Avis Budget Group Inc (CAR) 2004 Q3 法說會逐字稿

Welcome to the ebookers plc quarter 3 results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. (OPERATOR INSTRUCTIONS). As a reminder this conference is being recorded for Web broadcast. I would now like to hand the conference over to Latasha Malik, ebookers plc Corporate Communications Manager.

Hello to everyone. Today ebookers plc reported its third-quarter 2004 financial 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 Website section, www.ebookers.com. Taking the call today are Dinesh Dhamija, Chief Executive Officer; and Michael Healy, Chief Financial Officer. Also on hand for any financial questions at the end of the call, is Bill Scott (ph), Group Financial Controller. As a reminder, some of the comments made during the call by management in responses to your questions may contain forward-looking information. Statements are either subject to certain risks and uncertainties which may cause actual results to differ materially from those in such forward-looking statements. These and other risk factors are described in detail in the Company's listing, particularly dated 17 April, 2001, as supplemented by the Company's supplementary listing particularly dated 20 April, 2001, and the Company's annual report on Form 20F for the year ended 31 December, 2003 that was filed with the U.S. Securities and Exchange Commission on March 25, 2004.

Please note that all figures referred to in the call are in U.S. dollars and in accordance with U.S. generally accepted accounting principles. UK GAAP pound sterling figures are given in today's press release. This press release is on the investor relations section of the ebookers' website, www.ebookers.com. Solely for the convenience for our listeners for the financial information in this call, it is all expressed in U.S. dollars translated at the rate of 1 pound to U.S. 1.809 which was the buying rate at 30th of September, 2004. As 30th of September, 2003, it was 1.662. As of 30th June, 2004 it was 1.8126. I will now turn the call over to Michael Healy, CFO. Please go ahead, Michael.

Good morning to those participants in the U.S. and good afternoon to those participants in Europe. In quarter 3 we have delivered a solid no surprises performance of year-over-year improvement against key financial metrics. On the top line growth, sales rose to 286.4 million, up from 258.4 million in quarter 3 last year, an increase of 11 percent. Indeed this is encouraging that we have grown sales despite removing significant unprofitable off-line sales through shop closures earlier on in the year. On a like-for-like basis, that is adjusting for the effect of 9 closed shops, sales grew by 26 percent. Also during quarter 2 we were in the midst of a major restructuring which inevitably had a subduing effect on staff morale and hence productivity. There are clear indications that by quarter 3 morale has been restored. Revenue rose to 34.7 million from 32.7 million in quarter 3 last year, an increase of 6 percent. On a like-for-like basis, revenue rose by 19 percent. Gross margin, or revenue as a percent of gross sales, was 12.1 percent in quarter 3, 2004 compared to 12.6 percent in quarter 3, 2003. This decrease in gross margin is due to accounting changes for incentive income. As you may have noticed the margin figures on the U.S. GAAP accounting differ from UK GAAP accounting where margins are shown to increase from 12.5 percent to 12.6 percent. With our air business, an increased proportion of revenue is derived from performance related incentive payments from airlines rather than fixed percentage commission based revenue. Under U.S. GAAP such revenue can only be recognized when performance targets have been fully achieved, whereas under UK accounting revenue can be recognized as targets are estimated to be achieved.

As a result, approximately 1.5 million U.S. dollars of revenue recognized under UK GAAP in this quarter has not yet been booked under U.S. GAAP. If we were to adjust for this, gross margin for quarter 3, 2004 would have been 12.6 percent, the same as in the UK. Keys to growing our gross margin is the sale of higher margin non-air products. Non-air products (indiscernible) account for 36 percent of revenue compared to 32 percent for quarter 3 last year. Dinesh will update you on the strategy for the non-air businesses later in this call. Positive progress has also been achieved with respect to operating expenses. The restructuring announced earlier this year has been completed resulting in a headcount reduction of around 360. This headcount reduction has allowed us to redirect funds, investments, into areas designed to benefit ebookers' future growth and profitability. Key areas that have increased year-over-year spend include continued investments in people and technology for our growing non-air businesses. We have also invested more in our brands predominantly through increased online advertising. Despite the growth of our businesses and these increased investments, operating costs have been kept relatively stable mainly because of the positive affect that restructuring has had on lowering our costs. Overall, operating expenses decreased from 39.1 million in quarter 3, 2003 to 33.6 million in quarter 3, 2004. This decrease was principally due to stock compensation costs which varies according to our share price and which was a credit of 3.5 million this quarter 3 compared to a charge of 6.9 million quarter 3 last year. Within our operating expenses restructuring has helped us to reduce general and administrative spend, excluding stock compensation, from 12.7 million to 11.2 million.

Meanwhile marketing and sales spend increased by 2.2 million principally to support the growth of online sales. The increase in depreciation charge from 1.6 million to 2.6 million results from increased capital expenditure compared to last year on key technology projects, including our customer relationship management system and Web development costs. By constraining operating expenses and growing revenues, we have delivered improved profitability. Net income for the quarter is 1.1 million compared to a loss of 6.3 million for quarter 3 last year. Of course while a proportion of this improvement is accounted for by the stock compensation credit, nonetheless there is a performance-based improvement that underscores the leverage potential of ebookers' business model. Turning to the group's balance sheet, cash at the end of the quarter was 102.6 million compared to 89.6 million at 30th of June, 2004. This increase is principally due to trading in the P&E (ph) offset by capital expenditure and scheduled debt repayments amounting to 4 million U.S. dollars. That concludes my financial summary of what I believe to be a strong set of results that demonstrate encouraging year-over-year progress and which provides ebookers with a solid base for 2005. Let me now hand the call over to Dinesh.

Good day to everybody. As well as delivering an improved financial performance operationally, with our restructuring behind us and other initiatives well underway, I believe that we enter 2005 in a better state than the business has ever been in before. Key to this is our non-air business and channel mix. Our non-air businesses received significant incremental investment over the last year because of the high profit margin nature of these products. Even though we have indicated all along that realistically we would hope to see meaningful results to show through from 2005, we have done very well. Our share of revenue from non-air products has gone up from 32 percent to 37 percent year-over-year for quarter 3. The most important non-air business is hotels. We have now completed the recruitment of an experienced hotel management team, led by Ranjan Singh, who joined us from Expedia. New hotel technology is also nearing delivery. A second generation dynamic packaging booking engine and other hotel technologies are due to be rolled out in December 2004 and early 2005. Hotelbookers.com, our new hotels Website, is scheduled to go live at the end of 2004. Another important area of operational progress is the success we have had in changing our channel mix. Channel mix which means our Web Internet businesses or Web enabled, businesses coming from the Internet sometimes on the phone and off-line, which are just straight through on the telephone, is important from a growth and profit leverage point of view.

As many of you will be aware, in the past ebookers has carried out strategic acquisitions of traditional off-line travel agencies in order to develop its strength in product range and supply relationships. While this product range is a major strength of ebookers in the short-term, these acquisitions have given ebookers a significant proportion of slow growth or no growth off-line businesses. To address this, we have shut down uprofitable parts of this offline business. The rest we have been converting to the Internet. Over the last 12 months we have made good progress with this Internet conversion process. In quarter 3, 62 percent of our sales were online or Web enabled. This compares very well with the figure of just 46 percent in Q3 2003. We, of course, intend to keep improving this figure. This channel shift has 2 key benefits which will impact positively on ebookers' future profit growth -- I'm sorry -- future growth and bottom-line performance. As the Web channels have gone past the 50 percent mark of total revenue and sales, the growth of the Company as a whole, has started accelerating because of the higher growth rates of the Web channels.

Our like-for-lie gross sales growth was 26 percent for the quarter. Bottom-line performance should also increase as the contribution margin of online sales is significantly higher than off-line due to the effect of automation. This is the leverage effect of the Internet model. We estimate that for quarter 3, our online sales delivered a contribution margin of 6.2 percent which was over twice that of the off-line at 3.1. So with these 2 trends, (1) investment in high margin non-air businesses, and (2) a successful shift to high-growth Internet channels, I'm increasingly excited about ebookers' operational positioning. As you can see from the press release, we're also optimistic about the overall market outlook. In terms of our market, Europe continues to show increasing Internet takeoff and the outlook for mid and long-haul continues to be strong.

As a leading agency with strong brand positioning, we can only benefit from this. Ladies and gentlemen, we have done a lot of restructuring and process reengineering over the last 12 months. With this restructuring behind us, we approach 2005 with the confidence that we are in far better shape as a business than at the beginning of the year. We are a much leaner organization now, but have strengthened our management team in key areas. We believe that we are investing in the right areas and have the right people to take advantage of the growth opportunities that are available in this exciting market. We will now be delighted to take any questions. The operator will remind you of what numbers to press to do this.

(OPERATOR INSTRUCTIONS). Michael Mellman (ph).

Maybe you could explain a little bit why the revenue, compared to bookings, was sort of flattish when you increased substantially the non-air products which I would assume would give you a much higher revenue? I have some other questions as well.

I guess I am not quite sure what the question is there, Michael. The revenue compared to bookings --.

I thought that was 12.5 percent or 12.6 percent.

I think the difference there -- you're talking about the difference in gross margin between the U.S. GAAP and the UK GAAP?

No. Basically there wasn't a lot of difference in the 2 years, yet your non-air bookings were up to 37 percent from 32 percent. I would assume that those non-air bookings brought in much more revenue, had a much higher revenue margin than your air bookings.

I think we are seeing the growth in the non-air. We are seeing the business mix change such that it is now 37 percent of our business and the margins around those businesses, hotels (indiscernible) cars, are indeed greater than the flights. However we are also seeing it is a timing issue in terms of being able to book the airline incentive income from flights as well and that's what has been putting the pressure on the margin. In the quarter, in the third quarter, approximately 1.5 million U.S. dollars of revenue under airline incentive income that would otherwise have been booked under UK accounting, have been deferred under U.S. accounting and in total for the 9 months, that is about 4 million U.S. dollars of revenue.

But also, let me add Michael, that our air margins have gone down by 1 or 2 basis points, not percentage points but -- have they not?

Yes, indeed they have.

That is the reason why you are seeing this.

Maybe if you could explain the performance fees that you are -- how they were compared with the incentive fees (technical difficulty)?

Hello? It's a bad line.

I was wondering if you could explain how the performance fees, your airline performance fees, worked and how that compares with the incentives that they are replacing I guess from the GDSs?

Well our airline incentives -- we generate income from airline incentives by virtue of achieving certain targets of segments. When we achieve those then we can recognize the income from those, except that under U.S. accounting, the rules only allow us to recognize the income from the airline incentive when all of the obligations have been fully achieved, all of the metrics have been fully achieved. Under UK accounting, if you like, we can recognize them as we approach the achievement. So we can amortize, if you like.

Could you give us an idea of what the segment incentives you're receiving are and if you achieve maximum performance, what they become?

Well we have a number of airlines, but generally the way they work is we are given targets, annual targets, that we achieve. If we do achieve those targets we get an additional amount of revenue. Airline incentives and GDS revenues, total revenues, are now becoming an increasing proportion of our revenues in real terms. Up to almost 20 percent of the total revenues is generated from these incentive fees. The recognition of those revenues clearly have an impact on our profitability.

Can you talk about whether the Cendant, whether you believe that the Cendant acquisition of Orbitz will have some effect on the competitive climate?

I wouldn't believe that Cendant's acquisition of Orbitz will have any effect on Europe because Orbitz is a U.S. -- sells to consumers just in the U.S, and we basically focus in Europe.

I thought that there might be some thought that they would bring the brand.

You will have to ask Cendant that.

We haven't seen any impact and we don't expect any impact. Our main competitors in Europe are of course, currently Expedia and LastMinute, and to some extent (indiscernible) Travelocity.

Thank you.

(OPERATOR INSTRUCTIONS). There are no further questions at this time. Please continue.

Thank you for your questions and joining in the call. If after this call you have any further questions for me or my colleagues, then please contact us via Latasha Malik on 44, for England, 207-489-2451 or email Latasha Malik at Latasha.Malik@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.

That does conclude our conference for today. For those of you wishing to review this conference, the replay facility can be accessed by dialing in the UK on country code 44-1452-550000 or 0-845-245-5205. The reservation number is 2188997, followed by the # key. Thank you for participating. You may disconnect.