Avis Budget Group Inc (CAR) 2003 Q2 法說會逐字稿

Thank you good day to everyone. Today, ebookers plc reported quarter 2, 2003 results. By now, you should have all received a copy of the press release issued this morning. If you have not, you can find it on the investor relations section of the ebookers website, and that is www.ebookers.com. On the call today are Dinesh Dhamija, Chief Executive Officer and Nigel Addison Smith, Chief Financial Officer.

As a reminder, some of the comments made during this call by management and responses to your questions may contain some forward-looking information. These statements are subject to risks and uncertainties which may cause actual results to differ materially from those made in such forward-looking statements. These and other risk factors are described in detail in the company's listings (ph) dated 17th of April 2001, and supplemented by the company's supplementary listings particulars (ph) dated 20 of April 2001 and the company's annual report on form 20 (indiscernible) for the year ended 31st December 2002 that was filed with the U.S. Securities and Exchange Commission on June 27, 2003. Please note that all figures referred to in the call are in US dollars and in accordance with U.S. generally accepted accounting principles. UK GAAP pound sterling figures are given in today's press release. I would now like to turn the call over to Dinesh Dhamija, CEO.

Thank you very much, Oliver. Good morning to those participants in the US and good afternoon to those participants in Europe. Welcome to ebookers Q2 2003 conference call. Without further ado, I would like to hand the call over to Nigel Addison Smith, our Chief Financial Officer.

Thank you, Dinesh, and hello to everyone. During the period, ebookers has continued its track record of strong growth combined with cost control. When the addition of travel bag (ph) holdings and its long haul effects on our seasonal mix, quarter 2 is now the group's weakest seasonal quarter. This quarter was also affected by SARS and the Iraq war. Nonetheless, despite the difficult circumstances, ebookers managed to come in slightly better than market expectations. Looking first at sales growth, gross sales for quarter 2 were $191.1 million US, up 84 percent on quarter 2 last year when gross sales were $103.8 million. We expect this increasing scale to have an ongoing positive impact on our negotiating power with suppliers, as well as economies of scale with our cost base. Revenue increased 118 percent year-on-year to $24.1 million, up from $11 million in quarter 2 last year. The organic increase was a very encouraging 38 percent. Another absolutely excellent result for the quarter was our margin, which shows that despite the difficult trading circumstances as a business, we're working hard on our margin and not chasing it downwards to increase sales to the detriment of profitability. Our margin this quarter was 12.6 percent, compared to 10.6 percent in quarter 2 last year. This continues a trend of strong margin improvement by ebookers. This is due to improved bargaining power with suppliers, and also ebookers' strategy to increase the sale of higher margin, non-air products. 37 percent of our revenue is now high margin non-air, compared to 24 percent in the same quarter last year, a very pleasing trend.

The acquisition of travel bag also had a positive effect on margin, although the ebookers business without travel bag still record a significant rise, up to 12.2 percent for the quarter, showing a strong underlying organic margin improvement. As followers of ebookers will know, as management, we place great emphasis on controlling our costs. This is a three-pronged approach -- better buying, automation technology and the transfer of processes to our Indian BPO. Cash operating expenditures -- this is marketing and sales costs, technology and general administrative costs -- were $24.2 million in quarter 2 of 2003, compared to $12.3 million last year. This increase was predominantly due to bringing travel bag holdings' cost space into the enlarged group. Last year's cost represents 12.6 percent of gross sales. Excluding the impact of travel bag, ebookers' cash operating expenses were 11.3 percent of gross sales, compared to a figure for travel bag alone of 16.3 percent. This indicates the significant potential to strip out costs from this acquisition, particularly through the transfer of functions to the Indian BPO, and increased online sales and automation.

Looking at the bottom line, our adjusted loss after tax was $1.7 million in quarter 2. Adjusted loss or profit includes all stock compensation cost and exceptional items. The figure of $1.7 million was on market expectations, an excellent result. Quarter 2 is a weaker seasonal quarter than quarter 1 when we announced our first adjusted profit of $800,000. Excluding travel bag, ebookers made an adjusted profit of $100,000 for quarter 2, 2003 with travel bag making an adjusted loss of $1.8 million due to this being its weakest quarter and the effects of SARS.

I will be delighted to take any detailed financial questions at the end of the call, but one final point I would like to highlight is ebookers' strength and financial position at the end of the quarter. As of 30th of June, 2003, ebookers had net cash of $91.8 million, compared to $75.8 million at the 31st of March, 2003, an increase of $16 million. The group also has a $41.3 million, 5-year facility, of which 24.8 million is drawn down, giving considerable flexibility and security. That concludes my financial summary for a quarter in which we have continued to perform to expectations, despite the impact of SARS and the Iraq war. On that note, I would now like to hand the call over to Dinesh Dhamija, our CEO, to review our operational progress and then give a statement of training and outlook.

Thank you, Nigel. I would like to concentrate my part of the call a three areas which will be critical to the ongoing success of our business -- the integration of our travel bag acquisition, our India business processing process outsourcing facility; and finally, our technology platform. Ebookers has recorded an excellent second-quarter. This is despite the impact of SARS and the Iraq war. In terms of SARS, we estimate that up to 20 percent of our business, including travel bag, is to Asia and Canada, plus a lot of our Austrail-Asia (ph) traffic did not materialize as many stopovers are in Singapore, Hong Kong and Bangkok. The Iraq war took away most of our traffic to the Middle East and the Indian subcontinent. Yet despite these difficulties, we still managed to record a very satisfactory quarter, indicating the strength of our business model.

Another factor this quarter was the impact of our February acquisition, travel bag holdings. As a bricks and mortar travel company with a focus on long haul Southern Hemisphere destinations, travel bag holdings has traditionally been unprofitable in the second quarter as this is its seasonally weakest quarter. Instead, it has tended to make the majority of its profits in the peak autumn and winter period. This obviously had a significant impact on group profitability this quarter, as Nigel explained. However, this seasonal profitability trend is for travel bag in its current state as a bricks and mortar company. With our online expertise, we aim to use the Internet to ensure that in the future, travel bag has the capability to deliver profits, whatever the season. We're already making an excellent start with this. The travel bag branded web sites' online sales have increase from 16 percent of all passengers in January to 35 percent in July. This is obviously a very encouraging result. However, I should emphasize that the process is still in its early stages. The faster we can convert travel bag to online sales channel, the more profitable their sales will become. For the travel bag brand, our aim is to deliver over 70 percent Internet passenger bookings within the next 12 months.

The travelbag indication is making excellent progress in other respects, too. Cultural and human issues are always critical to the success of any acquisition integration and I am delighted that in this case, there seems to be an excellent fit between the two organizations. Management and staff at all levels have combined extremely successfully. We're driving forward cost reduction synergies with travelbag, these are focusing on property rationalization, rightsizing, automation and the transfer of functions to the India BPO. 150 redundancies have been announced to date.

The India BPO is key to cost reduction for the entire group. But one thing I have not highlighted before is that it is also a critical driver behind our sales and revenue growth. Cost levels in India allow us to take on high-quality revenue generating staff. With India, we can carry out processes such as e-mail sales and use customer service staff to encourage the cross-sell, high margin products to supplement customers' existing bookings. Not only can we do these processes cheaper, we can also offer a more comprehensive service. For example, is a customer contacts us via e-mail, we can reply within two hours on a 24-hour basis. Our competition cannot achieve this, resulting in more sales.

India has also been our secret weapon in helping share best practices within the ebookers group. This has meant some terrific wins. Travelbag, our acknowledged leaders in Austrial-Asia, their customer service and content knowledge is legendary. Travelbag are transferring this expertise to people servicing all of the group companies in India.

In quarter 2, 2003, we estimate that the BPO facility in India delivered cost savings of $2.2 million. This is the estimated cost if Indian functions had been carried out in Europe instead. With travelbag functions currently being transferred, BPO cost savings could rise to over $3.2 million per quarter by the end of the year. Our BPO is also about to enter a new stage. The BPO facility has been designed to act as a third-party service provider and we have already received several approaches from top-tier international organizations anxious to benefit from ebookers' cost reduction facility. To service these external clients, as well as the additional workload from ebookers, the company has taken on an additional 62,000 square feet in New Delhi with capacity to recruit another 1500 additional staff. This expansion is being supported by the recruitment of additional senior management and the establishment of internationally recognized quality accreditation programs, such as the customer operations performance center certification, the quality standard for the BPO industry. The facility is currently on track to be able to accept third-party clients by the end of the year.

Finally, technology. Ebookers' technology development program is focused on sales and margin growth, as well as supporting group cost reduction target through automation with a common group (indiscernible) infrastructure. On the UK web site, new technology is just being launched, allowing the dynamic packaging of hotel and flight products, giving excellent value to our customers and the capacity for significant margin enhancements to our business. Enhanced car and insurance booking engines are in advanced stages of development. All of these initiatives will be supported by a new company wide CRM program aimed at improving conversion and customer retention rates and providing data to drive future marketing campaigns.

Ladies and gentlemen, thank you for listening. I would like to finish this part of our call with current trading and outlook. As you can read, we have seen excellent performance from travelbag with its new Internet technology and also from mainland Europe. Many of our European subsidiaries have reported double-digit growth. In the UK, we have had some knock-on (ph) effect in mid and long-haul markets due to SARS and the Iraq war, and also, uncommonly hot weather in the UK, which always subdues consumer demand to go abroad. However, we are not going to overreact to this by dropping our margin as we believe that the prospects remain positive for a good return in demand for the autumn and winter booking season. As far the wider outlook, we're extremely confident about the future due to our strength in destination coverage, geographical spread, ability to sell customers both on and off-line and our low-cost BPO in India. The question and answer session will be conducted by our operator, who will remind you of the technical procedure for asking questions.

(Caller Instructions). Michael Novak, Frontier Capital.

Good afternoon. I have one strategic question, then a couple of financial questions. What is it about the European marketplace that makes more sense to have a multi-brand strategy like you have, versus what Expedia or Travelocity or competitors in the United States have?

Good morning, Michael. Because we are taking -- buying bricks and mortar companies, they have customers who have been trading with them for 20 years. What we don't want to do is take their brand away, and thus, lose a whole lot of customers. I don't know if you know, but Expedia bought four businesses in the states, and I think one of them, their tour operating business, which was changed -- one of the businesses I understand was changed to the name of Expedia, very fast. They said they lost between 33 and 50 percent of the customers. We do this in Europe -- we have taken over 14 other companies apart from travelbag in the last four years. Most of them have been integrated into ebookers brand over the last three years, but the larger the company, the longer it takes to integrate and we don't want to lose any customers.

Is there thought over time to integrate them all into the ebookers brand or sub brand with ebookers?

Absolutely. Over time, absolutely.

And then a couple of financial questions. Could you talk about to the synergy opportunities with the travelbag acquisition; specifically, the G&A line, and is there -- at any point, would you expect to see sequentially the absolute dollars to head down from current levels?

In terms of the synergy benefits we announced with the travelbag deal, we indicated at the time of the deal that there were synergy benefits of 5 million pounds, or $8 million. We have achieved that number, and that's on an annualized basis, where clearly, some of the synergy benefits kicking in this year. Specifically in terms of G&A savings, we indicated that they're in the region of 3.5 million pounds, or $5 million, let's say, of G&A savings. Those have come through as a result of some automation work, and also migration of activity to India. In terms of getting our costs down in absolute terms as well as in relative terms, clearly, that is something we would like to do. But whether we can actually get as far as that, clearly, because we're actually trying to grow the travelbag and bridge the world's businesses, we may find cost coming up in other areas. So there will be certain areas where cost would come down, but others will increase with the size of the business.

What would you expect the growth rate of sales and marketing and G&A to be, relative to the topline?

I think a question as specific as that, we'll probably have to come back to you separately with once I've looked at the numbers. That would be the easiest thing to do.

Thank you.

Ashley (indiscernible), Breen Murray.

Good afternoon and congratulations on a good quarter. Is it possible at all to quantify the impact of SARS and war on results in the second quarter?

I had been hoping to give as clear an indication as I did for Q1 where it was a lot more cut and dry and indicated that the number for Q1 was in the region of 3-4 million pounds of profit. In actually looking through the data for quarter 2, it was a lot more difficult. And so I haven't actually been able to do that. But I would imagine that it was probably of a quantum, it's probably a bit less than that, but still a substantial number.

Okay. We witnessed a significant swing in cash flow. Do you have the breakout? Is it safe to assume that both units, ebookers' core as well as the acquired travelbag business, were cash flow positive and that it will stay that way?

Certainly. For quarter 2, both businesses generate cash. In fact, the split out we're actually doing at the moment in detail, so that information I can get through to you separately. Clearly, we have the issue in Q1 of the fact that we bought travelbag at close to its cash peak for the year. And therefore, we have the big operating cash outflow with the Q1 results. That is particular to the seasonality of the travelbag business. And really now from until the end of the year, the cash continues to climb.

Excellent. On the BPO front, when would you expect the certifications to be in place? And also, when would you expect to sign your first third-party client?

We are just finding out as to the certification while you are on the line. But so far -- actually, we refused about six clients because we felt our service levels were not right. We think now our service levels are right. We have taken on the space. The interior decorators are in there, they're going to hand over the building to us in November. It is pretty large -- 62,000 square feet -- and we're already in talks with some clients. Hopefully, we should announce some contracts by the end of the year. I have Presham (indiscernible), who is our CEO from India, visiting in London and he has just walked in. This is (indiscernible) on the phone. Hello. Repeat that question.

It's actually a two-part question. On your expectations and the timeline for the quality and process certifications being in place, as well as when you might be in a position to take on work from your first third-party client?

We are beginning the process of quality certifications shortly, but it is a long process. Let's target the quality question. There are two parts to it. One is actually implementing quality processes, and then the second half of it is actually getting the certification. We are now beginning the implementation of quality processes. The certification process tends to take longer, but we don't see that as a (indiscernible) obtaining third-party contracts. As far as obtaining third-party contracts are concerned, we're in the process of keeping our additional 62,000 square feet, which will be done by about mid-October. Sometime after that is when one can see us signing our first third-party contract.

That's helpful. Thank you. I just wanted clarification and one final question. I'm looking at your web representation, and does this sound right to you, that excluding travelbag, revenue at ebookers rose from 11 to 15.2 million while operating expenses went roughly from 14 to 15 million?

Is that in dollars, was it?

That's right.

Can you say that again?

Revenue, excluding travelbag, from 11-15 million and operating expenses from 14-15?

The revenue figure sounds right. And I guess the operating expense probably is as well.

Thank you very much good quarter and good luck.

Thanks.

Michael Novak, Frontier Capital.

A follow-up question. Could you talk a little bit about, in conjunction with the banking announcement, what you're seeing in terms of the acquisition pipeline, when you would like to do another deal, in terms of making sure that you have everything fully integrated and running the way you would like at travelbag? Also, the size of --

You are referring to us pointing UBS as our financial advisers.

Correct.

Absolutely. We think that we have integrated the vast majority of travelbag holdings group by not only on the Internet side on the front end, but also a lot of that process is being moved to India. Obviously, this will carry on until the end of the year. We don't think we should wait for this to happen fully before we do another acquisition. We're looking at acquisitions now. And not that we can name them or tell you when they will be done, but absolutely. We're looking at European acquisitions as well as UK ones.

Are you targeting a certain size, and is there a certain level of online integration that you would like to see with travelbag before you are willing to do another deal?

We're certainly targeting a size which, as we said, as big as travelbag. That would be fine. But there are three things that we're targeting. First is reach. We're not in Italy, for example, and we need to be there. There's 60 million people in Italy. We're very small in France and Germany. We need to boost our presence in those two countries. The second reason why we want to make an acquisition is destination focused. Before travelbag holdings because of their specialization of Australia, New Zealand and around the world we were very good ourselves on the USA North America. There could be companies that specialize in other parts of the world that we might be very interested in on a (indiscernible) basis. The third kind of company that we might want to target for acquisitions are product companies. We're very good on flight (ph) but we need to beef up our presence in hotels we need to beef up our presence in (indiscernible) and insurance, travel insurance that is. And thus, we are very keen if we see some companies that have those expertise to buy one of those as well.

Okay. I guess what I am getting at though is that converting travelbag to Internet bookings from actual agency bookings seems to be a key driver of the profitability. Before you go out and a make another large acquisition would you want to see that your 70 percent goal is eminent?

It is the (indiscernible) and most difficult. Culture there is a great fit. It was 30 percent in June and 35 percent in July, for example. People are in place, the wheels are turning and this is going to happen. We're not going to make an acquisition tomorrow. So by the time we make the acquisition, it should be further along the road towards integration to be online. Most important here is we still need to apply content gaps, destination gaps and reach gaps. If we see something that really fits the bill which is of great value to our shareholders, we will certainly look at it and try and buy it. Let me tell you that our competitors would be wanting to do the same.

Thank you.

Kate (indiscernible), (indiscernible) Partners.

Actually, it's a colleague of hers, Pete Stavis (ph). On the segmental analysis, the line marked UK continuing operations, and two questions really. One, turnover in that area has declined year-on-year and quarter-on-quarter, contrary to what happened last year. And also, profits or gross profit from the business has also declined quarter on quarter. My understanding is that that bit of the business is not the bit that is seasonally depressed in the second quarter. So could you just explain what is going on in that particular part of the business and whether it's something we should be concerned about or not?

UK continuing operations, that is the main ebookers UK business. The (indiscernible) something, clearly, it was the period when we had was and SARS. So the reason why the numbers are lower is specifically as a result of that. And the key driver in such a tough trading period was to ensure that we maintained profitability. So at the end of the day, that is where a lot of the margin improvement came from is actually by keeping prices high and not chasing prices down in the market, which is why we would not necessarily have expected much sales growth. If you look at the growth in gross profit, just quickly calculating what it is. It is 25 percent growth in gross profit, which given the war, we're very comfortable with those numbers. In a better trading environment, clearly, we intend to see the growth come back again.

Just to follow up, two questions. Although gross profit is obviously up year-on-year, it is down quarter on quarter. And two -- I think what you said earlier about SARS (indiscernible) and the war (indiscernible) the second quarter had been less effective than the first quarter. Could you reconcile that comment with the argument that it was the second quarter where you saw the weakness in the UK?

In terms of quarter on quarter, the ebookers' UK business, Q3 is the strongest quarter, followed by Q1. In fact, they're pretty much the same, then Q2 and then Q4. And actually, it is one of the weaker quarters, and so we would expect -- and I think if you look back at the numbers for last year, the year-on-year growth -- sorry, the quarter-on-quarter growth from Q1 of '02 to Q2 of '02 was not that significant either. So actually, these figures don't surprise me in the slightest, in terms of quarter on quarter. It wasn't great sales, sort of 10 percent quarter-on-quarter and (indiscernible) turnover. All of these quarters are seasonal.

So it should be seasonal the same way in different years, shouldn't they?

What do you mean?

The seasonality should be fairly constant, I would have thought.

Business has grown and there are certain emphasis that we have. Quarter 2 -- I don't know -- you're saying -- I don't have the figures in front of me. You're saying there was growth in from Q1 to Q2 in the previous year?

Yes. (MULTIPLE SPEAKERS). 46.2 to 43.2.

The reason is we were just coming off 9/11 and there was great demand coming on and not enough time. And so it wasn't a real representative two quarters.

Fair enough. Thank you very much.

(Caller Instructions). There are no further questions at this time. Please continue.

Thank you for your questions and for joining on the call. If after this call you have any further questions for me or my colleagues, please contact us or our investor relations manager Oliver Strong on -- for the UK -- +44-207-489-2239, or e-mail oliver.strong@ebookers.com, and we will get back to you as soon as we can. Thank you for your time and may I wish you all a good day.

(CONFERENCE CALL CONCLUDED)