'm not going to do, which is give you an update on future activity. But one of the things that we do know is irrespective of whatever we think is germane material increases in the volume and activity of our businesses even in B2B or B2C, we won't need to add any more bodies to the business as a consequence of some of the initiatives that we've undertaken. And yes, we can say that quite comfortably for the next 12 to 18 months. So we're pretty comfortable that the design appears consistent with our objective, and we can deliver against that. So that's the first element of what we're doing. And at some point, when they're more fleshed out and there's something more discernible and discrete to discuss, I'll -- we'll do a roadshow of some discretion, and that'll probably come after the full year results. So that was the first part of the question. The second part, Tim, was, I forgot.

Just how you guys are dealing with inventory in the B2B business, given that some of the destinations over in Europe are probably changing compared to what your previous inventory looks like?

Sure. So we've kept full global coverage, as I answered one of the questions for Quinn. So we still have global coverage. What we have done is focus more on domestic inventory that we previously would have ignored because the vast majority of WebBeds' customer base, the vast majority, not all, but say the 90% are customers who are crossing a border or it's a long distance journey to the hotel that they're staying. So they're either a long car journey or a flight. So we're focused on short-haul destinations in markets that are going to have -- that are open. And so therefore, that's changed a little bit of a mix that we've had. So we've been working on that, as well, over the last couple of months. And as I said, the reduced staff numbers haven't compromised our ability to get hotel inventory allotment as we did pre-COVID, but the mix has changed a little bit.

The next question comes from John O'Shea with Ord Minnett.

Just a question for me about the markets that are starting to sort of open up in B2B, and obviously, you mentioned that it's more localized. And then if you can just perhaps give us some color around what we're sort of seeing there in terms of the very early stages. And perhaps a couple of comments on the Middle East because that seems to me to be one that's sort of, obviously, really struggling at a moment, just to perhaps give a little bit -- and then a bit of a sense on just the geographical marks. I won't go into too much detail on things, but just give us a sense on the B2B as to sort of how bad each of them are just at the present time, I suppose?

Sure. So let's start with the bad news first, and then we'll get to what is opening up and is starting to see some volume come back. So we'll start with the Middle East, which you rightly identified is the market that is the most shut. It reflects what most western markets and Asian markets look like in April is what the Middle East looks like today. Saudi Arabia, which is our largest outbound market in the Middle East is shut. Kuwait, our second largest outbound market in the Middle East is shut. So when you got your 2 largest markets effectively shut and Dubai has only been open as an inbound destination to a limited number of travelers in the last week, it'd be fair to say that the trajectory of that business is closer to the nominal income, the nominal revenue we were getting back in April and May across the entire business. So that hasn't recovered at all. The Americas was the least affected of them. But again, last week has been the worst-performing week for our U.S. business in the last 6 or 8 weeks. Europe is starting to open up, and you can read about it with the -- with how Shenzhen is -- the Shenzhen region has opened up to 19 countries and free travel across most of the countries. And it's changing on a daily basis where many of the countries that had quarantined as recently as the 29th of March, no longer have a quarantine, U.K. in particular. And markets like -- major destination markets like Spain, Italy, Greece, France are open to travelers, to some extent, but that's only just started in the last week or so. So it'd be way too premature to draw any conclusions about what all that will mean. I think we'll have a pretty good idea of -- well, obviously, we'll have a pretty good idea on the 20th of August and how the summer has gone, but we'll have a pretty good idea of how that progression and level of consumer confidence is as people are either willing or less willing to travel and where they've been willing to go to. So way too early to make a call on any of that, but we are seeing improvement across the vast majority of our markets. Asia has been low growth for the same period of time as Europe, and it's seeing a little bit of growth, but nothing too exciting at this point.

The next question comes from Wei-Weng Chen with JPMorgan.

John, just a couple of questions on my end. You alluded at the start to the 0 transaction in 2018. In that transaction, the company also entered into a call spread arrangement to reduce stockholder dilution. Was there any thought into entering any similar arrangements to protect shareholders?

No, we haven't entered into any of those arrangements.

Yes. Okay. And then just to confirm [ because the notes are cash total ], there's no dilution of ownership that's beyond the conversion price, this transaction will be value dilutive to shareholders. Is that how to think about it? Or is there another way to look at it?

Well, I don't see that could be value dilutive when it could be only converted at some point in the future at a rate in excess of the current share price. So it can't be value dilutive. It could be diluted by number of shares if they get physically settled at some point beyond April of 2021. So I can conceive that point. But we wouldn't be raising $100 million -- EUR 100 million because we thought we could screw over the rest of our shareholder base, that's certainly not our thought process. Our thought process is -- and I've given it a couple of lengthy answers to it, the rationale is compelling, and it is a combination of opportunistic M&A acquisitions that we'd be, in essence, funding at a price that we wouldn't be able to get in the open market through the equities market. That's a given. So you're buying stuff with less equity as a consequence, if that's the way we go. Or the second is, in the most extreme bear-case scenario, we have greater preservation, both of which are positive for all shareholders, irrespective of whether you have come on recently or not. So I would frame it in that context rather than value dilution.

All right. Cool. And then just a question on receivables. So you've got $115 million of receivables outstanding. I guess, to go back to the terminology used during the raise, can you give an indication of what the naked or for the net exposure of those receivables might be?

I'll let Tony answer that.

Wei-Weng, we'll provide a better update come August, as it relates to that. I know what you're asking for, you're probably asking for how do we think about it in the context of Slide 9 from the April side deck that we put out?