Despegar.com, Corp.
Q3 2020 Earnings Call Transcript

Published: 12 Nov 2020

[Operator:]

Good morning. Welcome to Despegar’s Third Quarter 2020 Earnings Call. A slide presentation is accompanying today's webcast and is available in the Investor section of the company's website www.investor.despegar.com. There will be an opportunity to ask questions at the end of the presentation. This conference call is being recorded. As a reminder, all participants will be in listen-only mode. Now I would like to turn the call over to Miss. Natalia Nirenberg, Investor Relations. Please go ahead.

[Natalia Nirenberg:]

Good morning everyone and thanks for joining us today for a discussion of our third quarter 2020 results. In addition to reporting financial results in accordance with US Generally Accepted Accounting Principles, we discuss certain non-GAAP financial measures and operating metrics, including foreign exchange neutral calculations. Investors should read the definitions 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 as substitute for or superior to GAAP financial measures and are provided as supplemental information only.

[Damian Scokin:]

Thank you, Natalia, and good morning, everyone. I hope you and your families are healthy and safe. We have been able to successfully adapt to and rapidly react to countless COVID related challenges. From the start of this pandemic, we took decisive action to lead our business and organization through this . Our accomplishments throughout 2020 have been a testament to the strength of our value proposition and resilience of our business model. Our ability to be agile and innovative and the exceptional work of our talented and passionate teams. This was further demonstrated in our Q3 results, which showed sequentially improvement despite the ongoing negative impact of COVID on the travel industry. We have outlined key strategic initiatives, and on these quarterly calls we have been providing updates as to the progress we have made. First, we have a flexible toolkit to support our business. During the quarter, activity levels began to recover from the impact brought about by the pandemic and we executed on our growth strategy. Let me walk you through some key events. During the third quarter of 2020, Mexico and Brazil where the two major Latin American markets relatively more open to travel. The sequential improvement we saw in transactions and gross bookings was driven primarily by these two markets, where we also benefited from successful negotiations with our travel supplier to our product offering. A favorable mix with a higher share of accommodations and packages contributed to an exceptionally high quarter take rate, excluding cancellations.

[Alberto Lopez Gaffney:]

Thank you, Damian, and thank you all for joining us today. We delivered improved sequential top line performance this quarter, although still significantly impacted by the pandemic. As reported revenues returned to positive territory this quarter, reaching close to $12 million from negative nearly $10 million in the second quarter. Customer cancellations continued to have a strong impact on our top line and amounted to over $9 million this quarter. This reflects the relaxation of Despegar's refund policy as we introduced our frontier policy that includes refund of customer fees as well as provisions for potential customer cancellations in October and November, given the lagging industry recovery in LatAm. Higher flexibility in nonrefundable bookings following our negotiations with our travel partners also contributed to the increase in cancellations. During these extraordinary cancellations and provisions, revenues in the quarter would have reached $21 million, up from slightly over $4 million in the prior quarter, but still significantly behind the $132 million reported in the third quarter last year. As Damian mentioned earlier, we achieved an exceptionally high take rate of 12.7% this quarter, excluding cancellations. This solid performance also reflects the volatility we are experiencing in our market these days. Moving on to profitability on Slide 9, comparable adjusted EBITDA for the quarter improved sequentially to a loss of nearly $17 million from a loss of $32 million in the second quarter of this year. Year-on-year, however, comparable adjusted EBITDA were down from a gain of over $9 million in the third quarter last year impacted by the pandemic. As detailed in our earnings release published this morning, comparable adjusted EBITDA excludes extraordinary charges of slightly over $17 million incurred in third quarter 2020 in connection with COVID-19. In addition to customer travel cancellations and provisions, it includes severance payments from our cost savings initiatives, as well as one-time fees related to M&A and capital raising efforts. Remember that second quarter 2020 also included nearly $34 million in extraordinary charges, mainly resulting from the pandemic. Moving to liquidity on Slide 10. We closed the quarter with a strong balance sheet with cash and equivalents at $386 million, which include proceeds from the recent $200 million private capital raise closed towards the end of September. This compares with a cash position of $228 million at the close of the prior quarter. In these challenging context, our operating activities drove a use of cash of $24 million compared to cash generation of nearly $26 million in the same quarter last year. The use of cash this quarter mainly reflected a net loss of $42 million that was partly offset by non-cash adjustments in connection with allowances for doubtful accounts and amortization of intangibles. In terms of working capital, new sales triggered an increase in Tourist Payables offset by a reduction in accounts payable. Now please turn to Slide 11 for an update on the Best Day integration. We are pleased to report that in less than a month following transaction closing, we achieved two key goals. As Damian just discussed, we have started to quickly capitalize on the monthly recovery we are seeing in the domestic travel market in Mexico and are very encouraged with the progress we're seeing to date. On the tax front, we have already migrated Best Day B2C business to Despegar's platform just 30 days after closing the transaction. Over the next months and until early 2022, we will be executing on integration plan of Best Day, advancing on four different fronts that we anticipate will have a direct positive impact on our P&L. First, from a top line perspective, we are now operating through two different branch in Mexico to fully capture the country's attractive potential as a tourist destination. As the second most recognized travel agency in Mexico after Best Day, and over a three decade future in the country, Best Day provides us with a deeper understanding of domestic travel of the Mexican consumer. To put this in perspective, note that 8 of the top 10 destinations booked by Mexicans in 2019 were domestic. Mexico is also Latin Americans largest travel market, the seventh largest destination worldwide. The combination of our existing B2B operations, together with , Best Days leading hotel service aggregator provides us with the most extensive hotel quantity in Latin America. Second, we aim to enhance revenue margins and two key initiatives. On the one hand, we are starting to consolidate source further leveraging our negotiating power. At the same time, we plan to cross-sell Best Day in destination services to Despegar’s passengers traveling to Mexico, thus contributing to margin expansion. Third, our plan also calls for additional efficiencies in terms of cost of running the market, particularly in Best Day's kiosk model and call center operations. We also plan to leverage our marketing capabilities and consolidate back office operations, which are anticipated to drive improvement in costs and installments, create . Lastly, we also expect to drive higher efficiencies in terms of G&A as well as technology and content. To achieve this, we are working on integrating all of Best Day's business lines, namely its B2C, in-destination activities and the B2B operation into Despegar’s IT. platform. This also entails an ambitious restructuring as we merge IT, sourcing, operations and administrative rules providing operating leverage. All these actions combined, once the LatAm travel returns to 2019 volume levels, we expect Best Day's revenue margin to increase from 300 basis points from 2018 levels. In terms of cost of revenues and marketing expenses, we expect Best Day operations to achieve savings of between 1 to 1.5 percentage point as a percentage of gross bookings. We also see 40% to 50% reductions in terms of G&A on Tech and Content. All combined, we anticipate this integration initiatives will contribute between $20 million to $30 million in annual EBITDA and Best Day. Recapping quickly on the key highlights for the quarter. While we saw sequential improvements in Brazil and Mexico, the travel industry in LatAm remains highly impacted by the restrictions in place. Commercial air travel in LatAm was down 70% year-on-year in the third quarter. This compares with declines of 50% in the U.S and 56% in Europe in the same period. Our win-win value proposition for customers and travel partners contributed to a particularly high take rate, excluding cancellations. Organic channels continue to perform well, declining per transaction paid marketing. Importantly, mobile accounted for 51% of transactions. We are running a lean operation after meeting our goal of cutting structural costs by 49% this quarter. The combination of these efforts allowed us to get adjusted EBITDA in comp sequentially. We are also advancing rapidly on integration of Best Day. And finally, we have further strengthened our balance sheet with a recent capital raise to support execution of our growth strategy. Now, please turn to Slide 14 for final remarks. Looking ahead, we continue to operate in an uncertain environment with external factors still impacting consumer behavior and the travel industry. In this context, we remain focused on the four key goals established earlier in the year. We expect to continue benefiting from the adjustments made across the company to navigate these new market conditions and integration of Best Day. First, focusing on the business activity. Brazil and Mexico remain our key growth markets, in particular we expect to see continued recovery in hotels and packages in Brazil. At the same time, we anticipate a slight recovery in Argentina, Chile, Colombia as restriction in these markets are gradually lifted. In Mexico, as you can see from the October data points per share, fourth quarter results are already benefiting from the contribution of their day as it leverages a strong focus on the Mexican domestic market. Prioritizing unpaid marketing sources is also a key element of our strategy, as we have successfully done this quarter. The next few months are quite relevant with two most important markets. In Mexico, we have one feet, which is the biggest national marketing campaign of the year in the country, and Black Friday in Brazil. We're leveraging our relationship with our financial partners with a goal of providing an attractive value proposition that includes discounts on financing. We continue to enhance our domestic offering and prioritizing the personal health of our customers. We're working on further strengthening our 320,000 vacation rental offering. We have achieved significant cost reduction over the last two quarters, which provide an indication of how we expect to see, our DNL depending on recovery events. Although unclear on its timing, I think they are navigating through this pandemic environment. We are encouraged with the future performance of the Despegar business. To share such a view, we will be excluding the impact of both Best Day and Koin with our respected integration efforts and the impact of canceled tickets rescheduling and their servicing to 2019 due to COVID-19. Under these assumptions, we understand Despegar could be EBITDA break even as we get to gross bookings per quarter in the 400 million area, which is approximately 35% of DESPEGAR's 2019 gross bookings. Third, we have a strong cash position. The recent capital race has provided Despegar with resources to continue advancing on our growth strategy. At the moment, we are screened and evaluated several M&A opportunities. At the same time we continue taking care of our customers and processing refund requests and cancellations. Many of these require a manual response that is taking our time and efforts to complete by moving forward on this front. Finally, we continue making progress on the integration of recent acquisitions. During the following quarters, we expect to make working capital investment at Best Day in connection with this travel . According to the revised terms of the acquisition disclosed last July, these working capital adjustments, together with indebtedness are included in the base consideration of $56.5 billion. As such consideration to be paid 36 months following closing will be approximately $26.6 million. There are no payment performance dependent, EDU only 48 months following . Again, we're working on integrating this business into our best-in-class fraud analysis platform. Progressing and completing the API connectivity both on the app, while launching the fix project in line with Central Bank development aimed at fostering . In conclusion, the pandemic have challenged our business model, and we have demonstrated agility and operational efficiency as we leverage a digital technology we've been investing in four years. We also continue to progress on developing our longer term strategies intended to ensure we maintain our leading position, while further strengthening our financial performance and creating ongoing value for shareholders. This ends our prepared remarks. We are now ready to take your questions. Operator, please open the line for questions?

[Operator:]

Our first question is from Edward Yruma -- from from Itaú. Go ahead.

[Unidentified Analyst:]

Hi. Good morning. Just one question, if I may. I wanted to have a little bit more clarity on how much working capital will be demanding the Best Day operation?

[Damian Scokin:]

Okay, sure. Good morning, Alexandra. Addressing your questions, I would like to point on two aspects. One is, what's the actual burn rate? Burn rate is in 2020, and we expect that to be -- to go down significantly next year, Okay? It is around $10 million. Then what you have is that is already included in what will be -- will end up being the final payment to the selling shareholders on Best Day. Sorry, reminder that will take place 36 months only in September 2023, okay? And we do have to inject capital when it comes to paying down supply of debt that Best Day have, Okay? And that amount in 2020 and 2021 is around slightly above $30 million dollars. But importantly, going back to the final consideration to be paid to the shareholders, okay, remember that we announced that the final price for Best Day, excluding the earn out was $56 million, okay. And so the remaining value to be paid to the selling shareholders is around $26 million, okay. So there's a $30 million reduction that at the end equates nicely with what is the supply of debt that we need to pay down in 2020 and '21. Hope that’s clear.

[Unidentified Analyst:]

Okay, perfect. Yes, very clear. Thank you.

[Operator:]

Our next question is from Edward Yruma from KeyBanc Capital Markets. Go ahead.

[Edward Yruma:]

Hey, good morning. Thanks for taking the question. Just as you start to contemplate what a post-COVID environment look like, just trying to understand how quickly can you re-add capacity, particularly on packages? And is there a , given that I know many package consumers do installment payments. Is it that will lag a general reopening. Thank you.

[Damian Scokin:]

Hey, look. Hi. This is Damian, how are you? Thanks for your question. There was some noise in the line, let me make sure I understood. The question is mostly how fast can we add capacity to the package aspect of our business? In terms of capacity, we don't have any constraints. Moreover, we're increasing capacity as we integrate, basically and consolidate our sourcing teams. So therefore, at the moment, we not only have the same, but I would say significantly more capacity than we had last quarter. The constraint at this moment is more demand. And as we measure our remarks, demand for packages is showing growing at a in both Mexico and Brazil, and as a percentage of total assets are increasing. But we expect the remaining geographies to catch up and continue a positive trend in the next quarter. But there's no capacity constraint at this moment.

[Edward Yruma:]

Got it. And really the follow-up to that is, do people think prospectively about vaccination reopening or do you think that they want to wait and actually see the markets reopen prior to purchasing some of these packages? Thank you.

[Damian Scokin:]

Well, that's hard to sell. Hard to say, in a sense, we -- what we’ve seen, for example, in Brazil and Mexico where government restrictions have been much milder, these are people do not wait a significant portion at least of the population in consumers do not wait until a vaccine type of solution is in place, and they are reacting nicely and continue showing strength in demand. So while our expectation is that as other countries relax their restrictions, we'll see some ramp up in demand even before any vaccination is available.

[Edward Yruma:]

Thank you.

[Operator:]

Our next question is from Eric Sheridan from UBS. Go ahead.

[Eric Sheridan:]

Thank you so much for taking the question. Hope everyone on the team is safe and well. Can I just get an update on the broader competitive environment? What are you seeing in terms of taking market share vis-à-vis your competitors? And is there any sense of country by country where you might see opportunities to maybe grow inorganically and take advantage of some of the market dislocation during this period, the way which you've had -- where you've talked about on prior calls. Thank you so much.

[Damian Scokin:]

Hi, Eric. How are you? This is Damian. In terms of competitive dynamics, we -- what we see is obviously a significant reduction in overall marketing investments compared to other more quote-unquote normal quarters. We now -- our strategy as we described, we are less focused in market share because we value percentage point of market share in an overall market that's 80% to 75% smaller than what normally is, as a logical, much less valuable. As we say, we're publishing in a strategy to maximize margin and generate cash to preserve cash in this context. So what we see is in a nutshell a less intense competitive pressure, a significant portion of our offline competitors are having financial trouble. And we are happy with the balancing between the recovery and marking we are getting. In terms of inorganic growth, as you hear from us several times, we continue having a set of conversations with a lot of potential partners. And obviously this is a good time to consolidate, given the situation of the industry as you expect. Maybe we cannot get into details and into the specifics, but the combination of the market context and the strength of our balance sheet obviously make this a very attractive moment for us to speed up those conversations. As usual, just another touch point, if you are focusing in the key markets of Brazil and Mexico, as we've been saying over time.

[Operator:]

Our next question is from Brian Nowak from Morgan Stanley. Go ahead.

[Alex Wong:]

Hi, this is Alex Wong on for Brian. Thanks for taking the question. Just two questions. First, I think you rolled out the loyalty program in Brazil last year at around 100,000 members. That's grown nicely to over 500,000 now. Can you talk a little bit about the early learnings and type of engagement you see, whether it's repeat rate or conversion rate and whether there are any plans to roll this out to additional markets? Second, you talked about obviously leaning in on unpaid channels like email and push notifications. How do you see the mix of unpaid evolving as demand normalizes? And what are you seeing on the competitive front on the paid marketing side as well?

[Damian Scokin:]

Alex, hi. This is Damian. I will start by the loyalty question in the part of geographic expansion. Obviously, we have plans to roll out our loyalty program into new geographies. The priorities are Argentina and Mexico as per the evolution and the performance of the program in Brazil. Obviously, we have to adjust our target in terms of performance, given the context of the industry. But I would say that after you take that into consideration, the performance in terms of repeat rate, in terms of our ability to sell credit cards and other indicators like the average selling price, the ticket price is much higher, the penetration of in all those dimensions, the program has exceeded our expectations. When we adjust those, as I said, the situation in the overall travel industry. So we're very happy with that performance and we are very excited about this rolling into other geographies. Obviously, that roll out on the launch of the program will be timed according to when market investments like the one required to launch a program makes sense in the context of the travel industry. To the second portion of your question about traffic, as we said, we believe this is a great time to leverage our brand and use our organic traffic. We do not expect that to be the situation on an ongoing basis. Having said that, remember that Despegar has traditionally high -- a very high portion of non-paid traffic in normal conditions. So we'll step up our investment in paid traffic, but we expect to return to normal levels on a pre-COVID situation. As I mentioned before, overall investment to your point of competitive intensity has been reduced significantly in the region.

[Alex Wong:]

Thanks, Damian.

[Operator:]

Our next question is from Kevin Kopelman from Cowen. Go ahead.

[Emily Levin:]

Hi, good morning. This is Emily Levin on for Kevin. Thank you very much for providing us with the monthly gross bookings progression throughout Q3 and October for Brazil and Mexico. I was wondering if you could help us understand what those numbers imply on a year-over-year basis for October and if you're continuing to see sequential improvement in November? Thank you.

[Damian Scokin:]

Okay. Sure, Emily. I think the performance first and foremost, as we have highlighted in the opening remarks of the call, they differ very much by market. As we stated, Brazil and Mexico are clearly the engines behind the recovery of our business, okay, on what you're seeing on year-on-year both Brazil and Mexico are currently, let's say, around minus 70 vis-à-vis last year, okay, and Mexico, minus low 70s. Brazil over the past -- up until October, I think the trend was what is clear in our presentation, what we have seen, and again, I think it's important just to always consider the amount of uncertainty, every troubled player is currently operating today. And in that context, where we see Brazil continued in November in a nice way, okay, but we started to see some signs, early signs of fatigue that again, I think we need to be particularly prudent -- fatigue in Mexico, okay. So there was a bit of explanation vis-à-vis the October trends, okay, in November, in Mexico. This week is -- for the next 10 days on aggregate from beginning to end, there would be the one fin ph. One fin is a big sale sale in Mexico, okay. And I think a relevant portion of the November numbers will be actually obtained through what happens in these -- in the upcoming week. Then when it comes to the other countries, okay, clearly, Argentina is the one that is the most, let's say, subdued. Argentina, to give you an idea is in minus 90 vis-à-vis last year. And this is all in -- all the other savings in gross bookings in dollar terms. And then what we're seeing is that the Andean region, let's say Colombia, Chile, Peru, where they are starting to recover, they have recovered a lot more slowly than Brazil and Mexico. But they currently are in, let's say, in the high 70s, okay, minus relative to last year. So, again, we have seen a good comeback of the market. Still we are awfully away from the metrics that this company posted in 2019. We need to be particularly prudent on providing a longer term perspective on this. That's why we're just sticking to what the history has been up until October. But importantly, we are running today a company that is on us -- on a a lot more profitable, okay, with this strategy of increasing profitability and cash preservation and cost creation.

[Emily Levin:]

Thank you very much.

[Damian Scokin:]

You’re welcome.

[Operator:]

Our next question is from Michael Tanzer from Callaway Capital. Go ahead.

[Michael Tanzer:]

Hi, guys, I wanted to say congratulations on the capital raise and shoring up your balance sheet in a time of uncertainty and part of the financing was done at very attractive rates. So, as a shareholder, I want to say we appreciate the mindful consideration for dilution and cost of capital. And my question had to do with your guidance earlier or let's not say guidance, but the notion that you would be roughly operating cash flow breakeven at something like 35% of 2019 gross bookings. And while it's uncertainty that you're facing about the picture of demand, I guess my question would be as to how we should be thinking about the cost structure going forward as demand ramps up closer to 2019 gross bookings or some level there thereof. And should we think about the structural costs that you're currently running as fixed and then how should we think about the, let's say, incremental variable costs as levels of demand return to 2019 levels? Is it structural cost will stay relatively fixed? And let's say demand should be at 50% of the market increase or something like that. Could you maybe help us out with that. Thank you.

[Alberto Lopez Gaffney:]

Hi, Michael. Alberto Lopez here. Thanks for your question and thanks for your remarks. With regard to the cash flow breakeven, okay, specifically our statement was that we were seeing that this company could be EBITDA breakeven. EBITDA breakeven with a gross booking level on a quarterly basis of around $400 million gross bookings. So, again, it's not operating cash flow that is EBITDA, okay? And having clarified that point, okay, on the structure clearly the statement is also excludes what our -- what the impact of the day, not only from the perspective of the P&L, of P&L, but also from the perspective as you might imagine, that we are not including those structural cost integration. You take some resources to integrate this and the target companies or the partner -- the new partner companies efficiently. And a proof of that is that in just 30 days, okay, we transfer the B2C business of the day. And now that it's operating under our platform. However, in order to do that, what we're doing is adjusting some resources. In addition, importantly, okay, as you might imagine, with the current context given the amount of bookings that have been put on hold, we have a number of open tickets vis-à-vis our air travel suppliers. So clearly, from a customer service perspective, the cost structure today is -- it is heavier than what we will be. What we understand will be once they called it backpack, let's call it that way, like the COVID backpack is taken off our shoulders. Okay. So again, the $400 million need to be considered for gross booking for a portion of of gross booking. For an EBITDA breakeven, they consider those two key assumptions, okay. Then how will the current cost structure of $27.8 million achieved in Q3? Move forward, okay. The focus of the company and that is one of the key priorities for the company is to increase the standardization of the internal processes on automation of those processes so that we can reach for the fixed cost. We can reach from that level of around what will be close to $2 billion of gross booking on a yearly basis. We can then only grow, let's say, with an operational leverage of around 50%, meaning that if orders go up by, let's say, for argument sake 10%, our free cost structure would only go up by 5%. And I think that's the beauty of the business as we continue to automating our backoffice processes, all the support areas, etcetera. So hopefully with that, you understand what's included in the EBITDA breakeven numbers, okay. How will that cost structure start growing with the amount of operational leverage? And we expect that cost structure to start growing from at around a gross booking number of $2 billion. We believe that we can't have a cost structure that up until around $2 billion of gross bookings, we do not need the material cost to the structure.

[Michael Tanzer:]

Understood. I mean that that's very helpful, both on, as you say, the COVID backpack and also the way that the cost structure should scale and that the business should be very profitable as you kind of leverage your fixed cost and the variable costs grow at a significantly lower rates than the demand picture. And so I appreciate that and thank you for clarifying.

[Alberto Lopez Gaffney:]

You're welcome.

[Operator:]

This concludes our question-and-answer session. I would now like to turn the conference back over to Damian Scokin, CEO. Go ahead, please.

[Damian Scokin:]

Thank you. Thank you all for joining us today. We look forward to speaking with you again next quarter. In the meantime, we will remain available, as usual, to answer any questions that you might have. Stay safe. Bye.

[Operator:]

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