Sabre Corporation
Q4 2020 Earnings Call Transcript

Published: 16 Feb 2021

[Operator:]

Good morning and welcome to the Sabre Full Year and Fourth Quarter 2020 Earnings Conference Call. My name is Josh and I will be your operator. As a reminder, please note today’s call is being recorded. I will now turn the call over to Vice President of Investor Relations, Kevin Crissey. Please go ahead, sir.

[Kevin Crissey:]

Thanks Josh, and good morning everyone. Thank you for joining us for our full year and fourth quarter 2020 earnings call. This morning we issued an earnings press release, which is available on our website at investors.sabre.com. A slide presentation, which accompanies today’s prepared remarks, is also available during this call on the Sabre Investor Relations web page. A replay of today’s call will be available on our website later this morning.

[Sean Menke:]

Thanks, Kevin. Good morning everyone and thank you for joining us today. Before we get into the details of the fourth quarter, I’d like to reflect briefly on what has been an extraordinary year. In light of the COVID-19 pandemic, 2020 presented the greatest challenges ever faced by the travel industry, with global air and hotel bookings down more than we have seen in any prior year. Against that backdrop, I couldn’t be prouder of how many of my Sabre team members around the world how they responded. They provided exceptional service for our customers and advanced our technology transformation, while managing the personal challenges of the pandemic, including operating in a remote work environment. I thank them sincerely for their dedication. As the impact of the COVID-19 virus spread, we took quick and decisive actions to improve our financial position. We reduced our go-forward annual costs by approximately $200 million. This represents a five-percent point improvement in EBITDA margin versus 2019, all else equal. Our cost savings actions include a labor expense reduction of about $175 million per year. We also renegotiated our DXC contract to lower our fixed costs and are consolidating our real estate footprints as we moved to a more flexible, “Work from Anywhere” program.

[Doug Barnett:]

Thanks, Sean and good morning, everyone. As expected, the impact of the COVID-19 pandemic significantly and negatively impacted our results in Q4. Revenue was down 67% in the quarter, totaling $314 million, versus $941 million last year. We’ve described how 15% of our revenue, or approximately $150 million per quarter is not tied to travel volumes. This remains the case, because our net bookings have remained positive and continued to improve versus the second and third quarter, our revenue surpassed this figure and has continued to sequentially improve. Our Distribution bookings were down 79% in the quarter, with air bookings down 80%, and lodging, ground and sea bookings down 79%. Gross air bookings were down 80%, 78%, and 77% in October, November and December, respectively. We report bookings on a net basis, meaning net of cancellations. Net air bookings were down 81%, 80% and 78% in those same months. Consequently, our Distribution revenue in the quarter was down 79% to $131 million. When we report Q1 2021 results next quarter, we plan to provide detail regarding booking trends versus both 2020 and 2019. Our IT Solutions revenues fared better again this quarter, down 40% year-over-year, due to a higher percentage of revenue not tied to travel volumes. Passengers boarded were down 58% in the quarter. Hospitality Solutions revenue was down 42%, with a 40% decline in CRS transactions. Because our property mix, particularly in the enterprise segment, is less dependent on city centers and conference venues, we have seen relative outperformance in our Central Reservation System Transactions versus Distribution bookings and passengers boarded. EBITDA and operating income were negative in Q4, reflecting the impact of the COVID-19 pandemic. The year-over-year decline in revenue was partially offset by declines in Travel Solutions incentives expense and Hospitality Solutions transaction fees due to lower volumes, headcount expenses due to cost savings initiatives we have already executed, and technology expenses due to the lower transaction volume environment. Net income and EPS were also negative in the quarter, driven by the decline in operating results and increased interest. Tax expense was higher than expected in this quarter. In addition, free cash flow was negative $200 million in the quarter. As expected, our free cash flow was reduced by approximately $15 million related to severance payments. Excluding this, our monthly free cash flow was negative $62 million. Looking ahead to 2021, we have approximately $20 million of severance payments remaining from our 2020 cost savings actions. We expect the first quarter to be the lowest free cash flow quarter, primarily due to the timing of large working capital items that will have offsetting benefits over the rest of the year, as well as paying out majority of the remaining severance balance. We expect our cash burn rate to improve sequentially throughout the rest of 2021. In 2020, as described, we took swift and decisive actions early in the crisis to reduce costs, increase liquidity and extend our debt maturities. In total, we strengthened our liquidity position with over $2.1 billion of additional capital in 2020. Through our capital market transactions, we raised $1.1 billion from the issuance of senior secured and exchangeable notes; we raised $598 million in net proceeds from our common stock and mandatory convertible preferred stock offering; we drew down on our revolver in the amount of $375 million; and finally, in the fourth quarter, we reduced our real estate footprint with the sale and leaseback of our headquarters buildings, resulting in net proceeds of $69 million. This is in line with our new, “Work from Anywhere” program as we work to right-size our global real estate footprint. In addition to securing capital, we took several other actions to further strengthen our liquidity position. We implemented cost-savings actions with $200 million expected savings on an annual runrate basis. We refinanced over $2 billion of debt. We extended our debt maturities to 2024 and beyond. And we suspended common stock dividends and share repurchases. As Sean mentioned earlier, we ended the year with a cash balance of $1.5 billion and have no significant near-term uses of cash. In 2020, the actions taken to improve our cost structure and balance sheet enabled us to continue our important IT investments. As Sean mentioned, we made considerable progress with our five strategic initiatives. This includes our technology transformation and modernization, which is expected to result in over $100 million of annual savings starting in 2024. We believe our strategic initiatives will strengthen our financial model, resulting in

[Sean Menke:]

Thanks Doug. I hope you all have found our remarks helpful in understanding how we have managed the global pandemic thus far and what we see is the future. The road to recovery will be bumpy. We are a global company with global customers and recovery in each region of the world may be a little different. Through our data, we believe there is pent-up demand to travel again. However, we have also seen increases in reported COVID-19 cases lead to more travel restrictions and put downward pressure on the travel recovery. We are hopeful that with the rollout of vaccines and continued vigilance, confidence will be restored and travel will rebound. In summary, we remain focused and confident in the future, and feel competitively well-positioned post-COVID-19. I want to once again thank my Sabre teammates around the world for their dedication to serving our customers, shareholders, and each other during this difficult time. And with that, I would like to go ahead operator and open the call for questions.

[Operator:]

Our first question comes from Josh Baer with Morgan Stanley. You may proceed with your question.

[Josh Baer:]

Thanks for the question. This is for both Sean and Doug. I imagine for many months in 2020, some of your highest priorities were around getting through the crisis, focusing on employees, or liquidity, raising capital, pushing out debt maturities, cutting costs and then even the Google partnership. And I am wondering, like at this point, it seems like most of these areas are stable. And it seems like there is a shift taking place where you can focus on other initiatives. I am wondering, like, does that resonate with you the shifts and I guess, like what of those five initiatives or others like, where are you now spending most of your time and focus?

[Sean Menke:]

Yes, Josh. I’ll take that and let Doug add on. But, you are spot on it. If you go back to 2020, the major objective that we had is to make sure that, we did ensure that we have plenty of runway to manage through an extended sort of global recovery. And what we also had in the back of our mind is maintaining our focus on our technology and capabilities, and the one thing that we haven’t lost sight of is we, and this is on a pre-COVID basis, we believe strongly in the technology needs that we are driving. I do believe that we are going to see COVID driving accelerated changes in the ecosystem. So, and I do believe technology will be a catalyst and I think we are well positioned. So, when you look at it relative to what we have done with cost structure, what we have done with liquidity, pushing out the debt maturities, I am laser-focused on what we are going to be doing post-COVID. And what I feel really good about is there was a lot of work that was done by the organization essentially organizational alignments, streamlining expenses, that allow, really the team to focus on the day-to-day business really in 2021 and 2022 and there is group of us we are very focused on the next decades to come, because we believe that the initiatives that we put forward are very important and the reason I gave you some of the data points that relates to the initiatives is they are essentially important in the conversations that we are having in new deals. They are very important as it relates to, what I’ve talked about in hospitality. So, as I look at it, we’ve laid the foundation really well. We’ll continue to monitor it, because as we know, it’s going to be a choppy recovery. Well, that again, I am looking forward to continuing to drive in the future with this organization. Doug, I don’t know if you have anything else?

[Doug Barnett:]

Yes, Josh, I might add, even though it’s not a strategic initiative, but obviously the opportunity we did do during 2020 was to combine and create the GS organization. And so, one, my focus right now is to make sure that I have the people, processes and systems in place to support not only that restructuring, but also these five initiatives. But there will be changes in some of our systems and some of our processes that support these initiatives. So, you are absolutely correct. I turn more to this now in the future than kind of just making sure and show enough – and making sure we get through this pandemic.

[Josh Baer:]

Great. Thank you.

[Operator:]

Thank you. Our next question comes from Matthew Broome from Mizuho Securities. You may proceed with your question.

[Matthew Broome:]

Thanks very much. So, in terms of the Google cloud migration, you mentioned the target of moving at least 15% of your mid-range workloads to GCP this year, I mean, is the environment now sort of fully set up? And when do you expect the start up of the workloads to be fully migrated?

[Sean Menke:]

Yes. So, and I mean, I’ll have Dave Shirk jump in on this, as well. The important thing that has been taking place really with in 2020, 2021, as you’ve heard in my remarks is really setting up the landing zones around the world and there is a lot of essentially migration of data that will be happening. Dave, if you want to get into maybe a few of the specifics that are taking place, it will be helpful for Matthew, I believe?

[Dave Shirk:]

Yes, Matthew, the answer to your question is, yes. We’ve been setting up the development certification customer roll out environments requests in the United States and Europe. So that piece is well underway. We are also moving now interconnected all the networking and the networking for high capacity, capability exchange to take place around that. This is off setting up the development in build out areas. We will move 15% of our mid-range systems, which is about 250 production applications. We’ll start that process. We expect to have the air shopping for Travel Solutions also moved to the Google platform sometime in 2021. And then, by I will take some steam from my colleague, Scott Wilson hearing this on the call our Hospitality Solutions team will also be going live in production. They have their development and chest environment set up and so, that’s also planned for this year. So, this is kind of a broad range of the things for this year with the Google platform.

[Matthew Broome:]

Okay. That’s definitely helpful. Thanks. And then, regarding the update on your strategic initiatives, do you anticipate R&D spend increasing from these objectives or do you already have the resources that you need?

[Sean Menke:]

Yes. I’ll let Doug comment on that, but it’s really within the envelope that we have been talking about and managing too. So, Doug, you can provide a little more color?

[Doug Barnett:]

We have all the resources we need right now between us and our providers. So, we are in good shape and that’s including our cost runrate right now.

[Matthew Broome:]

Okay. That – I appreciate that, Doug. And assurance to be the last one, and just in terms of air booking fees, do you still need to get to 70% of 2019 levels to get to initial free cash flows?

[Doug Barnett:]

No, what we’ve done is, given – look at where we exited our cost structure, as you are actually correct, before – it depend on what it was between business and leisure and international and domestic, because right now, those are running a little negative to what we’ve typically seen. Right now the goalpost if you were to use to be 60% to 70%. They are now more like in the 56% to 67% range. They’ve improved by 3% to 4%.

[Matthew Broome:]

Great. Thanks very much.

[Sean Menke:]

Yes, maybe to add on that, Matt, because you probably dropped, but it’s a testament to the organization and just managing cost, getting more cost docs that is cost-driven. The other thing I think is also helpful for people to understand is, sort of what we are seeing on the domestic to international mix, historically, on a pre-crisis basis, that has been 45% to 55% international and what we have begin to see is that is, in Q2 of 2020 where that is 70

[Matthew Broome:]

Okay. Thanks again.

[Operator:]

Thank you. Our next question comes from Jed Kelly with Oppenheimer. You may proceed with your question.

[Jed Kelly:]

Hey. Great. Thanks for taking my question. Just looking how your Solutions bookings and your GDS bookings are trending versus some of like the TSA data, it seems like the GDS is sort of lagging some of the overall industry recovery. But the solutions is kind of growing more in line. So, as we kind of go the next 18, 24 months, you’d sort of expect that GDS to lag in your Solutions segment to become more important. And then as a follow-up, where are you in terms of solution contracts over the next, call it, 24 months?

[Sean Menke:]

Okay. So, Jed, let me take the first part of that question. And then I’ll let Scott and Dave talk about it from a contracting perspective. You are correct, when you look at it, and I look at sort of the CRS bookings, as well as the – in the PD bookings which are the airline IT. You are seeing that. Part of the thing that we are seeing as it relates to GDS and we’ve talked about this in the past, is because there is more of a leisure mix. You are finding that, more of that is going to airline.com. And as you go back to what I was just referencing and as it relates to domestic and international and leisure and in corporate, as we see the mix begin to normalize back to pre-COVID levels or pre-crisis levels, I think you’ll begin to see that gap close. So, as we talk about, because we have a large book of our business in the GDS’ business related that goes through the GDS, but because the leisure component you are finding that you are going to have that mix issue that we are seeing right now. So that is the response to your first question. As it relates to contracting, Scott, why don’t you go first and then, Dave second?

[Scott Wilson:]

Thanks, Sean, and hey, Jed. We actually, in addition to the two deals we just announced this morning, we actually have seen some of the strongest pipeline or lots of engagement come and our price hoteliers that we have seen in our history, I think a lot of that goes through the fact that this nexus platform is now one of the most capable CRS platform in the market, but the strength of our distribution network is really important right now. And as hoteliers looking at recovery, that’s going to be a really key factor in their own recovery. So, we are very excited about the next 24 months and we hope to have more to share as this progresses forward.

[Dave Shirk:]

Jed, to as of the date add to what Sean and Scott just talk through, as you know, we talked about this for several years. Over the last three years, we’ve had a pretty major renewal cycle on our IT solution set. That continues to bode well for 2024 and 2025. The other thing, as you see here is we had some pretty sizable renewals, whether that was WestJet or Lion Air, or Comair, those were all strong renewals going forward for many years. And then, our operations wins and portfolio pieces with the likes of Jetstar, Aeroflot and Endeavor and NAYSA, those were all nice renewal cycles or wins that took place within the quarter. So, we navigate through the recovery cycle, but right now, we always have a handful of renewal cycles that we are working. But over 80% of our contracts should then renews through that 2024, 2025 period.

[Jed Kelly:]

Great. Thank you. And then, just one more quick modeling question for Doug. When we are looking for next year, I guess, you do have the best visibility on expenses. I mean, are the 4Q expense numbers will fit SG&A and tech cost? I mean, are they good baseline to model for us?

[Doug Barnett:]

Yes. They are good baseline to model up. Obviously, these are merit increases that will come, but there is a – they are a good base. I think we should make sure, you capture is the tax rate going forward, versus in this situation, our benefits or losses, you should assume a tax rate of 5% to 10%, not, not 20%.

[Jed Kelly:]

Thank you.

[Operator:]

Thank you. Our next question comes from Victor Cheng with Bank of America. You may proceed with your question.

[Victor Cheng:]

Thank you for taking the question. Just two from my side. I think about the conversation on the cost savings of $100 million for 2024, how would you think about the savings between now and then? Are they generally proportionate to the workload you migrate over to your cloud? And then, the other question is, of the approximately $200 million 2020 cost savings that you have, how much of that will be continued forward to 2021? Just thinking about the temporary headcount savings that you have, how much of that will recover and when do you see that recover? And that’s it from my side.

[Doug Barnett:]

Okay. Maybe let me take that – your two questions. One, with regard to the last quarter, we talked about the incremental $100 million savings and how that would play out. It’s really no difference in what was presented last quarter, mainly the majority of that $100 million will be realized in 2024 and beyond. Some will come in there around, but most of it will come – the majority of it will come in 2024 and beyond. With regards to the actions number, you are absolutely correct. The actions that we took in 2020 generated savings of $275 million in 2020. However, you are right. Some of those items that you referenced will not continue into 2021. What will continue into 2021 and beyond is the headcount savings of $175 million and then some of the benefit from the DXC contract, the $25 million. That $200 million will continue in 2021 and beyond.

[Victor Cheng:]

Got it. Thank you. That’s great.

[Operator:]

Thank you. Our next question comes from Neil Steer with Redburn. You may proceed with your question.

[Neil Steer:]

All right. Thanks very much. And I got two quick ones. One is a follow-on from the last answer and question. I hear if the headcount reduction is 175 in your DXC savings is 25. I presume as we gain some recovery say, through 2022, 2023, 2024 and so forth, you would naturally expect principally in that – in the headcount. So, is it right to assume that was to get an initial direct benefit of the 175 on the headcount side as the business recovers and revenues expands. That’ does go, but obviously there will be some operational leverage there, which we have to take into consideration.

[Doug Barnett:]

Well, I’ll take that and then Dave, jump in on if you’d like. I think, that the headcount that we are growing, there will be modest growth as well we’ll just try a bit, but nowhere near proportional to what the top-line will go. I think they are comfortable there we get some leverage benefits from the increased revenue streams. I think netted with the new members. We capture a workforce so if you continue to invest in the tech transformation we will touch on that. So, it’s now like, we are going to have to continue to go that past just for that initiatives. So, there will be modest growth. But they will be proportionate to the top-line growth.

[Sean Menke:]

Yes. Let me jump in, Doug on this, I think it’s important to you when you look at it and that’s where that was going to relative to what Doug have stated is, when you think about the way that we have managed through COVID-19, it was one that, yes, we did take some actions as it relates to cost reductions. Some of the things that Dave Shirk has led within Travel Solutions, has really streamlined that organization. I think that we are finding on the efficiencies of reduced headcount in some portion because we did have to look at some of our Sabre team members. But what I can tell you is the way that organization is running, I think is a lot more efficient. So, I am happy you’ll get about that. The other thing is, we are very careful in the balance of the number of employees that we let go, because we knew that there is some number of things that we needed to get accomplished, even though bookings are down, transactions are down, the level of engagement as you would imagine with the customers around the world is very high, so sales force and the people that are focused on that are there as we focus on the technology piece, they continue to move forward. So, as Doug articulated, I think I feel good where we are right now. There is always going to be a level of additional headcount that will be added in. But it’s going to be really based on what the recovery looks like.

[Neil Steer:]

Okay. Thanks. And the other question has more to do with the structural shape of the market in the future. Are you expecting and anticipating the material shift from sort of the traditional travel agency community to more of the OTA in terms of the booking mix? Or are you expecting when we get back to the fact to get back to the normalized market situation, the proportionate of bookings from OTA, post-pandemic is going to be where the booking mix rolls for OTA pre-pandemic. And I am thinking they have more to do incent with the OTA are able to negotiate on the unitary basis?

[Sean Menke:]

Yes. Good question, Neil. And it really does get into what is the shape of recovery and I think, the way that I look at it is listen, to be fair, when you really look at it from an airline perspective, a hotel perspective, and then you look at it from an agency perspective, be it OTA or be it brick and mortar TMCs, when there is less essentially demand that’s out there, there is going to be probably some rationalization that’s taking place. You would believe, you go down the path and we are really seeing this in the numbers that OTA has recovered faster than the TMCs have recovered. And in doing that, that’s Leisure-driven. I think it’s all going to be based on the mix of recovery and as I stated, Leisure will be leading that recovery and I think business will be lagging the recovery. So, when you think about it, bookings via OTA will probably be ahead and continue to be ahead of what we are seeing on a TMC basis. When we look, probably two to three years in the future, and I get asked the question often about business, business mix, I do think you have to look at it relative to duty at care and how organizations are essentially going to allow employees to travel. The first step of that is offices actually have to open for people to travel to. I think they are going to see domestic travel or short haul travel be next and then it’s going to be the international side. So, I do think it’s going to be a longer period. But, specific to your question, Neil, I think you are going to see OTA leisure recover faster than the TMC side of the equation.

[Neil Steer:]

So you are optimistic that longer term, if we say longer term, you think there is not going to be sort of a significant structural shift if everybody, say, if once they get international travel back?

[Sean Menke:]

I don’t and I go back to – and I’ve said this a couple different times in previous calls. I think you do have to go back and look at history and you look at 9/11, you look at – at actually what took place in the financial crisis. This is bigger than those two to be fair. But there was also the comment that we are not going to see a strong recovery in business than we did over a period of time. So, I think, everybody just have to be following it a little cautious and calm about recovery and what it looks like over a longer period of time.

[Neil Steer:]

Thanks very much. Thank you.

[Operator:]

And your next question comes from Victor Cheng with Bank of America. You may proceed with your question.

[Victor Cheng:]

Hi. Sorry. Just one more question from my side. I am just thinking about the – obviously, the IT capabilities that you are spending on, be it the Google partnership and on the Sabre Smart Retail Engine and Dynamic Availability or NDC, what are you actually hearing from clients on what they are interested in most? I guess, if you will, what is at that top of the party on IT spend if and when the volume it covers?

[Sean Menke:]

Yes. There is a lot in that question and I’ll let Doug talk about the cost component of this. A big part of everything you just walk through really does go back to the strategic initiatives and what’s taking place. And if I look at it relative to the retail engine, I look at it relative to things that are taking place with Google. Each and every one of the engagements that is happening on the Travel Solutions side, as well as what’s happening in Hospitality, these are key things as it relates to the opportunities, one, to retain business, but also win business going forward. And there are important things that we weren’t engaged in these things. I would it would put us at a disadvantage in the marketplace and everything that we are focused on is the transformation. So, from that perspective, I feel good with what we are doing. They are top of mind for our customers. That’s why I stated in my prepared remarks as I was walking through the initiatives, what’s happening essentially as it relates to commercial negotiations. And I would say, it’s very high, because there are those that very focused. They’ve done a lot of work as it relates to their own balance sheets. And they are focused on the opportunities they see going forward. So, I am encouraged by those discussions that are happening. Doug, I don’t know, if you want to comment on the cost side, but it really is within the envelope that we talked long.

[Doug Barnett:]

Yes. It’s within – but I think you are talking about, you are seeing interest in the customer base is, I think that Dave and Sean are talking about, vast interest, lot of commercial discussions going on with both airlines and hoteliers are right now, they can come out to be more so. Yes. They are top of mind for customers.

[Victor Cheng:]

Got it. Thank you.

[Operator:]

Thank you. And I am not showing any further questions at this time. I would now like to turn the call back over to Mr. Menke for any further remarks.

[Sean Menke:]

Great. I would like to thank everybody for joining us today on the update of the 2020 results, but also talking about how we are looking at 2021 and beyond. I do want to thank my Sabre team members around the world. I couldn’t be more proud of an organization of what they’ve actually gotten accomplished in a tough period of time. They’ve been very professional working from essentially different locations throughout the world at home as many of us have. As I sit here, as we’ve entered 2021, I also look at it and what we have accomplished really over the past three to four years, and there has been a lot of discussion and lot of questions relative to not only just how we are managing the business, but what we have done from positioning ourselves financially. And Doug and team have done an enormously – an amount of work that have allowed us to be in a position that we can lean into the opportunities. And I think that’s where I’d like to close is, in running this organization for the past four years, we are entering 2021 probably with the best pipeline that I’ve seen in an era that there is a lot of headwind. So, again, thank you for taking the time to get the update from Sabre. I look forward to talking to you in the future.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.