Sabre Corp (SABR) 2006 Q2 法說會逐字稿

Good afternoon and welcome to the Sabre Holdings Corporation's conference call to discuss 2006's second quarter results.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded on August 3, 2006 and is being broadcast live over the internet.

I will now turn the call over to Karen Fugate, Vice President of Investor Relations for Sabre Holdings. Please go ahead.

Hello, everyone. Thank you for joining us today at our new time.

I'm here with Sam Gilliland, our CEO, Jeff Jackson, our Chief Financial Officer, Tom Klein, President of Travel Network and Airline Solutions businesses, and Michelle Peluso, CEO of Travelocity.

Before we get started I would like to remind all of you that some of our comments on matters such as our forecasted revenues, earnings, transactions, operating margins and cash flow, contract or business and trend information would constitute forward-looking statements. These matters are subject to a number of factors that could cause actual results to differ materially from our expectations.

Those factors are described in the risk factor section of the Company's most recent form 10-K filing with the SEC. The Company undertakes no obligation to publicly update or revise any forward-looking statements.

We have provided a detailed explanation and reconciliations of our adjusting items and non-GAAP financial measures in our earnings press release and on our Web site.

Now I'd like to turn the call over to Sam.

Thank you for joining us.

Today I'll give you a summary of overall Company performance for the quarter and our plan and I've asked Tom and Michelle to brief you on a couple of major highlights in their business units. Jeff is here as usual and will dig into the numbers for you. And of course, all of us are here for Q&A after the overview.

So let's dive in. We had a very good second quarter, both financially and operationally. On an adjusted basis, we saw strong growth on both the top and bottom lines and we achieved excellent overall earnings, positioning us to reach our 2006 goals.

In addition, our free cash flow was particularly good, so we're on track to exceed $300 million in free cash flow for the year. And Travelocity's impressive financial results, along with first-rate cost discipline across the businesses, drove total Company profitability in the quarter.

If we take a closer look at Travelocity, we find that the business operated very well and significantly improved margins over the last year. With solid performance around the world, we're pleased with how the quarter ended. We did see some revenue softness in North America while Europe turned in solid overall results.

To discuss more about these two regions, I'll turn it over to Michelle.

Thanks, Sam.

Turning first to North America, in short we were very pleased with our overall performance. We're making good on our commitment to consistently improve operating margins despite the softness we saw in packaging revenue and the lower yields we anticipated in air.

Over the quarter we saw softness in both total trip and Site59, our last minute packaging business. Given reduced capacity, record high load factors and prices up roughly 10% across the air industry, carriers have had less inventory available for discounting and hence have provided less bulk fares to round out demand.

This is generally a seasonal phenomenon which affects all players in the packaging business and encouragingly, we're starting to see this rebound as carriers have begun to add bulk fares back in as we approach the fall and as low-cost carriers have stepped in to fill demand.

But even though the packaging environment dampened our revenue growth, we made tremendous progress on the bottom line. First, our operational focus on areas such as credit card fraud and customer service led to significantly lower costs that we expect to continue throughout the year.

Also, we continue to spend our marketing dollars thoughtfully, focusing on ROI, even while our competitors increased spend earlier this year, in some cases dramatically.

And finally, while our portal partners declined sizably year-over-year, our new contracts protect us from this and we received the benefit from a cost perspective. So big picture in North America, it was a strong quarter despite a more challenging environment for packaging.

Moving to our European operation, our performance was encouraging. Overall, the business was just shy of breakeven, a significant improvement over the first quarter.

We continue to focus on three key areas. First, our primary goal is to run the business well and hit our growth and operating income goals, particularly for the key online assets that we acquired.

And over the second quarter, on a pro forma basis, we saw overall growth sales grow in the single-digits on a local currency basis, the lastminute.com brand growing north of 20%.

Additionally, we've put focus on cost control and marketing effectiveness and we're beginning to see the payoff from these efforts. For instance, our revenue per dollar of marketing spend increased by 20% over the prior year.

Secondly, we continue to simplify our business across Europe. During the quarter, we exited several non-core businesses, including our offline retail travel stores in France and the U.K. and our offline wholesale tour operating business in France.

Lastly, we continue to realize synergies from our acquisition and in the second quarter we began to flow the first bookings through Sabre significantly ahead of our schedule. We also launched the North America point of sale for our unique Holiday Autos car rental business.

To wrap up overall, it was a strong quarter from a bottom line perspective and with the exception of the packaging business in North America, the core metrics look healthy.

With that, I'll turn it back to Sam.

Thanks, Michelle.

Travelocity continues to differentiate itself and its products from the competition. Although some competitors announced similar customer service initiatives, our customer championship program remains the foremost service guarantee in the industry.

Travelocity also made great strides behind the scenes. As Michelle mentioned, her team's execution of ongoing fraud prevention issues have seen impressive results. The most notable being that the air fraud rate is now half of last year's average.

On the corporate solutions fronts, Travelocity Business added Lockheed Martin to its customer list. Lockheed is one of the single largest travel accounts in the country and by far our biggest win to date.

At GetThere we signed several major accounts and added six new distributors. GetThere also added online dining reservations and activities and moved the majority of its interface to the Travelocity look and feel.

And Zuji, which has consistently performed well every month since we acquired it, continues to grow in Asia Pacific and is slated to launch in India later this year under the Travelocity brand.

Now let's shift our attention to Sabre Travel Network, which continued to show solid operating performance in the quarter and generated strong cash flow, and perhaps most important, is the increase in margin.

We're maintaining the core strength of our efficient marketplace, which is highly valued by suppliers, travel agencies and corporations alike and we continued to take advantage of our scale, effectively managing costs, thereby lowering our cost per transaction. We continued to gain momentum in the second quarter by completing multiple, content distribution deals.

And I've asked Tom to share more insight on those deals as well as other topics within Travel Network. Tom?

Thanks, Sam.

Our Sabre Travel Network business had a strong quarter operationally. We continued to use the strength of our portfolio and our scale to fortify and improve the business and to meet our objective to be the ultimate one-stop shop for travel agents and the most effective marketplace for suppliers.

There are a couple of areas that I would like to call out in particular. As I mentioned on our last call, we signed long-term full content distribution agreements with Delta Airlines and United Airlines in April and in May, we signed a similar agreement with Continental Airlines. I'm very pleased to say we just recently signed a long-term full content agreement with Alaska Airlines.

Content is paramount for corporations and travel agents. Clearly, they need assurance that they will have long-term access to airline's full content to service their customers efficiently, which is what our Efficient Access Solution is all about.

In fact, we now have more than 280 carriers around the world signed up for full content agreements, which speaks volumes of the value we continue to provide carriers. And travel agents have continued to recognize the value of Sabre, which is reflected in the growing number of transactions.

We're particularly pleased in the growth in our online segment. During the second quarter, we began to see bookings from lastminute.com and Site59 flow through the Sabre system. In the past two weeks, bookings from Expedia and Priceline began to flow through Sabre as well.

Adding volume of this magnitude is not inconsequential and our technology team has done an outstanding job managing the increase. The high volume of transactions from online agencies adds further to our scale and as we continue to manage our costs, contribute to the low cost per transaction that Sam mentioned.

So those are the two areas I'm particularly excited about this past quarter. The growing number of carriers with full content in the Sabre system and the volume of bookings flowing from online agencies.

With that, I'll turn it back over to you, Sam.

Thanks, Tom.

Clearly, there was an abundance of great work done at Travel Network in the quarter, not only to reach agreements with major airlines in the U.S. and elsewhere, but also to tackle the very hard cost issues that stem from those new agreements, but we believe that equilibrium is emerging.

We have long-term full content agreements with five of the six major network carriers in the U.S. and our Efficient Access Solution, that takes effect next month, will ensure full content for travel agents, address the airline's cost objectives, provide further value to corporate agencies, and help avoid fragmentation in the industry. It's already gained support from a number of leading airlines and some of the largest travel agencies, both offline and online, so we're pleased with this momentum.

Moving to hotels, our hotel business continued to grow at a steady pace accounting for 10% of Travel Network's quarterly revenue. The Sabre GDS not handles distribution for 72,000 properties and counting.

SynXis, which now serves more than 8100 properties worldwide, opened a new reservations call center at our headquarters in South Lake, Texas and recently introduced its new and improved central reservation system.

So our continued progress with Travel Network and throughout the Company demonstrates that the team continues to reign in costs, build scale, provide better service and increase productivity. This is what allows us to maintain strong, free cash flow and adjust our business model to respond to the changing needs of the marketplace.

One of the best examples of how our business model is changing comes from Airline Solutions, where we are shifting away from one-time revenue generated by up-front licensing fees to a more predictable model characterized by reliable, recurring revenue streams that allow for better comparisons on a quarterly basis and for stronger revenue growth over the long-term.

One carrier that adopted the newer model is fast-growing Indian carrier, King Fisher, who recently chose us to install more products and technology in addition to those they already use. Just last week, they went live with our Sabre Sonic reservation system, making their technology infrastructure almost entirely Sabre-based.

So overall, Airline Solutions had a solid second quarter and that combined with a solid first quarter and a strong sales pipeline leaves us confident that we'll reach our year-end goals.

Now for more on the numbers for this quarter and the overall outlook for the year, I'll turn the call over to Jeff.

Thank you, Sam. This afternoon, I'll cover our second quarter results for total company and each business unit and then turn to our outlook for third and fourth quarter.

Our total company second quarter results were strong with double-digit growth in revenue and earnings and robust cash flow. Total revenue was $723 million, 17% higher than last year, primarily attributed to growth at Travelocity.

Total company operating income on an adjusted basis was $105 million, healthy year-over-year growth of 17% and margin of 15%. GAAP operating income was $78 million with an 11% margin.

Earnings per share on an adjusted basis grew 9% to reach $0.45 and GAAP earnings per share were $0.26 which includes the loss we took from the sale of non-core European assets at Travelocity.

Both our adjusted and GAAP results include a positive impact of several million dollars, or a few pennies of EPS, due to a reversal of a federal tax accrual. Even without this reversal, adjusted earnings per share were at the higher end of our projected range.

Total company cash flow grew significantly over last year to reach $155 million, an increase of over $60 million, or growth of 66%. Cash flow from operating activities grew 53% to $179 million. This increase is due primarily due to strong execution across the portfolio and the addition of lastminute.com.

At quarter end cash and marketable securities stood at $466 million, debt at $1.1 billion and net debt of $658 million. On a trailing 12-month basis our debt to adjusted EBITDA ratio is 2.8 and by year-end we expect that ratio to drop to around 2.

We believe this is a comfortable level for debt to adjusted EBITDA considering the amount of annual free cash flow we generate across our businesses.

Turning to business unit results, I will cover key highlights and metrics for each business. All reported financial and operating metrics are provided in the earnings release and reconciliation schedules. And I'll start with Travelocity.

Global Travelocity had another impressive quarter with strong revenue growth and margin expansion. Global gross travel book for the quarter totaled $2.7 billion, strong growth of 58%.

Europe gross travel booked was $689 million and North America, which includes Zuji, was $2 billion. Healthy growth of 22%.

Travelocity's global revenue totaled $281 million, growth of 63%. Europe revenue was $103 million and revenue from North America grew 8% to $178 million. Total global transaction revenue grew 68%, driven by 86% growth in non-air transaction revenue.

Despite some revenue softness in North America, Travelocity significantly improved adjusted operating income to reach $23 million, a margin of 8%. This represents a year-over-year margin pickup of over four points.

Operating income on a GAAP basis was $6 million for a margin of 2%. North America, inclusive of our Asian business Zuji, had adjusted operating income of $24 million, 33% growth over last year and a strong margin of 14%.

On a GAAP basis operating income was $20 million with an 11% margin. Europe had an operating loss of $1.5 million on an adjusted basis and $14 million on a GAAP basis.

Travelocity's total adjusted EBITDA nearly tripled to reach $31 million. North America was $29 million, an EBITDA margin of 16% and an adjusted EBITDA for a Europe turned positive at $2 million.

Our operational integration activities at lastminute.com are on target and we continue to make steady progress on Sarbanes-Oxley compliance, although we still have work to do. To ensure we meet future compliance deadlines and bring world-class financial systems to lastminute.com, we've increased our financial system integration spend for the back half of the year by 5 to $6 million.

Now turning to Travel Network. Revenue for the quarter was $420 million, a year-over-year decline of 2% with total transaction growth of 1%, both in-line with our expectations.

As we've said before, our mix of transactions continues to evolve. These lower rate transactions dampen our revenue growth, but have minimal impact to earnings due to associated cost savings.

In hotels, we grew revenue 16% driven by organic growth, marketing programs and SynXis transaction growth. Travel Network had strong operating income for the quarter of $73 million on an adjusted basis and strong margin of 17%.

On a GAAP basis operating income was $65 million with a margin of 15%. Adjusted EBITDA was $86 million, 5% growth over last year with an EBITDA margin of 20%.

We continue to operate this business efficiently, taking out costs and lowering the costs per transaction. In particular, we are very encouraged with the progress we are making to reduce data processing and overhead costs.

Our long-term goal remains the same in Travel Network, to maintain mid-teen margins and stable cash flow and thus we are pleased with the margin of 17% for the quarter.

The Airline Solution business had a solid quarter with revenue of $68 million, growth of 1%. Adjusted operating income was $10 million for a 15% operating margin and GAAP operating income was $8 million, margin of 12%. Adjusted EBITDA was $15 million for a margin of 22%.

I was pleased with the overall financial performance this quarter. All of our businesses met their earnings and cash flow objectives during a challenging time in our industry.

Strong mid-teens margin in Travel Network and Airline Solutions, margin expansion in Travelocity and strong cash flow across all of our businesses is the model for financial success at Sabre Holdings for the next several years.

Now turning to outlook. We remain confident in our adjusted full-year projections for Sabre Holdings, which includes our assumptions on Expedia and Priceline transactions as well as opt-in dynamics in the marketplace.

To reiterate, our adjusted total Company full-year outlook is revenue approaching $3 billion, adjusted earnings per share of greater than $1.70, adjusted EBITDA of greater than $500 million, operating cash of greater than $425 million and free cash flow greater than $300 million.

Our GAAP earnings per share is now expected to be greater than $1.12, down from our previous guidance due to the loss we took in Q2 from the sale of non-core European assets. GAAP income is projected to be over $147 million.

Now moving to guidance for the third and fourth quarters. For the third quarter we expect total company revenue to be in the range of 745 to $775 million with adjusted earnings per share in the range of 58 to $0.62 and GAAP EPS in the range of 44 to $0.48.

For the fourth quarter, we expect total company revenue to be in the range of 650 to $680 million with adjusted earnings per share of 42 to $0.46 and with GAAP EPS in the range of 29 to $0.33.

And with that, I'll turn it back to Sam.

Thanks, Jeff.

So for the first half of the year, we are well positioned for the second half. Travelocity continues to grow as it differentiates itself from the competition. Travel Network and Airline Solutions are operating effectively and significantly contributing to our free cash flow.

And as we move further into the second half of the year, we remain on strategy and are on course to meet our 2006 forecast across the businesses.

With that, let's go to Q&A.

Thank you. [OPERATOR INSTRUCTIONS] We do have a question from the line of Paul Keung from CIBC World Markets. Please go ahead.

Hello. Good afternoon, everyone, this is Myresh for Paul Keung. Thanks for taking our questions.

How you doing?

Good.

My first question has to do with your long-term strategy of returning capital to shareholders. Sam, we are potentially on track to have solid full-year visibility in GDS economics which is a major improvement compared to past years and it looks like Travelocity and lastminute are showing improving cash flows. But your stock has done nothing for quite some time, so how do you feel about spinoffs, major share buybacks or dividends over the next 12 months?

So do you think that this is the time to do it or at least give it some serious consideration? And I have a follow-up question after this question.

Okay, all right.

Let me start by just saying we do feel very good about our current cash position and future cash flows and we do feel like we're getting to a place of predictability, sustainability and then growth in those cash flows. We look at a lot of different options in terms of our capital deployment to increase shareholder value.

As you might imagine, we look at things like stock buybacks, dividends, capital projects, obviously, that support organic growth and acquisitions. I suppose we could go down any one of those paths. I imagine that you will see us primarily focused on things like stock buyback, dividends, paying down debt probably as areas that we're more focused on than others.

So as an example, we don't -- we have a lot on our plate already in terms of the acquisitions that we've done over the last year or so and so we don't have any plans for significant acquisition activity and really we do want to with our cash flows drive value for shareholders and we think we can do that through things like our dividend, which we increased again this year, things like share buyback and buying down our debt.

Jeff, anything --

The only other thing I'd say maybe as emphasis to Sam is that as I said in my remarks, as we see the year progressing and with a sort of debt to EBITDA ratios that we project by the end of the year, that is a very comfortable level, ratio level. So I don't expect that we will be needing to tinker with that much beyond the end of the year.

That's right.

Thanks.

And my second question is about Jet Blue. On Jet Blue's second quarter conference call, management had mentioned ongoing discussions with GDS partners and it looks like an announcement is coming. So I was wondering if you could tell us if you're speaking with Jet Blue and how important is this deal from a competitive standpoint?

I can't comment on this a whole lot, we haven't made a formal announcement. We expect Jet Blue to be in Sabre very soon and I would just say stay tuned for an announcement that will be forthcoming shortly.

Thank you.

Thank you. Our next question is from Brian Egger with BMO Capital Markets. Please go ahead.

Thank you. Good afternoon.

Just wanted to ask a little bit more about your GDS revenue growth. Was a little lighter than we might have expected in the context of your revenue performance and I know you mentioned a decline in some lower-rated transactions. If you could provide maybe a little bit more color maybe on revenue per booking trends and other non-direct revenues in quarter?

Well, yeah, okay.

So let me just dig in on that. In the second quarter our growth rate in transactions was relatively flat, just about 1% year-over-year. There was some anniversary effect in there for Easter, so Easter occurred in April this year whereas last year it was in March, so that had some impact.

And while transaction volumes grew the revenue per transaction declined slightly and that is due to a mix of agreements we have in place with travel agents and obviously new long-term agreements with the airlines.

Okay. Thank you.

Our next question is from the line of Robert Peck with Bear Stearns. Please go ahead.

Hi. This is [Granal] for Bob.

A couple of quick questions on the GDSs and the feedback that you're getting form the EAS. When should we expect to see some kind of details on like travel agency feedback on the EAS and some economics?

Well, I'll jump in here and then Tom, maybe you can provide some more color here.

We have, as you might expect -- and we were really first in the industry to announce this type of program, and we have seen some of the other programs, well, we've seen other programs announced since then, both by airlines and the GDS competitors.

As you may be aware, we had originally set a timeline for implementing the program at August 1. And in fact, because others announced their programs later with later effective dates, we decided that we wanted to give travel agents the full benefit of looking at all their options before making their decisions, and therefore we set our time frame as September 1st to implement the program.

We have had, actually, considering the fact that this is a hard thing for travel agencies, because the program, while it involves a lot of new product capabilities, it also involves a change in economics. We've actually gotten good feedback on the mix of both capabilities and functions and content that we're providing along with these economics.

You look at various segments of our customer base and you see that, and actually, just to talk a little bit about the mechanics of it, a lot of our customers are auto-enrolled in this program. So over 5,000 customers already auto-enrolled with an effective date of September 1. These customers have the ability to opt out, but to date there have been very few that have chosen to do that.

So I think we're making good progress here in that part of the -- in the part of the market that is really the small, the mid-sized agencies. We're also having very productive discussions with larger agencies.

We've gotten endorsements in term of our overall approach. You may have seen these from America Express and from Expedia, and I expect more will follow.

So overall, I think it's going reasonably well, again, considering the fact that this does represent an economic change in the relationship.

So I don't know, Tom, anything else that you'd add?

Only that, you mentioned Expedia and American Express, the largest business travel agency and the largest leisure, so we were pleased with those endorsements. The Hogg Robinson deal that went into effect that we announced earlier this week is a very large, I believe the second largest European business travel entity and they also have a presence here in the U.S. and then we mentioned the Priceline bookings start to flow and it's right in the middle of these discussions. So I think just the fact that Priceline is already also moving business along is helpful.

So in all segments of the market, we've got some level of endorsement and as Sam said, we're not pushing the people to sign up before September 1. That's when they'll make their decision and all indications are that the large majority of our customers will be on board with the program.

And moving to Travelocity, and potentially looking at other markets out there in Asia, that is probably maybe bigger than India, that is China? Any plans to go in there either starting from scratch or maybe acquiring something?

We're looking at China very closely, as you'd expect. India for us represents, we think [inaudible] an opportunity for a variety of reasons. First of all, we have operations there already. We have a call center and technology developers there.

Secondly, from a language and a product capability perspective, we feel pretty confident we've got the right product. So it feels like a near-in opportunity, but as you expect, we're looking carefully and thoughtfully at other countries like China.

Thank you so much.

Thank you. Our next question is from the line of Jake Fuller with Thomas Weisel. Please go ahead.

Good afternoon, everybody. Question for you on the guidance side of the equation.

It looks to me like the implied back half revenue and EBITDA guidance is down versus your prior expectations. What's changed to lead your expectations down?

Well, actually, kind of looking around the room, I think that my impression is that we didn't move any of that down.

It looks, if I read the release correctly, it looks as though your full-year EBITDA guidance went from $5.26 to $5.41, down to $500 to $513 at the high end.

Our guidance is -- maybe we should get on the phone with you afterwards, but it's greater than $500 million on an EBITDA basis, and again, I'm looking around the room but I don't think that that's changed all year.

Okay. Happy to talk about it after, but it looks as though there's a table in the back of the release that provides a range and that range is different than the range provided in the prior release from the first quarter.

So assuming EBITDA this quarter was in line or ahead, I'm assuming that the downward reduction in that full-year guidance would have to be coming out of the back half.

Well, again, we'll have to get on the phone with you afterwards because that's not my impression.

If you looked at European online travel bookings, what was the pro forma trend?

Sure, Jake.

In terms of growth bookings on a pro forma local currency basis, it was a little bit softer than the first quarter, so single-digits as opposed to the 10% in the first quarter total and then lastminute.com grew at about 30% in the this quarter and over 20% this quarter. Part of that's just the World Cup phenomenon so there's a bit of a softer period in second quarter from the World Cup but overall, some pretty strong trends.

And the U.S. pro forma growth rate if you backed out Zuji?

We don't break those out, but as you know, Zuji is a very small part of our business.

Great. Thanks.

[OPERATOR INSTRUCTIONS] And our next question comes from the line of Michael Millman from Soleil Securities. Please go ahead.

Several questions.

Hey, Michael.

Hey, Mike.

Hi. Thank you for taking the call. I have several questions.

First, I wanted to back up to the last question. It looks like EBITDA is down $25 million compared with what you projected in the first quarter. In any event, on Travelocity, could you talk about how much marketing declined in the second quarter?

Well, Michael, we don't give out our specific marketing numbers for competitive reasons, but we have been very thoughtful and focused on ROI so we continue to grow revenue at a faster pace in North America and we're growing marketing spend.

Is it fair to assume that marketing was down?

No, I wouldn't say down year-over-year necessarily, but absolutely the case that we're growing marketing spend at a slower pace than we're growing revenue in the North America.

Okay.

Also, for the full-year is there a slight change -- previously I thought that full-year guidance excluded Expedia and Priceline and now it seems to include it. Is that correct?

No, we have always said that there was -- we've always said there was going to be a pool of travel agent bookings in the back half of the year that we expected to come online and Expedia and Priceline were built into that plan for the back half of the year. So there's no change.

Okay.

Is it fair assume that when everything shakes out that the incentives that will be given to Travelocity will be the same as Expedia and Priceline?

So, and Jeff, you can comment on this, too.

We have a very disciplined approach of, in essence setting a market rate for the incentive that's transferred between Travel Network and Travelocity. So Jeff runs that process and we look at market data to determine what is an appropriate market rate incentive and so that's the way it works and we evaluate that from time to time based on what we're seeing in the marketplace.

And as we mentioned on the first quarter call, that is in Travelocity's projections and in some cases already in our actual numbers.

Maybe just a little bit more on that. If Expedia is getting a better deal would that -- is that what you mean by market rate?

Well, what we mean by market rate is we look at a large number of market indicators, meaning incentives with customers that we see out of the marketplace or that we're aware of that even maybe even other GDSs have with either online players or other players. So we look at a lot of different market indicators and that helps us determine what we should be transferring between Travel Network and Travelocity.

On Travel Network, what was -- on the growth, what was that on an organic basis?

Organic basis, I don't know.

I'm not sure I understand.

Well, you --

There were no acquisitions. Do you mean acquisitions? There were no acquisitions.

Maybe excluding, you said you added lastminute, for example, and I think you said there was someone else --

Yeah, there were bookings that began to flow from lastminute -- [overlapping speakers] Michael, we don't provide account-by-account builds on our growth rates.

We build in a growth bookings over the course of the year, the timing is not precise when we do our plan, obviously, but we're right on track for what our bookings growth plan for the full-year is based on, not just the online booking growth, but some reasonable growth from our brick and mortar segment as well. But we don't break it out on an account-by-account basis.

Well, it was more just trying to get an idea of what the underlying strength is in the business.

Okay.

We felt like we had a pretty strong quarter, 17% operating margins and reasonable booking growth and booking growth is strong through the year, through the back half of the year, because a lot of the online business is coming on now.

Okay. Thank you.

And Michael, we had about a one point improvement in margin year-over-year, and as you've been watching us over the last three or four quarters, that's actually a good, nice uptick versus what we were seeing in some of the other quarters. So I think from an expense perspective in particular, the team's managing the business really well.

We're obviously pleased to have new business coming online. And again, whether it's online players and online customers that are internal like lastminute.com and Site59 or now in this quarter in the current quarter, online customers Priceline and Expedia.

Thank you. Appreciate it.

We now have a question from the line of Chris Gutek from Morgan Stanley. Please go ahead.

Thanks. Hi, guys.

Just a couple follow-up questions, maybe starting with follow-ups on the Efficient Access Solutions. And I know it may be a little bit early to answer this fully but given how much traction you are getting or expect to get from the travel agency community, I'm curious what you expect the margin impact to be on the Sabre Travel Network business, just in rough terms?

Well I think at this point, we're not going to get into a lot of detail on that. We've gotten questions along the lines of, is this going to be -- is the Efficient Access program going to be kind of neutral, is it going to drive us to neutral in terms of this overall program and the deals that we've done with airlines.

The EAS program itself is really only one component of a broad set of cost initiatives. So as I think we've said a number of times in the past, we've got a lot of work underway to improve our cost structure and that's the combination of the EAS program, those cost initiatives to what's required to allow us to price our products at levels that are attractive in this case with suppliers and allow us to meet the short and long-term financial goals.

Now, again, I would just reiterate that our plan is to maintain mid-teens margins in the Travel Network business.

Let me try a similar question for Michelle if I could.

Presuming that a meaningful percentage of the Travelocity revenue comes from incentive and presume that's a very high margin revenue stream, assuming that Travelocity has fully adopted Efficient Access Solution on market terms, same question, can you say just roughly, maybe qualitatively what the impact on Travelocity's margins would be?

Sure. Well, first of all, in the second quarter incentives were 16% of Travelocity's overall revenue. So it's [inaudible] meaningful number, certainly a number that we can kind of make good by other cost efficiencies and other improvements in our operations. And that's fully what we intend to do to continue to build our revenue streams by selling higher margin products and then also obviously to have operational efficiencies.

So I think it's something -- the good news is it's something we've obviously been planning for a while and been thoughtful about and thinking about for a while and we feel comfortable that for the portion of carriers that will be -- that we will opt in for, which is obviously the major carriers, not all European carriers for instance, we have ways to offset that with operational improvements and expansion revenue.

A couple more quick ones. Sam, can you say what the holdup is on a new deal with American?

Well, I think both American and Sabre are just trying to be patient. No, I'm kidding.

I think, look, we'd like to get a new agreement with American. I think we're still pretty far apart on a number of terms and as you may be aware, we are now operating under the terms of what we call our participating carrier agreement.

We call it the PCA and it's been in place for years. Actually, DPA 3 was a modifier, an amendment to the PCA agreement. So we're operating under that agreement today.

We'd obviously like to get to a long-term agreement that provides American with better economics. You might even presume best economics given their size and volume. And along with the best economics, we want to ensure that we have protections for customers that the other 14 airlines have clearly gotten comfortable with.

So that's where we are. We clearly have work to do and we'd like to get a new agreement with American, obviously.

And Sam, let me sneak in one more if I could while you're, putting you on the hot seat here.

In response or a follow-up to the previous question about strategic action, if you look at the multiples paid or relative multiples paid for Galileo, [inaudible] Orbitz and other online travel assets for Travelport, it would suggest that in a sale to private equity firms that your Company could set your price in the mid- to high 20s, maybe a bit higher, and I think in the past you talked somewhat explicitly about the frustration with the stock price performance. Could you address specifically the management team and the board's current thought on a potential sale of the Company?

No, I couldn't comment on that. I think we obviously watched with interest the Travelport sale and beyond that, I wouldn't comment on our valuation now or in the future, obviously.

Okay. Thanks.

Thank you. Our next question is from the line of Scott Shiffman from Lehman Brothers. Please go ahead.

I just wanted to follow-up on the earlier comments regarding your target gross leverage of about two times. I guess the question is, in particular to your direct GDS peers, why so low? Maybe if you can just expand upon your rational of why two times?

We don't have a target ratio. That was more of a comment on where it's headed and the fact that we're comfortable at that level. I would simply say that several, in fact, soon almost all of our GDS competitors are going to be in a private, highly leveraged position. So it would be different.

And the only other thing I would say is we're coming out of the lastminute.com acquisition where we did add leverage. I think we've been very encouraged by how quickly we've been able to delever the Company and so we're just a year away from that and are balancing the needs of all of our constituencies on the equity side and the debt side and those are my thoughts on that.

Do you feel that you're at a financial disadvantage relative to your peers of given the leverage constraints that your investment-grade ratings imply?

I do not -- if where you're headed with that is, are we unable to make acquisitions, make investments that would drive growth and cash flow, I don't feel constrained in the least bit, period. We have always had enjoyed good access to capital in the debt and equity markets that I don't feel any differently about that today, and I certainly don't feel disadvantaged competitively.

Great. Thank you for the thoughts.

Thank you. Our next question is from the line of Michael Dimler from UBS. Please go ahead.

Thank you.

Just as a follow-up to the AMR question, is there any color you can give around which issues seem to be the most contentious? Like in general terms?

I could, but I won't. We really prefer to keep these negotiations confidential and out of the public and so that's what we'll continue to do.

As far as Travelocity, you had said you expected to get to a 10% run rate operating margin. I believe you'd said this year, but are you still expecting that for this year or is that more of an '07?

Our guidance was to approach 10% this year, and clearly, we're pleased with our first quarter and second quarter performance.

So you're looking at first quarter/second quarter as kind of representative of what you continue to produce on an average basis?

That's right. I think, you know, as you know, obviously our business is seasonal and particularly in Europe where the profits we generate are really in the third quarter.

North America is less seasonal. But to see us hit, for instance in North America, even with the investments in Zuji, the 14% margin is encouraging.

Okay. Thanks.

Thank you. Our next question comes from the line of Justin Post from Merrill Lynch. Please go ahead.

I wanted to follow-up on the Travelocity margins.

I think back in December you gave some guidance for '07 where you thought they could get up to a certain number. Can you refresh us on that and whether you still think that's possible?

Yeah, broadly, we said we would continue to expand our margins significantly in '07 and we certainly feel very comfortable with that. I don't think we've gotten into, or we haven't recently gotten into very specifics, but if I remember back from the call we talked about operating income margins approaching 15% and we'll clearly refresh all those numbers as we get closer into next year.

But clearly, the progress we're making this year and hitting the numbers this year goes a long way in making sure we continue to expand our margins in out years.

And you've just got to like that even in a quarter where we did have a bit of a slower growth rate domestically than in past quarters when we'd been on a really nice string, the scale of the business is at a place and the operating efficiencies are at a place where we had four points of margin expansion. You've got to love that and you've got to believe, as I do, that that can continue.

Great.

And I don't know if you covered this, but just on the incentive fee changes intercompany, I think you have commented on it a bit a couple times. What effect do you think that will have on margins in next year? Can you comment at all on that?

On the Travelocity side, just to reiterate what I said earlier, the incentive from Efficient Access, the incentive opt-in is baked into our guidance and in some cases actually in our actual results.

Great. Thank you.

Thank you. Our next question is from the line of Scott Devitt from Stifel Nicolaus. Please go ahead.

Thanks, most of the questions have been answered. I just had two for Michelle.

Michelle, I think you noted some softness in Europe related to the World Cup. I was wondering if you could elaborate on that and if specifically it's related to air travel or inclusive of hotels as well?

There always seems to be a bit of softness in bookings particularly in the month of the World Cup, and of course, the World Cup was in June of this year. So we did see a bit of a slowdown in all of the countries across Europe, broadly across most of [inaudible] travel, but that has rebounded now we've gone back into July.

We did have a nice, solid quarter across the board in dynamic packaging in hotels much like we did in the first quarter. But again, there was a little bit of a stepdown in the gross travel booked rate between the first and quarter owing to the World Cup.

And then just finally, you noted 16% of Travelocity revenue from incentives. Do you know what that is in terms of percentage of EBITDA?

No, I don't have that number, but again, it's mid-teens in terms of the incentives that are in Travelocity's North America revenue.

This may be the appropriate time for me to clarify some of those EBITDA questions that were made at the outset of the question-and-answer period.

A couple of key points. One is, as I said, our overall position on EBITDA company-wide hasn't changed. It's still greater than $500 million.

The second thing is if you -- and I think some of these questions were coming from looking at the reconciliation tables associated with the press release. If you go to the business unit EBITDA ranges, they also remain unchanged, which is where that stuff comes from and then what we did do is tighten up the TSG EBITDA range to reconcile better with the business unit ranges.

And as we talked about on our call, there were a number of things that were going on below the EBITDA line. Our taxes -- we had a benefit from taxes, the accrual being released. That's below the EBITDA line.

We had stuff going on in the D&A line as well. But fundamentally, the EBITDA ranges for each of the business units hasn't changed nor as our guidance overall and there was a mechanical, if you will, tightening up going on in the reconciliation tables to tie to the BU results.

Thank you. And our final question today comes from the line of Chris Gutek from Morgan Stanley. Please go ahead.

Hi, just a couple quick follow ups.

Maybe Jeff, starting there, the loss on the sale of the European business, could you confirm that was not previously in your GAAP guidance and then could you also elaborate on what that was? Was that an underperforming piece of lastminute or the old Travelocity Europe that was divested?

Michelle will grab the second one, but it was not, you were right, Chris, it was not in our guidance.

And the businesses we exited were really offline businesses that we felt were complex for us to operate and not part of our focus on the core consumer growth businesses. So they were some offline wholesale and also stores network particularly in France.

Great. And then, Sam, one more.

I think you guys have been intentionally vague on how much business you expect to get form Expedia and Priceline for the Travel Network business, but I thought I'd try asking the question. Can you put some color around what the incremental benefit could be there for revenue?

Well, I think probably the best thing to do is maybe ask the folks at Expedia and Priceline what their views are on that. We obviously have established good relationships with them. We expect them to be productive relationships. But I think it doesn't make much sense for us to lay out any more specifics from that.

Okay. Great. Thanks guys.

And with that, we are done with our call for today. We really appreciate everybody's participation and we look forward to talking with you next time. Thank you.

Thank you.

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