Despegar.com Corp

Good morning and welcome to the Despigar second 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.despigar.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. Now, I would like to turn the call over to Ms. Natalia Nirenberg of Investor Relations. Please go ahead.

Good morning, everyone, and thanks for joining us today for a discussion of our second quarter 2021 results. In addition to reporting financial results in accordance with U.S. generally accepted accounting principles, we discussed certain non-DAF 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 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 materially differ, 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 the COVID-19 pandemic and integration and performance of the businesses we acquire, including Best Day and Coins. For a description of this week, please refer to our filings 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 second quarter and update you on our strategic priorities. Alberto Lopez-Afni, 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. Thank you for joining us and for your interest in Despegar. We are pleased to report the best quarter since the onset of the pandemic. Thanks to our geographic diversification strategy, gross bookings and transactions increased 22% and 8% respectively over the first quarter of 2021. If we exclude Argentina and Brazil, gross bookings were up 64%, and transactions increased 44% when compared to the first quarter of 2021. We experienced sustained recovery in Mexico, driven in part by the day, as well as in Colombia, as most of these countries entered the peak summer travel season. Additionally, travel restrictions were less significant in these two countries, and pent-up demand contributed to the strong performance. Moreover, ASPs in the quarter were up 22% sequentially, driven mainly by a 63% increase in international transactions. Once again, we experienced a high take rate, even more so when excluding Brazil, which makes a second wave of COVID, which drove a surge in extraordinary cancellations. Also, contributing to this quarter's tax rate are the investments we have made in technology and analytics, which allow us to price more accurately, improving algorithms to capture more profitable transactions, and the contribution from this day, which has a higher tax rate, who are key drivers. In turn, we also saw non-air products capture a larger portion of our sales in the quarter. Looking at our second quarter financial results, our adjusted EBITDA loss in the quarter, which includes extraordinary charges, was about 4 million lower than the first quarter of 2020 water loss. As mentioned previously, we believe the company on a standalone basis can be breakeven on reaching quarterly gross movings of $400 million. These, excluding extraordinary charges and call center costs, resulting from customer cancellations and rescaling. Lastly, we continue to be vigilant about our cash position. As a result, our balance sheet remains healthy with over $600 million in cash. Moving next for a discussion of the lockdown travel industry on page four. Almost two years into the pandemic and our business remains disrupted by this health crisis. During the second quarter, we can call out two factors that have the most impact on our P&L. First, countries with lower restrictions. such as Mexico and Colombia, saw better travel times. By contrast, Brazil was hit with a second wave of COVID, while Argentina and Chile were impacted by another round of higher mobility restrictions imposed by their government. Second, our geographic diversification provided a seasonality offset. Following strategic acquisitions, we have generally removed the seasonality factor from our results. Now we have summer, the peak travel period all year round in our business model. Now for a few highlights by country. Starting with Mexico, the highlight in the quarter, accounting for 33% of transactions, up 700 basis points from the first quarter of 2021. Although the country still has a low vaccination rate, the travel industry has shown sustained recovery as there are very few restrictions in place and the second quarter was the start of the summer season. In turn, gross bookings were up 49% as compared to the second quarter of 2019. Moving next to Colombia. where gross bookings were back 2% about the second quarter of 2019, pre-pandemic level, with recovery driven by both domestic and international travel. Sequentially, gross bookings increased 99%. Colombia represented 22% of total transactions this quarter, and 800 basis coins increased from the first quarter of 2021. Brazil, formerly our largest market, now accounted for 25% of transactions compared to 38% in the first quarter of 2021. With the country facing a second wave of phone and the tightening of mobility restrictions, transactions were down 33% quarter over quarter. Additionally, part of this decrease is also attributable to seasonality factors, as Brazil is in the winter season, whereas Mexico and Colombia are in peak summer travel months. As a result, gross bookings were down 64% when compared with the second quarter of 2018. On the positive side, as we move to the quarter, we began to see an easing of restrictions and gross bookings needing to reach a month in the quarter. Nevertheless, this was not enough, as Argentina and Chile both experienced a tightening of mobility restrictions, with Argentina's border basically closed, thus impacting travel. On a positive note, Chile has a high vaccination rate, with 63% of the population fully vaccinated, which bodes well with future travel. Notably, the level of cancellations observed through the peak of the second wave, which comprised the month of April to June of this year, was 55% below the one observed in the same period last year, when we experienced the first COVID wave. These results not only reflect better market conditions, but also the measures we have implemented to assess the risk of transactions. Moving to slide five, LATAM on average continues to have more mobility restrictions in place than the US and Europe. Although there have been some periods when restrictions were eased, in general, the region has mostly curtailed travel as borders were closed or restricted during a big portion of the first half of the year. You can see this more clearly detailed in the chart on page five. Earlier, I spoke about the importance of Mexico towards resourcing the quarters. And, as also shown in this chart, travel is permitted in Mexico and the borders are open. That's giving us confidence that when we see similar lifting of restrictions in our other key markets, travel will once again pick up. As mentioned in previous calls, we estimate that the recovery path in Latam is lagging six months when compared to the recovery we are observing in the U.S., mainly because the vaccination rollout took longer. Fortunately, the pace of vaccination has accelerated across geographies by coming from very low levels last quarter. We are well positioned with a broad geographic coverage and customer base to capture anticipated recovery in our main market. Now, please turn to slide six. Although COVID has impacted the overall travel industry, we have continued to advance on our strategic initiatives, and in some instances, we have accelerated our plans. We launched our loyalty program in the second half of 2018 in Brazil, followed by the launch in Argentina. During the second quarter of this year, we launched this program in Mexico. In the short period that the program has been available, approximately 14% of our Mexican customers have signed up. Also in Mexico, we are almost finished integrating Best Day into our operations with both the B2C and the B2B already integrated into the Best Day platform. now we are working steadily to finalize the integration of the investigation activities vertical by the first quarter of next year in brazil we have been offering more financing options to customers coin has been key to this at coin we are implementing a risk-based pricing strategy but the interest rate that we charge depends on the risk profile of each customer based on internal and external sources of data. We are also adding B2B products that we are offering to e-commerce platforms, payment gateways and individual merchants. So far, we have two different verticals. First, we offer merchants the possibility to use Boleto Parcelat, our buy-now-pay-later payment capability. Second, we also offer our payment and antifund capabilities to companies from which we obtain a fee per client transaction. More recently, we have begun to work with some key online loan providers in Brazil, where we act as a distribution channel, obtaining a fee for each transaction that is closed. I will now turn the call over to Alberto to discuss the quarter's financial results. Thank you, Damian, and thank you all for joining us today. Moving on to slide seven, as Damian noted, Colombia and Mexico posted strong recovery trends. However, demand in Brazil, which is our most relevant market, was significantly affected by the second COVID wave. To a lesser extent, this was also the case in Argentina and Chile. This resulted in a 76% sequential increase in extraordinary cancellations to nearly $8 million this quarter. versus $4 million in the prior one. Excluding these extraordinary cancellations, we delivered a solid take rate of 14.4%, reflecting the initiatives we are undertaking on several fronts to further support profitability. Continued improvements in our algorithms are allowing us to make smarter pricing conversion decisions. Our healthy take rate also reflects the positive impact from Best Day in Mexico, given its higher share of non-air products. As we mentioned in previous calls, we believe that this take rate also reflects the industry's current circumstances. Moving on to revenues, excluding higher customers' extraordinary cancellations, we delivered a 26% sequential increase in our top line, reaching $71 million. although revenues were 39% below pre-pandemic levels. Now, please turn to slide eight. Comparably adjusted EBITDA, excluding extraordinary charges, was a loss of $10.5 million, representing a sequential improvement of nearly $5 million and the lowest quarterly loss since the COVID-19 outbreak. This compares to adjusted EBITDA losses of $14 million in the prior quarter and $31 million in the second quarter of 2020. One-time charges this quarter were nearly $12 million, most of them related to extraordinary cancellations resulting from the surge in COVID cases. Now, please turn to slide nine. We ended the quarter with a comfortable cash position of $316 million, down $10 million. While the second COVID wave put pressure on achieving higher top-line growth, it also drove extraordinary customer cancellations, as we have been discussing. As a result, we granted a higher number of vouchers to customers whose trips were impacted by the virus this quarter. This benefited working capital, with use of cash declining nearly 10 million compared to a drop of 25 million in the prior quarter. At the same time, operating cash needs declined to 1 million, down from over 7 million in the first quarter of the year. In turn, total net operational short-term obligations stood at $216 million, increasing 3% sequentially. Now, please turn to slide 10 of the key takeaways of the quarter. Let me step back a moment to go over the five takeaways of today's call. First, increased geographic diversification continued to drive revenue growth and help smoothen the asymmetrical dynamics observed across our Latin markets, both in terms of recovery trends and seasonal patterns. For example, countries facing lower restrictions, such as Mexico and Colombia, recovered at a very good pace. In fact, when excluding Argentina and Chile that faced higher travel bans, international transactions were up 120 percent, this sequentially signaling strong demand in markets more open to travel. In turn, demanding Brazil that was very weak in April and May began to improve in June, with this positive trend continuing into July. In summary, the strategy put in place over the last couple of years has allowed us to grow our business this quarter, despite the traffic restrictions imposed in Brazil due to the second COVID wave. As discussed earlier, cancellations soared this quarter, restricting how top-line growth translates into profitability. However, when excluding extraordinary cancellations, our adjusted EBITDA was better than last quarter's. Additionally, the second wave of COVID-19 and the resulting cancellations triggered the issuance of vouchers to customers, which prevented us from burning the level of cash that we reported last quarter. Second, our data remained at solid levels. with revenues excluding credit cancellations 39% below pre-pandemic levels, beating the 56% decline in gross bookings during the same period. Third, we continue advancing on our customer engagement initiatives, leveraging the consistent adoption of our loyalty program observed in both Brazil and Argentina, which reached over 900,000 members. This quarter, we successfully launched our loyalty program in Mexico. Fourth, we are expanding COIN's B2B product offering beyond Boleto Parcelado by adding new partnerships with our own verticals. And finally, in terms of ESG, we are pleased to report the launch of our inaugural corporate sustainability report prepared under the SASB framework. the e-commerce sector. This constitutes the first steps in its ESG journey, and we look forward to continue advancing on this front. Now, please turn to slide 11 for final remarks. Consolidated gross bookings in July were in line with the levels posted in June, which accounted for the highest gross bookings during the first half of the year. During third quarter 21, we expect the geographic mix to change in line with seasonality, as well as a gradual recovery in Brazil. Demand in Mexico and Colombia are expected to remain relatively stable, considering that demand in the third quarter is seasonally lower. We also plan to continue building new verticals of coin and strengthening its B2B business through the addition of platforms, payment gateways, and digital wallets. We also expect to further benefit from the implementation of risk-based pricing by focusing on expanding to other geographies. The integration of Best Day is also progressing nicely and will remain on track to complete this process by Q1 2022. The B2C migration to the SPGAD platform is allowing us to beat our internal targets for key KPIs, such as conversion rate and revenue margin in Best Day's B2C segments. The first quarter was the first time that Best Day B2C segment achieved profitability. Finally, we plan to launch a materiality assessment during the fourth quarter of this year as we continue our goal of advancing in our ESG journey. 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. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. And our first question comes from Ed Yerma of KeyBank Capital Markets. Please go ahead.

Hey, good morning, guys. Just a couple quick ones for me. I guess first, as you prepare for seasonal recovery in Argentina and Chile, are you anticipating that those travelers are domestic or are you looking at international packages? Second, it seems like you have a very interesting kind of hidden asset in coin, and it sounds like you're expanding into growth. I guess what kind of investment is necessary in the business as you build these new verticals? And then finally, just one housekeeping question on the tourist payable on the cash flow statement. How should we think about that going forward? Thank you.

Hi, Ed. How are you? This is Daniel. Thanks for the question. In terms of Argentina and Chile, and in particular not only those countries but in general, we are tracking both the evolution of domestic and international passengers. In general, you can see that domestic has recovered almost twice to three times as fast as international, we expect that to remain as a trend in the future. So to your question, yes, going forward, we're expecting Q3 and Q4 for domestic passengers to continue growing faster than international and taking longer for international passengers to catch up and reach pre-pandemic levels. I don't know if that addresses your question. It does. As per COIN, yes, we definitely are moving into not only increasing the penetration of COIN within the PEGAR and the COLAR in particular, but also moving into other verticals, and also we are exploring options to take coin to other geographies where despegar is very relevant. As you know, we will not disclose specific financial requirements for that, but I can tell you that the way we're managing the expansion and the way we're managing payouts and receivables with vendors and clients, it has not been a significant use of cash, and we don't expect that to be in the future. Ed, I'd like to join you here for your third question on two variables. And clearly, this quarter, we certainly benefited from, I think, again, the bottom line is the second wave in Brazil certainly impacted us negatively, so that actually curtailed our growth rate. Having said that, okay, it also drove a second wave of cancellations as already mentioned on the earnings release. That second wave of cancellations had a positive impact on working capital from the perspective that we granted either more vouchers or refunds, okay, that allowed us to conserve cash. If you look at the burn, the prior quarter was around $25 million. This quarter was around $10 million. So we expect that in the future quarters, our cash balance will diminish from the perspective of how many vouchers get redeemed in our platform. And at the same time, we return money to clients in the proper schedule. Having said that, you also compensate because the growth rate of the company, as we have positive working capital, we generate cash from that positive working capital. All in all, we expect that the minimum cash balance of the company will be at around year-end. I remember discussing this with you in prior calls, and the expectation was more around this second quarter. The situation keeps on getting delayed, and this tourist payable balance, again, is not something that you need to pay immediately. It's a very long cycle that actually, as I have just highlighted on this response, gets affected by the different waves of COVID in the region. Very importantly, very importantly, As you know, okay, we do pay our suppliers following checkout, okay? So in the end, okay, the expectation is that as sales recover, we will generate cash, and we only need to cancel that down following checkout. So we continue having the positive working capital dynamics that we exhibited pre-COVID.

Great. Thank you, guys. Thank you.

The next question comes from Kevin Copelman of Cowen. Please go ahead.

Hi, good morning. This is Emily on for Kevin. I was wondering if you could help us understand your market share strategy at present and once the market recovers, what tools we use to gain share, either organically or inorganically. Thank you.

Emily, hi, this is Damian. As we mentioned in the previous remarks, it was a very positive quarter in terms of share, and in particular because those share gains were obtained with the revenue margins we just described. What was remarkable is that In the strategy we've been sharing with you over the last few quarters, trying to maximize profitability, we were able to gain share because of the revenue management algorithms that we put in place in different markets. So, organically, we continue to improve our ability to remain competitive and taking advantage of specific pricing opportunities. us inorganically as part of the overall strategy of the company, you know that we're actively pursuing opportunities that help us to apply those tools in a broader scale. So basically, we are very happy with the results so far. We expect that to increase in a recovering market.

Very helpful. Thank you.

Again, if you would like to ask a question, please press star, then 1. And our next question will come from Brian Nowak of Morgan Stanley. Please go ahead.

Hi, good morning. This is Alex Wong on for Brian. Thanks for taking the question. Just to one, in your more reopened markets like Mexico and Colombia, can you maybe talk to how you may be leaning into marketing spend to capitalize on some of the pent-up demand and maybe provide a general update on what you're seeing from a competitive landscape? Second question, you mentioned a strong take rate, again, in the quarter, about a 400 basis point increase versus 2Q19. Can you help us quantify maybe how much of that may be due to the improved pricing algorithm that you talked about versus geographic mix and versus best day contribution and how durable you think that take rate is?

Okay. Alex, hi. Thanks for the question. As you know, we do not disclose specific numbers and particular by geography. What I can tell you is that we've been very careful in terms of our marketing spend by geography depending on, we believe, the different stages of the market. In Mexico and Colombia, to your specific question, as you correct your point, is where the markets during Q2 have been closer to full recovery, particularly in Colombia. Accordingly, we have been much more aggressive in our investment in those two markets. and particularly in Colombia, I can disclose at the general level that we've been gaining share significantly, and we perceive, we start to see a very similar competitive dynamic in those markets as the one prior to the pandemic. Obviously, not with just one difference, not so intense as many of our competitors have left business, if you want, but All in all, we will react in terms of marketing spend and pricing aggressiveness according to the evolution of the different markets, Mexico and Colombia being the ones closest to recovery. As far as the sustainability of the take rate, I think we mentioned in prior calls that we do not expect this to be the new normal. Desperade is a company that has significant growth potential going forward, and when the market returns to normal levels, we are ready to invest not only our full capabilities, but our financial resources to continue growing aggressively. That complemented the sacred response with the new algorithms, with the change in mix, improved mix, that we actually have more non-air, more packages, et cetera. The expectation is, as you might recall, what we discussed in the December 2019, but today that we have an 11.5-plus take rate horizon in the medium-long run, we do believe that certainly with the changing mix on the strategy, that can be improved, and we are looking more now in the 12-plus. Okay, that's long-term. That, of course, excludes all the noise that you have today with an industry that is operating at less than half its capacity.

Great. Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Damian Skokings, CEO, for any closing remarks.

Well, just wanted to thank you all for joining today, and we look forward to seeing you in our next call. Thank you very much.

The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.