Despegar.com Corp (DESP) 2019 Q1 法說會逐字稿

Good morning and welcome to the Despegar First Quarter 2019 Earnings Call. A slide presentation is accompanying today's webcast and is available in the Investors section of the company's website, www.investor.despegar.com. (Operator Instructions) This conference call is being recorded. (Operator Instructions)

Now I would like to turn the call over to Mr. Javier Kelly, Investor Relations. Please go ahead.

Good morning, everyone, and thanks for joining us today for a discussion of our first quarter 2019 results. In addition to reporting financial results in accordance with U.S. generally accepted accounting principles, we'll discuss certain non-GAAP financial measures and operating metrics, including foreign exchange mutual calculations. Investors should read the definition of these measures and metrics included in our press release carefully to ensure that they understand them. Non-GAAP financial measures and operating metrics should not be considered in isolation or substitutes for or superior to GAAP financial measures and are provided as supplemental information only.

Before we begin our formal remarks, allow me to remind you that certain statements made during the course of the discussion may constitute forward-looking statements, which are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to materially differ, including factors that may be beyond the company's control. For a description of these risks, please refer to our filings with the SEC and our press release.

Speaking on today's call, CEO, Damián Scokin, who will provide an overview of the first quarter and update you on our strategic priorities; Alberto Gaffney, our CFO, will afterward discuss the core financials and our outlook for the next quarter. After that, we will open the call for your questions.

Damián, please go ahead.

Thank you, Javier. Good morning, everyone, and thank you all for joining us. During the quarter, we've made significant progress across a number of our key initiatives to better position the company for the years ahead.

From a macro perspective, this was a mixed quarter starting on a more stable footing when compared with the volatility experienced through 2018. This dynamic continued through February. With such positive macro environment, we focus on driving improved profitability. We did this by increasing customer fees and reducing package discounts and the offering and duration of installments. The latter affected mostly our Argentine business. This strategy was successful and we delivered improved profitability when compared with the prior quarter. This was so even as we face record 1 -- first quarter 2018 results.

Additionally, with the more favorable macro environment, we saw an increase in demand for higher-margin international travel versus most of 2018 when travel was dominated mostly by domestic flights. However, by March, the macro environment had weakened again. The Argentine peso has further depreciated and inflation has hit mid-50s. Nevertheless, even in the face of challenging conditions, we have demonstrated further success in evolving our business models to meet changing customer preferences for booking travel.

A key metric when enforcing this strategy is our mobile app downloads, which now exceed 52 million mobile transactions, which accounted for 38% of the total in the quarter. Also, from an operating metrics standpoint, we continue to perform well, gaining market share, improving NPS, growing room nights and achieving a better mix and with growing mobile transactions. Excluding Argentina, which experienced a 54% FX devaluation in the quarter, transactions and room nights were up 11% and 22% year-over-year, respectively.

With respect to key financial metrics, both gross bookings and ASPs increased on a FX neutral basis, up 24% and 17%, respectively. A key driver of our strategy is identifying new sources of growth. To that end, subsequent to quarter's end, we completed our first acquisition post-IPO, which I will discuss later in my presentation. Importantly, our healthy cash position enable us to fund this acquisition with cash on hand.

Turning to Page 4. Moving to a discussion of transactions and gross bookings. Over time, we have been able to successfully increase both total transactions and gross bookings as well as gain market share and this trend continued into the first quarter. We have been able to accomplish this despite the macro environment and weakening industry conditions in Latin America, as we are able to leverage our leading market position by opportunistically adjusting our business model and adding more products and services for the traveler.

As you can see on this chart, total transactions were up 5% in the quarter with air transactions increasing faster than Packages, Hotels and Other Travel Products. Total Packages, Hotels and Other Travel Products were down 1% in the quarter on a reported basis and accounted for 43% of total transactions. This was down 300 basis points when compared to record first quarter 2018 results impacted by economic conditions in Argentina, which accounts for a significant share of these products offering. This also continued to drive a shift towards lower-margin products in the country.

If we look at the mix, excluding Argentina, Packages, Hotels and Other Travel Products grew by 10% year-on-year. A key area of focus is driving sales and increasing share of higher-margin Packages, Hotels and Other Travel Products with a particular focus on stand-alone packages. As a result of this effort, in Q1, stand-alone packages increased 17% year-on-year, remaining our fastest-growing product.

Contributing to the growth was an increase in international tourism. Gross bookings increased 24% on a FX neutral basis, a similar rate as the past 2 quarters. As reported, gross bookings, however, were impacted by weaker economic conditions in Argentina and were down 6%. Of note though, this performance was better than the high single-digit contraction experienced by the travel industry in Latin America during this quarter. Excluding Argentina, as-reported gross bookings increased 7%.

Lastly, the average selling price, or ASP, increased 18% on a FX-neutral basis, primarily benefiting from a mix shift towards international travel. The increase in international travel was reflective of a more stable macro environment early in the quarter and supported by a reduction in ticket prices in some markets.

Now turning to Page 5. Moving on to a discussion of some of the latest business development initiatives to accelerate growth. We are driving innovation and utilizing technology to shape the future of online travel. We are making travel booking at Despegar easier and have put in place the tools to serve customers better than ever before.

Let me now talk about a few. Our strategy is to invest in the most promising opportunities that will expand, however, we can grow the customer base. Last month, we announced plans to acquire Viajes Falabella, a full-service travel operator with online presence, call center and unique for us, asset-light stores within stores. With Viajes Falabella, we are purchasing a well-established business in the fast-growing Andean region. Viajes Falabella's product mix has a core focus in packages, which accounts for about 2/3 of the asset sale. This is strongly aligned with our strategy to grow our higher-margin Packages, Hotels and Other Travel products.

In today's marketplace, personalization is key and is a differentiating and competitive advantage. We are leading this charge and continue to personalize our product offerings to the individual markets we serve. We know and understand our customers and have been a leading OTA player when it comes to providing payment of social travel.

This quarter, we added an additional payment option for our customers in Mexico, enabling them to pay for their travel in cash to more than 17,800 Oxxo stores located throughout the country. We have been investing in brand building to attract new customers, increase market share and improve customer service. At the close of the quarter, we launched a rebranding campaign centered around continuous traveling. We seek to inspire customers to travel more frequently and elevate the trip experience along every step of the journey.

This starts from the moment they begin dreaming of traveling until they share their memories of that trip. We believe this new positioning is more reflective of our customer-centric approach, strong technological commitment and new product initiatives. As we continue to deepen our customer-centric approach, we also added several leading-edge features to our online and mobile platforms to enhance the customer booking journey, remain close to our customers and drive cross-selling.

Let me mention some of our exciting launches this quarter. Move on to Page 6. First, we launched a new homepage that is personalized based on the travel history as well as current travel plans for each customer. We not only provide appealing suggestions to enhance the trip and cross-sell other products during or after the purchasing of a trip, but we are now also following up proactively after the trip, requesting feedback to continue improving the experience and address any issues that may have arisen to ensure a flawless execution on our end. Through this new homepage, we're also offering suggestions for upcoming trips based on each person's travel history.

Second, we added a new tool that provides suggestions for short 2- to 3-day getaways. This consists of travel packages that are personally customized by each customer based on the city and date of departure, the number of people traveling, distance willing to travel and experiences interested in joining. This new getaway feature also provides a curated list of our attractive package trips ideal for a specific holiday all times of the year.

Finally, a unique development this quarter was the launch of our new travel inspirations theme. This is a unique customized and very easy to manage flow of traveler recommendations based on each individual's preferences. Through a friendly Q&A, Despegar walks the traveler through the process of building his or her trip and provide suggestions based on the date of the trip or time of the year, number of people traveling, assigned budget destination, big city, mountains and type of activities of interest, relaxation, sports and other cultural, et cetera.

We are excited about the enhancements we have added to reach customers in a more digitally connected way. Our commitments to the customer experience, we will be there when, where and how they want to book travel and where we'll deliver new and convenient experiences that's unique at Despegar.

I will now turn the call over to Alberto to discuss the financial results for the quarter.

Thank you, Damián, and good morning, everyone. Please turn to Slide 7 for a deeper look at our operations on a regional basis. Importantly, we expanded FX neutral gross bookings and gained market share across our 7 key markets. In Brazil, our largest market, we delivered our 3% year-on-year increase in transactions against a very strong first quarter last year and gained share for the past 3 years.

We continue to drive growth in international travel, particularly packages and air travel, supporting increases of 16% in ASPs and 20% in FX neutral gross bookings, beating overall market growth. As-reported gross bookings rose only 3% as the 16% currency depreciation offset the benefit from the mix shift from domestic to international travel and the expansion of higher-margin packages.

In Argentina, despite our reported 9% decline in transactions, we continued to gain market share as we performed in a difficult macro and industry environment. FX neutral gross bookings and ASPs were up 34% and 46% year-on-year, reflecting the positive impact from increasing customer fees and lowering package discounts this quarter, as we faced better market dynamics in the first 2 months of the quarter.

The 54% currency depreciation, however, proved too high of a hurdle to offset. Also remember, we are comparing against a record quarter a year ago. The rest of Latin America posted solid top line growth, up 20% year-on-year and FX neutral gross bookings up 18%. On a reported basis, ASPs declined 7%, reflecting currency depreciation in the region while gross bookings rose 12%.

We are particularly pleased with above-industry growth in transactions in 2 of our more competitive markets. Transactions in Mexico rose 16% year-on-year driven by overall international travel, while Colombia delivered a 27% increase in transactions both in domestic and international travel. Both countries, our strategy to drive solid growth in face of higher-margin packages remained intact.

Moving on to the financial results on Slide 8. FX neutral revenues were up 19% year-on-year. This was achieved even as we faced a contracting market and is a testament to our leading market position and ability to adjust to changing market conditions. We continue to make meaningful progress with our key strategic initiatives of increasing the share of higher-margin products. Packages, Hotels and Other transactions increased 400 basis points and accounted for 63% of revenues this quarter, up from 59% in first quarter 2018.

As-reported revenues for the quarter declined year-on-year by 10% to $133 million impacted by several factors: First, the FX translation effect from currency depreciation across the region, particularly the 54% peso depreciation in Argentina; second, revenues were also impacted by reductions in air customer fees and discounts in package transactions implemented last year to drive share gains in a weakened demand environment; third, we also saw lower supply bonuses this quarter, reflecting weaker customer demand. This more than offsets our profit overall year-on-year mix shift to international from domestic travel, driven by lower air supplier prices in key markets.

Note that while Argentina experienced a drop of 570 basis points in the share of international transactions impacted by the sharp peso devaluation, on a consolidated basis, we saw a positive mix shift of 100 basis points to higher-margin international transactions. Combined, these factors drove declines of 27% in reported revenues per transaction in the air segment and to a lesser extent of 4% in the Packages, Hotels and Other Travel Products segment.

Overall, we reported a 57 basis point drop in revenue margin to 11.5% in the quarter. Sequentially however, revenue margin was up 50 basis points, mainly as we increased air customer fees and offered fewer package discounts early this year to drive profitability given slightly better market conditions at the start of the quarter.

Moving down the P&L on Slide 9. Our strategic initiatives of driving cross-selling, enhanced customer satisfaction and share gains across our key markets resulted in a 6% increase in FX neutral gross profit, reaching $111 million in the quarter. Gross margin declined 460 basis points to 66%, as we compare against a record quarter last year. On a sequential basis, however, we delivered a 350 basis point improvement in gross margin despite first quarter being a seasonally lower quarter.

We also reduced the duration and availability of installment plans in Argentina. However, due to the steep interest rate environment, we incurred higher installment plan costs this quarter. Also, as we move ahead with our goal of further enhancing customer service, our payment costs were higher this quarter. Importantly, on a per transaction basis, fulfillment costs declined 6% year-on-year as we gain operating leverage while our net promoter score increased by 586 basis points year-on-year.

At the same time, our efficient approach to marketing and spending in this weak macro environment allowed us to achieve savings in selling and marketing costs of 12% on an absolute dollar basis and improved 40 basis points as a percentage of revenues. However, note that beginning in the second quarter, we stepped up our marketing spend as we pursue our rebranding strategy across the region, including an online TV, radio and print campaign.

G&A expenses in turn increased 30% year-on-year impacted by a new export rights tax on service in Argentina effective last January, higher stock-based compensation as well as administrative and professional fees related to the implementation of our strategic initiatives. On a per transaction basis, total operating costs decreased by 2%. We remain focused on optimizing our operational structure, taking efficiencies and leveraging our structure as we continue to grow the business.

Now please turn to Slide 10. Our strategy to drive further share gains, together with significant currency devaluation, impacted profitability. Adjusted EBITDA declined 44% year-on-year with margin down to 11% compared to a record of 18% in the first quarter of 2018. Sequentially, adjusted EBITDA margin improved 90 basis points. This mainly reflects our focus this quarter on taking profitability by increasing air customer fees and lowering package discounts in the quarter while reducing investment in installment plans.

We also reported use of operating cash flow of $5.6 million this quarter compared with cash flow generation of slightly over $14 million in the same quarter last year. This was mainly due to lower growth in supplier payables, given slower sales growth and increasing other assets and prepaid expense balances and lower net income. Last, we also made capital investments of nearly $8 million in technology, hardware and office expansion.

Summing up, let's move to Page 11. Our first quarter results demonstrate continuous progress against the strategic priorities we have laid out to accelerate growth. We are evolving the business to better serve our customers. We are improving our product offering and the client experience throughout the introduction of Despegar, as evidenced by some of the initiatives Damián spoke about earlier.

With Viajes Falabella, we have announced our first acquisition which complements our organic growth. Looking to the coming quarter, we continue to see our results tracking the macro environment. As mentioned earlier, the year began on more stable footing but weakened as we moved into March and we have not seen an improvement for this current quarter, experiencing softer transactions and gross booking performance.

Weakening trend extended into April. 2019 GDP growth forecast for Mexico and Brazil have been lower and Argentina is facing a more challenging scenario than previously expected, given higher FX volatility. As such, we now see a full 2019 heavily back-ended, but with a weaker-than-expected Q2 and following the GDP revisions, our second half 2019 with a more muted recovery.

We should also remind you that starting April, we have stepped up marketing spend in connection with our rebranding strategy across our key markets. As we have done in the past, we strive to find the right balance between growth and profitability and have opportunistically been able to make adjustments to our business model to adapt to changing competitive dynamics.

Our larger size and more efficient infrastructure, coupled with our healthy balance sheet, provides flexibility to weather more challenging environments. We remain focused on driving long-term shareholder value by delivering balanced top and bottom line growth while making strategic investments to accelerate long-term growth opportunities.

In sum, we have been operating in the region for over 2 decades. Latin American travel market is large and underpenetrated via online booking. Taking into account our leading market position and consistent enhancements to the customer travel booking experience, we are very well positioned to succeed and to deliver improved profitability once the market environment improves.

This concludes our prepared remarks. We will now take your questions. Operator, please open the line for questions.

(Operator Instructions) Our first question comes from Rodrigo Nistor of Itaú.

I just wanted to see if you could give us a bit more color on what's driving growth outside Brazil and Argentina and where specifically?

Rodrigo, this is Damián. If you look at the markets outside Brazil and Argentina, I would say that on -- at the market level, the dollar value of those markets remain flat year-on-year. And within that context, if you look at the Page #7 of our presentation, you can see that in that context, our transactions grew 20% and bookings 12% year-on-year. They are, as you know, and Alberto mentioned, in a more stable and favorable market conditions. The balancing between growth and profitability proved to be very positive for us and we are just executing our strategy in a more stable environment. So it's gaining market share in stable market. That will be my answer.

Rodrigo, what I would add is the Viajes Falabella acquisition also reinforces the commitment to that part of the region, okay? And I think it goes without saying also that from a macro perspective, okay, those countries in the Andean region are the ones that have shown the most stability over a couple of decades. So I think that we are implementing there, on the M&A front, that actually ties nicely with what we have seen on the field. So we're very excited with what's up for us over there in ex Brazil and Argentina.

Our next question comes from Edward Yruma of KeyBanc Capital Markets.

I guess, first, I know that you've highlighted that there have been downward GDP revisions in key geographies. Just so that we're completely clear, when you are modeling out a back-ended second half '19, what's the implied GDP for Argentina that you're using? Or just maybe asked differently, you had -- you previously thought that the back half would see a pivot. And kind of so when in your model are you seeing that? And then as a follow-up, a nice momentum in packages. I guess how should we think about the -- your inventory positioning against packages? Are you taking more forward positioning, given some of the success you're seeing there?

Alberto speaking here. Addressing the first part of the question or your first question. As you know, and as we have discussed with you in the past, okay, we analyzed what's consensus view for GDP growth. And following our analysis of such consensus, okay, we actually develop our business plan. Importantly, at the beginning of the year or end of last year, our view was not different from consensus as is usually the case. And specifically, the numbers were actually, as you might recall, we're pointing to a Brazil that was around a 2.5% growth for the year. You might have noticed that GDP revisions for Brazil went from around 2.5% to around 1.5%. That is revision over the past, let's say, 4 to 3 months, okay. That's not immaterial.

Then when it comes to Mexico, we were actually seeing, in line with consensus, a growth that was shy of 2%, okay? What we're seeing now is that consensus revisions have lowered those numbers between 1.1% to 1.4%. That's what we're seeing. Then when it comes Argentina, Argentina, the expectation was for a deep contraction in the first half, a contraction that we're currently going through with a back end recovery.

Summing up for the overall year, contraction -- overall contraction that was slightly above -- around 0.91%. What we're seeing now is that consensus is actually forecasting for Argentina, a contraction that will be more around 2%. So overall GDP growth, negative of minus 2%. So these are the numbers that the economists are actually looking for the 3 geographies you've asked.

As for the packages questions, you are right, we are happy with the performance. As you noticed, our nominal revenue mix has increased by 400 basis points up to 63% of total revenues. And in terms of the inventory, we have -- as we've been mentioning over the last few conversations, part of the growth strategy there is to get some own inventory in order to build more attractive packages not only in terms of better price points but also differentiated products. We've been growing in that direction although still does not represent the percentage of the share within the total packages we sell that we would like. There's ample room for growth there. I don't know if that answers your questions or you want to follow up on that.

Well, I'm just to that point, I mean as the momentum continues, are you being compelled to kind of take more forward position of either airspace or hotel space and how does that change the financial profile?

No. Yes. Two things here, we plan to increase those to by -- I mean, air and hotels inventory. And in terms of the financial implications of that, Alberto can go in detail through that but it's not a significant impact on our working capital dynamics.

Our next question comes from Alejandro Lavin of Citi.

My first question would be if you can give us please, not based on the competitive landscape of Argentina and Brazil. And my second question would be if you can give a little bit more color on what you're thinking in terms of more acquisitions perhaps for the rest of the year, what kind of products and regions you will be looking at?

Alejandro, Damián here. In terms of competitive landscape, I perhaps spent 2 seconds about talking overall in the region and then specifically about Argentina. Overall, in Latin America, what we see is players like Airbnb, Booking and Expedia increasing their ad spend, and some of other global players like Trivago and TripAdvisor decreasing their relative expenditure. So overall, a little bit more competitive in international -- in terms of international players than before.

On the other hand, the local players in each of the countries have somehow pulled out or decreased their investments. In Argentina, what you see is those same trends but accentuated by the macro environment. As per the M&A, as we've been commenting in previous calls, the only thing we can share, given the nature of the conversation, is that we are having conversations. We're actively looking into other attractive opportunities and we are hopeful that we can come up with other additional positive news on top of Falabella.

(Operator Instructions) Our next question comes from Kevin Kopelman of Cowen.

This is Emily dialing on for Kevin. My question is regarding the revenue margin that increased Q-over-Q. You noted an increase in air customer fees and fewer discounts. I was wondering in which markets have you deployed that strategy and do you plan to continue that going forward?

Emily, Alberto speaking here. With regard to your question, I think that overall, I wouldn't say that we have made material distinctions when it comes to increase in profitability in the region. There's one other variable that comes handy, that is financing like the cost of installments, et cetera. As you might imagine, the area or the region that we actually pulled back a little bit more was in Argentina. So that -- over there, you do see a differentiation, okay? So when it comes to financing costs, Argentina, we'll decrease it more than in other regions. But we're also starting from higher point. When it comes to discounts, in relative terms, we actually -- we increased, okay, our profitability across the board. But as you -- to be consistent with our strategy, we have actually identified Brazil and Mexico as our key growth countries. As such, every time we pull on these levers, we take into consideration the importance of those 2 strategic countries and as such, we lean more towards actually increasing profitability in countries where we have a lower level of priority.

(Operator Instructions) As we have no further questions, I would like to turn the conference back over to Damián Scokin for any closing remarks.

Thank you. Well, I just wanted to thank everybody for your time and attention. As always, we will keep you informed of any relevant news on the company's plans and performance. We look forward to talking to you soon and definitely in the next earnings results call. In the interim, as usual, the team remains available to meet with you and answer any questions that you may have. Again, thank you very much and have a good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.