Despegar.com Corp

Good morning and welcome to the DesPegar first quarter 2021 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 for you to ask questions at the end of today's presentation. This conference call is being recorded. As a reminder, all participants will be in listen-only mode. If you require operator assistance, please press star then zero. Now I would like to turn the call over to Natalia Nirenberg, Investor Relations. Please go ahead.

Natalia Nirenberg Good morning, everyone, and thanks for joining us today for a discussion of our first quarter 2021 results. In addition to reporting financial results in accordance with U.S. generally accepted accounting principles, we discuss certain non-GAAP financial measures and operating metrics, including foreign exchange mutual calculation. 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 substitutes for or superior to GAAP financial measures, and I provided supplemental information on this. Before we begin our prepared remarks, allow me to remind you that certain statements made during the course of the discussion may constitute forward-looking statements, which are based on management's current expectations and beliefs, and are subject to a number of risks and uncertainties that could cause actual results to not clearly be heard, including factors that may be beyond the company's control. These include, but are not limited to, expectations and assumptions related to the impact of COVID-19 pandemic and the integration and performance of the businesses we acquire, including Best Day and Connie. For a description of this week, please refer to our filing with the Securities and Exchange Commission and our press release. Speaking on today's call is our CEO, Damian Skokin, who will provide an overview of the first quarter and update you on our strategic priorities. Alberto Loquehazni, our CFO, will then discuss the quarter's financial results. After that, we'll open the call to your questions. Damian, please go ahead.

Thank you, Natalia, and good morning, everyone. We hope that you and your families are staying safe and healthy. Last year, our first quarter call was focused on how we were going to weather the biggest crisis our business has ever faced. Now, one year after the pandemic and the global lockdowns began, we have demonstrated our operational resilience while improving our strategic capabilities. In the first quarter, we executed well against our priorities. Now, let me discuss it separately, starting with geographic diversification. We significantly increased our presence in Mexico with the acquisition of Best Day, and coupled with an increase of restriction in that country, we saw gross bookings increase 12% sequentially. Mexico, in turn, accounted for a larger percentage of our gross bookings in the quarter. We also experienced an active recovery in Colombia and a slight pickup in Chile. By contrast, Brazil and Argentina experienced a second wave of COVID-19, sampling demand for travel. Excluding these two markets, transactions were up 12% sequentially and gross bookings increased 14%. As evidenced by the first quarter's results, A balanced geographic diversification will generate more sustainable growth going forward. Importantly, our market share has not been impacted by the volatility across the geographies where we operate. Moving next to our focus on profitability. As you have heard from us before, we are less focused on maintaining our leaning structural cost base. We achieved our target level in second half of 2020 as expected. And in the first quarter, we were able to maintain this cost in line with prior quarters. This focus on profitability has resulted in exceptionally high tech rates over the past few quarters. And we achieved the highest level in five years in the first quarter of 2021. Also contributing to the high tech rate of non-air revenue. We will talk more about these later in the call. Mobile accounted for 50% of transactions in the quarter at 200 basis points from the first quarter of 2018, a pre-pandemic period. Mobile is a cost-efficient means for us to acquire and market to customers. Summarizing our first quarter results, to achieve geographic diversification, which partially upsets global demand. High take rate reflecting an increase in non-air among other variables. Tight focus on cost controls and successful non-paid marketing programs. Adjusted EBITDA loss largely in line with the prior quarter and a solid cash position. Moving next for a discussion of the Latin travel industry on page four. COVID has and still does present challenges for our business. Let me give you some color on how we are seeing travel restrictions in the key Latin American markets. To begin, residual effects on travel are still present, but we believe we are most likely through the worst of it. Looking at the chart on the left, the green boxes point to countries where restrictions are easing. specifically Mexico and Colombia. And we are seeing some green shoots, although most recent social unrest in Colombia might affect mobility in the country. The red boxes point to countries where there has been a resurgence of the virus and restrictions have been imposed, with Argentina, Brazil, and Chile impacted by the second wave The crisis in Brazil, which was our largest market until this quarter, was at its worst moment towards the end of March. We are observing a slight recovery since then, as the vaccination program is rolled out. Argentina is heading into the winter months, a period of slower travel, and the vaccine rollout is moving very slowly, with only 18% of the population having received the first dose. The picture in Chile is mixed, with the country imposing some select restrictions in certain regions. In contrast, Chile has been successful with the vaccine rollout with 48% of the population having received at least one dose. As a point of reference, the US is at around 48% of the population having received a first dose. As a result, we believe the situation in Chile will be getting better over the next few months. I would like to call your attention to the chart on the right which shows passenger strength in Brazil and Mexico for the past six months indexed to pre-pandemic 2019 levels. When restrictions are lifted, we can see a significant increase in demand as it is the case in Mexico. where after some months of restrictions, travel trends are benefiting not only from a decline in the number of cases, but also from the arrival of the spring and summer season. Exactly the opposite side is Brazil, where the industry contracted in light of the very severe restrictions and a significant increase in the number of COVID cases, which started to subside in April. While the pandemic is still with us and some geographies are experiencing second waves, examples like the one we see in Mexico show us that people are eager to travel again. As we have commented in the past, we are not expecting linear recovery as restrictions are released at different times in each country. This is also correlated with the vaccine rollout, which will be key for consumers to regain confidence in travel. Moving next to slide five for discussion on how we are positioned to weather this ongoing challenging environment. As we reflect upon the past year, I could not be more pleased with how far our organization has come and how well we have responded to the market challenge. As we enter our second year with the current COVID crisis, we remain diligent in ensuring a solid liquidity position and laying the groundwork for possible growth when travel resumes in a meaningful way. In turn, We ended the quarter with a cash position of $326 million. Furthermore, due to actions we commenced over one year ago, we entered 2021 as a more efficient and leaner company and more geographically diverse. Importantly, Geographic diversification also brought about different cis-urbanity patterns, making us more resilient to both this crisis and potential future ones. As noted in the green chart in the top right, and as mentioned earlier, Brazil's demand was particularly hard with the resurgence of the virus, and growth rankings declined each month through the quarter. By contrast, in Mexico, gross bookings increase each month throughout the period. As part of our profit maximization strategy, we are taking our revenue toolkit to the next level. We have been optimizing our spend allocation to achieve the maximum marginal efficiency across our commercial levels, customer fees, installment, marketing, and loyalty. This was the result of intense testing. These actions have allowed us to further diversify our traffic sources and to use our segmentation capabilities to drive loyalty among higher LTV customers. We have also made some changes internally, putting revenue and marketing departments together, which allows for better coordination and driving a higher ROI for each transaction. On the sourcing side, we have been working diligently with our travel partners since the onset of the pandemic, which resulted in the offering of better package options for travel in Argentina, Brazil, and the Andean countries. At the same time, we were able to leverage destinations with higher trade rates in the South American summer months of January and February. Moving next to Tolagmics. low demand and restrictions for international travel in the main market along with internal actions coupled with the acquisition of Best Day in Mexico have enabled us to drive a higher portion of non-layer sales in the mix, 68% in the first quarter. Moving next to slide six for the discussion on how we are strengthening our capabilities for the recovery. We remain focused on our long-term objectives. We have been expanding our reach, but working with additional travel partners. The API connectivity with Trip.com went live on April 28th. As a reminder, Trip.com is a leading provider of online travel and related services. We are making available to Trip.com our direct accommodation inventory in Latin America, utilizing its API. It will be available across its associate brands, to its mobile apps and internet websites. On the marketing front, we're encouraged as throughout the last quarters, we have been seeing our marketing efficiency improve and have further developed our brand to enhance the perception of trust and affordability. We have also taken steps to further enhance product bundling, which resulted in a 3% increase in package transactions vis-à-vis pre-pandemic levels of the first quarter of 2019. Key initiatives include improving the flow clients go through when bundling products by themselves, either on our app or on the website, and ensuring they find the best offers based on machine learning predictive technology. The combination of the inventory from the different brands and the cross-selling of activities and carbon tax are also contributing to drive more efficient banking. Now, please turn to slide seven. We are well prepared and have the right ecosystem in place to capture the anticipated recovery in our main market. Started with an update on where we are with the best data acquisition, a key strategic asset for us. To begin, we are already capturing synergies in the B2C online segment as the migration to the SPGAD platform is complete. In turn, The revenue margins improved by 120 basis points, well ahead of our expectations disclosed in our third quarter 2020 earnings call. In addition, the conversion rate increased by 30 basis points. Progress in the integration process is also observed in the 5.4 percentage point increase in gross margins of the B2C offline segment. These good results are driven by the use of Testeras living technology integrated into Best Day. Thanks to this achievement, this past quarter represented the first time that Best Day overall B2C segment achieved profitability. In terms of the B2B segment, in the coming months we will complete the migration of the different white labels with which Best Day has arrangements. We started working on this project in the first quarter and expect to conclude it in the early third quarter. Lastly, next quarter we will start with the tech development in connection with the in-destination activities which will allow us to take this vertical to a different level. We're excited about all the opportunities that Best Day has brought to us, and we have already seen the benefit of the two brands working together under Best Payers' umbrella. Now, moving to financial and payment, where we're driving innovation in the Brazilian payment environment. At Coin, we're expanding this financing solution to other verticals beyond the Collab, Today, Coin is already available as a payment method as a post-gravel segment of the Complica, one of the leading and rapidly growing e-learning companies in Brazil. Additionally, we are also completing the integration of CoinCoin Vitex, a leading player in the B2C digital commerce. Sixth, the instant payment developed by the Central Bank in Brazil is also now available at the Colabro. With only two weeks since implementation, already 5% of transactions at Decolar were paid through PIX. In line with our focus on cost controls, PIX allows savings of 95% per transaction when compared to other payment methods. I will now turn the call to Alberto to discuss the quarter's financial results. Thank you, Damian, and thank you all for joining us today. Starting with slide eight, we turned in another quarter with a significantly high take rate of 14%, the highest level since 2016. When excluding extraordinary cancellations, the take rate reached 15.2%. These good performance were driven by a mix of internal and external factors. On the internal side, we are seeing the benefit of several strategic initiatives implemented to enhance sustainable profitability. First, the acquisition of Best Day, which has a better take rate. Second, the improvement introduced to our revenue toolkit, as Damian just noted, is allowing us to take smarter decisions when it comes to capturing transactions. Third, we are leveraging our scale, enhanced by the acquisition of Best Day and undertaking better negotiation with suppliers. And finally, We have also further enhanced our ability to bundle products more efficiently, as we just discussed. Take-aways also benefit from a couple of external temporary factors triggered by the pandemic. For example, we are seeing that in today's environment, many suppliers are faced with lower marketing budgets themselves and finding it more difficult and or too costly to sell via performance marketing channels, and preferred to offer their products and services directly to the display ad platform. Moving on to the top line, revenues were generally unchanged sequentially at $52 million, as the higher take rate offset the drop in guest bookings. In turn, customer cancellations due to COVID-19 were stable at slightly over $4 million. Now, please turn to slide nine. As reported, first quarter 21 adjusted EBITDA has been relatively in line with those of the previous quarter. On excluding extraordinary charges, adjusted EBITDA was a loss of $14.1 million in first quarter 21 versus a loss of $9.4 million in fourth quarter 20. mainly due to higher fulfillment costs and enhanced customer service levels in light of COVID-19 second wave in the region. One-time charges this past quarter were mostly in connection with extraordinary cancellations due to COVID-19. Esperanza, on a standalone basis, reported an adjusted EBITDA loss of $15.5 million, while Best Day and Coins contributed an adjusted EBITDA loss of $4.5 million. These metrics still have not captured the full potential of the synergies from the integration of the recent acquired companies. Additionally, and just as a side comment, in the 20F report, we have adapted our definition of adjusted EBITDA to the current circumstances and excluded restructuring charges and acquisition transaction costs. These results are based on this new definition. Now, please turn to slide 10. We closed the quarter with a strong cash position of nearly $326 billion, a sequential decline of $25 million. At the same time, total net operational short-term obligations stood at $201 million. at 4% when compared to the prior quarter. We obtained a positive contribution of nearly $7 million in working capital as we continued collecting our receivables while we granted vouchers to customers whose trips were impacted by the second wave of COVID-19. At the same time, Operating cash needs declined quarter on quarter by nearly $28 million to $7 million in the quarter. This compares to use of cash from operating activities of $68 million in the same quarter last year. Now, please turn to slide 11 to wrap up the key takeaways of the quarter. Our greater geographic diversification contributed to smoothing top-line volatility in the recovery trends and different seasonality across the region. Mexico and Colombia experienced the strongest recoveries in demand, driven by domestic leisure travel. By contrast, Brazil and Argentina saw the sharpest contractions as they faced a resurgence of the virus. At the same time, Our recent acquisitions, together with enhancement to our revenue toolkit and a higher share of non-air revenues, have allowed us to achieve a significantly higher take rate for the second consecutive quarter, the highest in the past five years. We have been successfully navigating this pandemic since its onset and believe that our strong cash position, streamlined operations, and consistent focus on profitability position as well as we face the second wave of the pandemic. The integration of Best Days is also moving along nicely. The B2C migration to the Speraz platform is allowing us to meet our internal targets for key KPIs, such as conversion rate and revenue margin in Best Days segment. The first quarter was the first time that Best Days B2C segment achieved profitability. Importantly, Espejada's business on a standalone basis remains breakeven when excluding one-time items and additional costs related to COVID-19. During the first quarter, we also completed the API connectivity with our travel partner Trip.com. Finally, our marketing strategy that prioritizes unpaid channels to drive direct traffic continues to deliver good results. Now, Please turn to slide 12 for final remarks. The past year has been one of a change, challenge and opportunity, during which we have shown incredible resilience, creativity, and focus as one team, from navigating the pandemic to generating momentum as we execute on our strategic priorities. We know we have both headwinds and tailwinds this year. the balance and degree of which isn't clear. As the year progresses, we hope to get more clarity around vaccine rollout, the scale and duration of economic recovery and demand for travel. Despite uneven travel recovery trends in early 2021, impacted by resurgent of the virus, as we go through the year, we expect Mexico to continue on its recovery path and other countries to eventually follow. We know that in an environment that is changing as fast as this one, demand recovery will be choppy. Note that we were hit by the second wave one quarter later than the Northern Hemisphere. But due to seasonality, it should take us one more quarter to begin to recover as we are now entering the winter season. We would expect that by the third quarter, Latam will be in a better position. In summary, given the seasonality patterns and the late impact of the second wave of COVID-19, we are lagging the Northern Hemisphere recovery by a long six months. Beyond seasonality, relative deployment of vaccination programs should be considered as we contrast Latin America with the Northern Hemisphere. Building on the work we began in 2020, we will continue to drive near-term cost and operational improvements that protect our bottom line while also taking actions to strengthen the company's long-term position for growth. Included is the ongoing integration of SDA and further rollout or enhancements to our loyalty programs, which is also benefiting from a record level of complex credit cards. while some uncertainty remains in our markets. We have positioned the company well in terms of future potential growth. This concludes our prepared remarks. We are ready to answer your questions. Operator, please open the line for questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. Please limit yourself to one question and one follow-up, and then you can return to the queue. At this time, we will pause momentarily to assemble our roster. The first question comes from Ed Druma with KeyBank Capital Markets. Please go ahead. Mr. Iruma, your line is open. Please go ahead with your question. Okay. Moving on to the next questioner. The next question comes from Kevin Koppelman with Cohen and Company. Please go ahead.

Great. Thanks a lot. So I wanted to ask about structural costs, the structural costs and the run rate and the key trends there. Basically, how do you see those playing out both for the second quarter? And then if you can also give us an update on how you would expect us to develop once you're into the bigger part of the recovery over the next year plus. Thanks.

Kevin, good morning. Alberto Lopez-Garne here addressing your question. So on structural costs, we continue with the same thesis that we have discussed in prior calls, that is that structural costs will be constant in this, let's say, $29, $30 million level, okay, until transactions are close to, let's say, 50% between 45% or 40% to 50% of 2019 levels. Following that, the expectation is that overall structural cost should grow approximately at 50% to 60% of transaction growth, demonstrating the operational leverage of the company.

Just one moment. There has been an interruption. Please stand by. Ms. Nirenberg, if Mr. Alberto would like to continue, please.

I'm okay. Can you hear me?

Yes, please go ahead.

Yeah, sorry. I think we got disconnected and just switching to the backup plan. So what I would say is... Yes. Structural cost in the $28-$30 million area. Following that, structural cost will grow at around 50% of transaction growth. It gets to the level of around 40-50% of 2019 transaction levels. This assumption remains on hold, assuming that salary increases in the regions we operate in dollar terms. okay, do not affect overall structural cost. And as you know, that is a function of inflation rates in the country, in the different countries, and, of course, in nominal FX rates, okay? But that is how we need to think about structural costs overall.

David Plylar- You got it. That's very helpful. Thanks. And then just a couple other quick ones. As you look to the second quarter here, and you're talking about gross bookings volumes being similar, I believe, Q over Q, how does that compare to what you're seeing in the overall markets? Is that in line with what you're expecting for the overall markets? Or do you have some share gains built in or perhaps some share losses? Thanks.

No, I think importantly the strategy of the company since the kickoff of the pandemic effect has been that the company is running the company for profitability, for cash regeneration or cash preservation. But again, the limit is for the company not to erode its market share. So those are the two key guiding principles. With regards to the actual performance in bookings, you might have seen that Some of either the airlines or competitors are actually expecting a strong performance of Latin America by the summer. But at the same time, we also believe that we need to be very prudent when it comes to providing visibility of what will be the sector performance. The expectation is that second quarter is going to be not very different from Q1. But again, as the vaccination programs roll out and also as the South American particularly gets out of the fall and winter season, okay, compounded, as I said before, with vaccination rollout. the expectation is that we should have a good summer season, okay? As a comparison, and I'm not saying that we have the same levels of travel activity, clearly the Northern Hemisphere is benefiting from the two factors that I have just highlighted, okay? At one extreme, we actually have the North American mark.

Thank you very much. That's very helpful.

You're very welcome.

Once again, if you have a question, please press star then 1 on a touch tone phone. And I see that we have a follow-up from Mr. Koppelman.

Mr. Koppelman, please go ahead with your follow-up. You're welcome. Thank you very much. Could you just give us a quick update on any acquisition activity that you may be pursuing or the current environment there? Yes. Hi, Gary.

Do you hear me? Yes. uh as uh usually we keep very active conversations with a lot of potential targets and partners uh obviously we remain prudent in terms of uh prices and aggressiveness that we're willing to pay but the conversations keep keep intensifying and as we usually say when we have concrete news we will share them with you as we repeatedly said inorganic acquisition is a key component of the company strategy but as we proved in the past we remain very prudent on what are we going to validate as a price got it thanks man

Again, if you have a question, please press star then one. The next question comes from Brian Nowak with Morgan Stanley. Please go ahead.

Hi, good morning. This is Alex Wong on for Brian. Thanks for taking the question. First one, Alberto, you talked about some of the internal and external factors driving the take rate improvement. And in particular, I was wondering if you can focus on the, you know, revenue yield management side on the internal front. And then you talked about sort of suppliers relying more on Deskbook or given their own marketing challenges. So how sustainable do you think that is as we sort of progress through the recovery process? The second question is, I think you called out some improvements in marketing ROI. I wonder if you can provide some color there, whether that's, you know, mostly driven by continued shift to mobile, or there are other factors driving sort of better ROIs in the performance marketing channels.

Okay, sure. Good morning. And then we'll start with you. Marketing clearly want to keep key anchors of the company marketing expenditure strategy or marketing investment strategy. is mobile and over mobile is a direct connection. So what we're seeing is that the share of the reconnection continues to be very much in line with the target that we set for the company back then More than the targets, the figures that we displayed back in 2019, which includes 70% of the world traffic of our website, actually goes either through the app or with direct typing or other unpaid channels. So we continue with that idea, and we believe that even as the app continues to solidify when it comes to the product offering and capabilities, I think we were in a strong position on that point. Going to your very first question on take rate, on take rate, I think I would like to maybe deconstruct the answer in at least two points. The first one is, importantly, today the PR is delivering an extraordinarily high take rate. And that extraordinary high take rate, of course, has various factors that drive it. But one factor that we should not lose sight is that the company is running its strategy not for market share gains, as it was in the past, but given the pandemic, in order to preserve cash and minimize losses, the companies have a higher price strategy in relative terms to the ones we used to have, and that is a contributor to higher take-away. Secondly, what we're seeing is clearly, as you all pointed out, suppliers relying on the SPEDAD to sell their inventory. I think we continue to solidify our relationships. We have strengthened our sourcing power through the integration of the day-to-day activities, and prior to that, the integration of the Yakut Falabella factory. So clearly, I think we have a more robust set of sourcing partners that we are benefiting from. And at the same time, given the capillarity we have in the region and given how well we connect and how well we market our suppliers' inventory, we believe our suppliers are also benefiting from us. With regards to revenue yield or revenue management, I think as the loyalty program continues to expand itself, we already have over 800,000 members in the region with limited marketing activity of this loyalty program given the COVID-19 situation. We have the four levers that work into the profitability function that are marketing expenditure, financing, pricing, and now the loyalty program. So we believe that the way we are looking at the operations is that we are building in the context of COVID-19 a much better company, a much more solid company with core competencies that should pretty much bring to bear an earning power for the company once we get back to 2019 levels. But we are not seeing, leaving aside a higher pricing level for cash preservation purposes, we are not seeing that the current situation, that the different factors at work in the current pandemia will not be there for the state in the future, i.e., and should be able, leaving pricing aside, to deliver stronger trade rates vis-a-vis what we have in 2019 and 2018.

Great, thank you.

You're welcome. Once again, if you have a question, please press star then 1 on a touch-tone phone. This concludes our question and answer session. I would like to turn the conference back over to Samihan Skokin for any closing remarks.

Thank you very much, operator. Just to close, wish to all of you remain healthy and safe. And thank you for joining us today. And we look forward to talking to you again with the next earnings call. Thank you very much.

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