On The Beach Group PLC

LSE:OTB

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Shaun Morton, executive]

Hi, everyone. Welcome to our interim results presentation. I will start with some highlights from the period. The booking momentum we had last year has continued through the first half of this financial year, resulting in bookings growth of 15%. Within this, we continue to see significant growth in our expansion areas of Long Haul and Premium, supported by our holiday perks. These perks enable us to maintain a communicable point of difference as we increase our exposure to these customer segments whilst also improving overall customer satisfaction.

In February, we've signed a partnership agreement with Ryanair. This is a big deal for our business and the industry as a whole. The agreement resolves a long-standing risk for the company around access to seat supply and enables us to move on from all litigation. More on this later.

Also during the period, we have taken the decision to simplify our B2B operation, and we'll be moving to a single brand and platform. This change will enable us to continue to access this valuable market, serve our trade partners and customers more efficiently than before and improve profitability.

Overall revenue growth and improved operating leverage for the whole group have resulted in a strong EBITDA growth, and our full year profit expectations remain in line with consensus. And finally, in line with our dividend policy, we have declared an interim dividend of 0.9p per share.

Moving on to trading. We've now had 9 consecutive quarters of record performance demonstrated on the chart in the top left. We're reporting a 22% growth in booked TTV for the first half of the year. And TTV for travel in every month of the year has increased, as shown on the chart in the bottom right. This includes 29% growth for winter and the summer forward book, which is currently 22% bigger than at this time last year. So I'll now hand over to Jon, who will take you through the financials.

[Jonathan Wormald, executive]

Thanks, Shaun. I will start with an overview of the group highlights before going into more detail on the B2C and B2C (sic) [ B2B ] segments. As Sean outlined on the first slide, we've seen strong bookings growth of 15% in the first half. ABV growth has come from mix effect with the continued growth in Long Haul and Premium holidays and a lower level of inflation than we were seeing at the end of the last financial year.

And this has resulted in group booked TTV up 22% on the prior year. Adjusted revenue is shown after writing back a GBP 2.8 million credit from historic Ryanair refund settlements, the exceptional cost of which was shown in previous periods. Adjusted revenue at 6% growth on a group basis is slightly diluted by the performance of CCH where revenue is recognized on a principal basis and which was back 8% on the prior year.

Marketing and overheads are up by 1% on the prior year, which we're particularly pleased with, given the focus that we've had this year on improved operational leverage, and the benefits of this can be seen in a 93% increase in adjusted EBITDA on the prior year. We've also shown on this slide a pro forma continuing EBITDA of GBP 10.1 million, which includes the add-back of CCH's result for the period, which will be shown as discontinued operations at the year-end, but which haven't met the accounting standard requirements as at the half year date.

Moving on to Slide 7 and the results for the B2C segment, which comprises On the Beach and Sunshine. Again, we've seen strong TTV growth with bookings up 15% and ABV growth of 8%. We've seen a movement in ABV through the half with growth in double digits coming into half 1, but moving to around 3% to 4% by the end of the half, reflecting additional seat capacity in the market and a strong late market.

Growth was particularly strong in the Premium and Long Haul markets with TTV growth of 41% for Premium and 61% for Long Haul. Adjusted revenue is up 11% on the prior year, and that is after perks investment of GBP 5.1 million, slightly up on the prior year, and Shaun will talk more to the results of our perks investment later and how that's driving both strong brand consideration and strong repeat booking rates. The adjusted revenue figure shown does also include one-off costs that were incurred prior to the signing of the Ryanair partnership agreement at the end of February. These totaled circa GBP 3 million, which equates to around GBP 11 per booking across half 1, and we've included within our underlying results rather than treating those as an exceptional cost.

Our marketing investment in half 1 followed a similar pattern to the prior year with the offline investment into TV and radio advertising, which supported the peak booking period but also continues to stimulate brand awareness for the rest of the year. The online channel remains extremely competitive with CPC inflation around 20% this year, which has driven the absolute cost up year-on-year by 23% in online marketing costs.

This reinforces our medium-term strategy to reduce reliance on online spend by improving brand awareness and differentiating our proposition through our perks suffer. Total marketing costs in half 1 are 5% down on the prior year with a full year expectation being below 40% of revenue, as previously stated.

Overheads have grown below the rate of bookings growth, predominantly growing due to wage inflation and variable debit and credit card charges. Headcount across the group is down versus September '23, and that's before taking into account the B2B restructure that's underway. This is a result of automation investments made across the business in previous periods.

Moving on to Slide 8 and the B2B performance. Shaun has talked briefly about the changes that we're making to the B2B operating model, and I'll talk briefly about the financial performance of each of the 2 businesses. So we're saying, going forward, we will report a single B2B segment, and this will be on an agent basis, consistent with the way in which we disclose and report on the B2C segment.

Starting with CPH, we've seen strong performance in CPH in the first half, which leverages an online platform similar to that of On the Beach to sell through the trade. Revenue is up 40% off the back of a 28% growth in bookings. And we've also been more focused in targeting our marketing activity, consistent with the plans that we set out at the year-end, which has resulted in CPH moving back into profit for the first half.

CCH has had a more challenging first half, reflecting the significant competition that exists on the high street and higher levels of price matching. The changes that we're making to the operating model will simplify the operations of CCH with a significantly reduced cost base going forward and leveraging group technology and operations.

Turning to Slide 9 and our cash position. Total cash has increased by GBP 32 million on the prior year, and we've made 2 changes during the half to our facilities. First of all, in December, we exercised a Plus 1 option to extend the maturity date on the facilities out to December 2026. In January, we then made the decision to exercise an accordion clause within the agreement to make available an additional GBP 25 million of funding to support future growth.

This accordion will be available until July 2025, and therefore, covers the FY '25 peak booking period. We've seen a significant increase in the trust account balance in the first half due to both the higher level of bookings overall and also customers choosing to book earlier. And the trust account balance is at GBP 196 million, which is GBP 59 million higher than the prior year.

And finally, moving to Slide 10. Slide 10 sets out the capital allocation framework, which remains consistent with the framework that we set out as part of our year-end results. And as Shaun mentioned at the start, the key point to note here is that the Board have approved the payment of an interim dividend of 0.9p per share. This is based on an expected full year payout of 25% of retained earnings, consistent with the policy that we set out in December and reflecting Board's confidence in the group's future prospects. I'll now hand back to Shaun.

[Shaun Morton, executive]

Thank you, Jon. So moving on to strategy then. I'll start with a recap of our growth strategy. On the left-hand side of this slide, we've summarized our addressable market. We define that as beach holidays sold online. The overall market size of 13 million passengers is split here between Value, Premium and Long Haul.

By investing in our Premium and Long Haul propositions, we have increased our addressable market significantly since before the pandemic. It is now 2.5x bigger in terms of volume and because the spend per head is so much higher in the expansion segments, this represents 6x the revenue opportunity. As well as having a 20% share of Value Beach customers, we have now firmly established a low but growing share of our expansion markets.

On the right-hand side, we summarize how we have evolved our long-term strategy to ensure we continue to grow our share of this wider audience. Holiday makers are increasingly engaging with us all year round. They are seeking support to every stage of their holiday journey from research and anticipation through to holiday and reminiscing.

Our strategic pillars shown in light blue are designed to meet customer needs throughout this cycle. And underneath this, the business fundamentals remain the same. We have no fixed commitment to seek sure bets and are, therefore, able to customize holidays from millions of flight and hotel combinations. We don't carry the fixed costs or operational complexity that comes with owning an airline or hotels, and we can pivot seamlessly to follow any change in customer demand or preference.

This operating model is underpinned by our technology and delivered through our native mobile apps. We will continue to differentiate our proposition, invest in service and ensure we have access to the most relevant and best value hotel and seat supply so that our customers can get more holiday for their money.

Moving on to technology. Last year was a big year for us in terms of investment in our technology. We completed migration to the cloud and upgraded our core platforms to better support our customer-facing apps. Supported by these developments, we continue to invest to ensure we can increase the accuracy and speed by which we're able to serve billions of deals to our customers, integrate with new partners quickly and reliably, like with the integration with Ryanair which was completed within 8 weeks.

We leverage native app technology to significantly improve user experience through feature development, leverage automation and AI where relevant to improve customer experience and make our operations more efficient. And of course, with the most up-to-date technology and ways of working, we can ensure we can continue to access a wide pool of tech talent.

Moving on to proposition. We continue to develop our perks proposition to enhance and extend the holiday experience through our app. We believe this will attract new customers and build loyalty and advocacy with existing customers by offering a unique value proposition, giving us a point of difference versus our competitors. Having this differentiation increases the effectiveness of our offline marketing activities, and it gives us the opportunity to talk about quality in a tangible way, which strengthens our brand, broadens our appeal and attracts new customers.

And to complete this loop, the value-add elements enhance our customers' holidays and increase the likelihood they will rebook or recommend us to friends and family. Some of the results as we show on the right-hand side include top 3 consideration of 29%, including 46% for those aware of our perks. Prompted brand awareness up at 89%, growth in 5-star TTV of 41% year-on-year, growth in Long Haul TTV of 61% year-on-year.

And as shown on the chart in the bottom right, the economics of this strategy are important. By investing in the proposition in this way, we have continued to grow these more premium bookings, which even net of the cost of perks, generate a higher revenue per booking than the value end of the market.

Moving on to the market. The market in which we operate in is healthy. Airline capacity to beach destinations for this summer is 7% bigger than last year. And the overall scheduled seat capacity to Europe as a whole is now ahead of pre-Covid levels, as shown in the chart on the right. Looking at our passenger numbers and forward order book versus these stats, we are up 15% versus last year, which is ahead of both the growth in seat capacity and also growth in ATOL licenses, which currently stand at 5% versus last year.

Moving on to the Ryanair agreement. This is a very big deal for us and a significant milestone, maintaining access to Ryanair seats and providing a good customer experience when doing so has been a significant risk and focus for our business. We are, therefore, very pleased that on the 27th of February, we signed a partnership agreement with Ryanair to enable direct access to Ryanair seats for use in our package holidays.

This agreement facilitates a smoother customer journey when booking Ryanair flights as part of one of our package holidays, and it simplifies all of our post booking operations. It also enables us to move on from the outstanding costly and disruptive litigation. More broadly, these partnership agreements are an important development for the holiday industry as a whole, and they will be good for consumers. They ensure that customers will be able to continue to benefit from the enhanced consumer protection that buying a package holiday provides whilst continuing to access the low-cost fares that Ryanair offers.

And moving on to our expansion areas and starting with Premium. As laid out earlier in the pack, there is a significant incremental revenue opportunity from growing volumes and share in mainstream premium holidays. We estimate the market is a similar size to Value Beach in volume terms, but due to higher prices, it is 2.5x more valuable. We are a key strategic partner of our hotels looking for distribution from the U.K. market and continue to add new relevant hotel product, most of which are 4- and 5-star properties.

This means our hotel supply position increasingly supports growth in this premium segment. This, combined with our enhanced proposition and the continued growth generally of this market means that On the Beach sales into 5-star products has grown by 41% year-on-year. We believe that whilst the market for premium holidays is in growth, the value end of the market is more subdued.

One key indicator of this is that there has been no price inflation in 3-star holidays versus last year. And also worth noting that over a 2-year period, compound growth for 3-star holiday sales with On the Beach is 23%.

Moving on to Long Haul. We continue to make significant progress in growing Long Haul, driven by further development of flight and hotel product, Long Haul sales were up 61% year-on-year and now represents 9% of B2C sales. This growth was supported by developments in our supply position over the last 12 months. This includes the integration of 6 additional airlines and building out our hotel portfolio. Whilst we still have a relatively small share of this significant market, our brand is now firmly associated with Long Haul Beach, and we are confident we can continue to grow this segment.

And finally, moving on to outlook. Trading momentum has continued since the half year. The summer forward order book currently stands at 22% ahead of last year. And as a result of these factors and our new Ryanair partnership, we expect to deliver our biggest summer ever. And finally, profit expectations for FY '24 remain in line with consensus expectations. Thank you for listening.