Despegar.com, Corp. (DESP) Q1 2021 Earnings Call Transcript

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Despegar.com, Corp. (DESP 3.30%)
Q1 2021 Earnings Call
May 19, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

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 Investors section of the company's website www.investor.despegar.com. [Operator Instructions] This conference call is being recorded. [Operator Instructions]

Now, I would like to turn the call over to Ms. Natalia Nirenberg, Investor Relations. Please go ahead.

Natalia Nirenberg -- Investor Relations

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 discussed certain non-GAAP financial measures and operating metrics, including foreign exchange neutral 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 substitute for or superior to GAAP financial measures, and are provided as supplemental information only.

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 COVID-19 pandemic and integration and performance of the recently acquired including Best Day and Koin. For a description of these risks, please refer to our filings with the Securities and Exchange Commission and our press release.

Speaking on today's call is our CEO, Damian Scokin, who will provide an overview of the first quarter and update you on our strategic priorities. Alberto Lopez Gaffney, our CFO, will then discuss the quarter's financial results. After that, we will open the call to your questions. Damian, please go ahead.

Damian Scokin -- Chief Executive Officer

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 capability. 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 easing of restriction in that country, we saw gross bookings increased 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 tampering demand for travel. Excluding these two markets, transactions were up 12% sequentially and gross bookings increased 14%.

As evidenced by the first quarter results, a balanced geographic diversification, we 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 laser-focused on maintaining our lenient 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 take rates over the past few quarters. And we achieved the highest level in five years within the first quarter of 2021.

Also contributing to the high take rate is an increasing share of non-air revenue. We will talk more about these, later in the call. Mobile accounted for 50% of transactions in the quarter, up 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, we achieved geographic diversification, which partially offset with lower demand. High take rate reflecting an increase in non-air among other buyers, 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 LatAm travel industry on page 4. 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 market. To begin, the residual effect 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, typically Mexico and Colombia and we are seeing some greenshoots although most recent social unrest in Colombia may affect mobility in the country. The red boxes point to countries where there has been a resurgence [Indecipherable] and restrictions have been imposed. These are Argentina, Brazil and Chile.

Impacted by the second wave, the crisis in Brazil, which was our largest market in previous quarters, was having worst moment toward the end of March. We are serving to slight recovery since then as the vaccination program is rolled out. Argentina is heading into the winter month, 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 U.S. 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 2018 levels. When restrictions are released, we can see a significant increase in demand as it is the case in Mexico where after some months of restrictions, travel trends had benefited 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 a 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 5 for a 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 market challenges. 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 profitable 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 enter 2021 as a more efficient and leaner company and more geographically diverse. Importantly, the geographic diversification also brought about [Indecipherable] making us more resilient to both this crisis and potential future growth. As noted in the green chart in the top right and as mentioned earlier, Brazil's demand was particularly hard to the resurgence of the values and gross bookings declined each month through the quarter. By contrast, Mexico gross bookings increased 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 levers, 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 to the revenue and marketing departments together, which allows for better combination and growing a higher ROI for these transactions.

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 traveling Argentina, Brazil and the Andean countries. Recent times we were able to leverage destinations with higher take rates in the South American summer month of January and February. Moving next to product mix. Low demand and restrictions from international travel main market along with internal actions coupled with the acquisition of Best Day Mexico has enabled us to drive a higher portion of non-air sales in the mix, 68% in the first quarter.

Moving next to Slide 6 for the discussion on how we are strengthening our capabilites 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 the 28th. As a reminder, trip.com is a leading provider of online travel and related services. We are making available to trip.com, our guided accommodation inventory in Latin America utilizing API, which will be available across its associated brand through its mobile app and internet web.

On the marketing front, we're encouraged as throughout the last quarters we have been seeing our marketing efficiency improve and have started to develop our brands to enhance the perception of trust and affordability. We have also taken steps to further enhance product bundling, which resulted in a 3 percentage points increase in package transactions vis-a-vis pre-pandemic levels of the first quarter of 2018. Key initiatives including improving the flow clients go through the 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 [Indecipherable] are also contributing to drive more efficient bundling.

Now please turn to slide 7. We are well prepared and have the right ecosystem in place to capture the anticipated recovery in our main markets, starting with an update on where we are with the Best Day acquisition, a key strategic asset for us. So, we deem we are already capturing synergies in the B2C online segment as the migration to Despegar platform is complete. In turn, the revenue margins improved by 120 basis points, well ahead of our expectations disclosed in our third quarter of 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 Despegar's leading technology integrated into Best Day. Thanks to this achievement, this past quarter, we presented the first time that [Indecipherable] 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 with. We started working on this project in the first quarter and we expect to conclude it in the early third quarter. Lastly, next quarter, we will start with the tech development in connections with in-destination activities, which will allow us to take this vertical to a decent level. We're excited about all the opportunities that Best Day has brought to us and we are already seeing the benefit on the two brands working together under Despegar's umbrella.

Now moving to financing and payment, where we're driving innovation in the Brazilian payment line. At Koin, we're expanding key financing solutions to other verticals beyond Decolar. Today, Koin is already available as a payment method, as a [Indecipherable] one of the leading and rapidly growing e-learning companies in Brazil. Additionally, we are also completing the integration of a company called [Indecipherable], a leading player in the B2C digital commerce. PIX, the Instant Payment developed by the Central Bank in Brazil is also now available at Decolar. 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.

Alberto Lopez Gaffney -- Chief Financial Officer

Thank you, Damian and thank you all for joining us today. Starting with slide 8, we turned in another quarter with a significantly high take rate of 14%, a highest level seen in 2016. When excluding extraordinary cancellations, the take rate reached 15.2%. This good performance was 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 position 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 negotiations with suppliers. And finally, we have also further enhanced our ability to bundle the products more efficiently as we just discussed.

Take rates are also benefited from a couple of external and 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 prefer to offer the products and services directly through [Indecipherable] platform. Moving on to the topline, revenues were generally unchanged sequentially at $52 million, as a higher take rate offset the drop in gross bookings. In turn, customer cancellations due to COVID-19 were stable at slightly over $4 million.

Now, please turn to slide 9. 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 to enhance 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. Despegar on a stand-alone basis reported an adjusted EBITDA loss of $15.5 million while Best Day & Koin contributed 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 a side point in the 20-F report, we have adopted our definition of adjusted EBITDA for 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 million, a sequential decline of $25 million. At the same time, total net operational short-term obligations stood at $201 million, up 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 resurge 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 keep a significantly higher take rate for the second consecutive quarter and 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 our consistent focus on profitability position us well as we face the second wave of the pandemic. The integration of Best Day is also moving along nicely. The B2C migration to Despegar's platform is allowing us to meet our internal targets for key KPIs such as conversion rates and revenue margin in Best Day's segment. The first quarter was the first time that Best Day's B2C segment achieved profitability. Importantly, Despegar's business on a stand-alone basis remains breakeven when excluding one-time items and additional cost-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 opportunity, 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 is unclear. 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 resurgence 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 on the second wave of COVID-19, we are lagging the northern hemisphere recovery by along 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 in the ongoing integration of Best Day and further rollout or enhancements to our loyalty programs, which is also benefiting from a record level of co-branded 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.

Questions and Answers:

Operator

[Operator Instructions] The first question comes from Ed Yruma with KeyBanc Capital Markets. Please go ahead. Mr. Yruma, your line is open. Please go ahead with your question. Okay, moving on to the next questioner. The next question comes from Kevin Kopelman with Cowen & Company. Please go ahead.

Kevin Kopelman -- Cowen & Company -- Analyst

Great. Thanks a lot. So I wanted to ask about 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 do develop once you're into the bigger part of the recovery over the next year plus? Thanks.

Alberto Lopez Gaffney -- Chief Financial Officer

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

Operator

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

Alberto Lopez Gaffney -- Chief Financial Officer

Are you OK? Can you hear me?

Operator

Yes, please go ahead.

Alberto Lopez Gaffney -- Chief Financial Officer

Yes, sorry, I think we got disconnected and just switching to the backup plan. So what I would say is.

Operator

Yes.

Alberto Lopez Gaffney -- Chief Financial Officer

Structural cost in the $28 million, $30 million area, OK? Following that structural cost will grow, let's say, at around 50% of the transaction growth gets to the level of around let's say 40% to 50% of transactions -- of 2019 transaction levels. This assumption remains on hold assuming that salary increases, OK, in the regions we operate in dollar terms, OK and -- 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, OK? But that is how we need to think about structural costs overall.

Kevin Kopelman -- Cowen & Company -- Analyst

Got it, that's very helpful. Thanks. And then, just a couple of other quick ones. So as you look to the second quarter here, and you're talking about gross bookings volumes being similar I believe Q-over-Q, is that -- 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 market or do you have some share gains built in or perhaps some share losses? Thanks.

Alberto Lopez Gaffney -- Chief Financial Officer

No. I think importantly, the strategy of the company since the kickoff of the pandemic, the fact has been that the company is running the company for profitability, for cash flow generation or cash preservation. But again, the limit is for the company, not to erode its market share, OK? So those are the two key guiding principles, OK? With regards to the actual performance in bookings, OK, you might have seen that in some of either the airlines or competitors are actually expecting a strong performance of Latin America by the summer, OK? 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 dissimilar to -- not very different from Q1 but again after vaccination programs rollout and also as the South America in particular gets out of the fall, winter season, OK, compounding to, as I said before, with vaccination rollout, the expectation is that we should have a good summer season, OK? And as a comparison, and I'm not saying that we will have the same levels of travel activity, clearly [Indecipherable] can see us benefited from the two factors that I have just highlighted, OK? On one extreme we actually have the North American market.

Kevin Kopelman -- Cowen & Company -- Analyst

Thank you very much. That's very helpful.

Alberto Lopez Gaffney -- Chief Financial Officer

You're very welcome.

Operator

[Operator Instructions] And I see that we have a follow-up from Mr. Kopelman. Mr. Kopelman, please go ahead with your follow-up. You're welcome.

Kevin Kopelman -- Cowen & Company -- Analyst

Thank you very much. Yeah, could you just give us a quick update on any acquisition activity that you may be pursuing or the current environment there?

Damian Scokin -- Chief Executive Officer

Yes. Hi, Kevin, this is Damian. Usually we keep very active conversations with a lot of potential targets and partners. Obviously, we remain prudent in terms of prices and aggressiveness those who are willing to pay. But conversations keep intensifying and as we usually say when we have concrete yields, we will share them with you. As we have already said, inorganic acquisition is a key component of the company's strategy, but as we proved in the past, we remain very prudent on what that are going to validate that price.

Kevin Kopelman -- Cowen & Company -- Analyst

Thanks Damian.

Operator

[Operator Instructions] The next question comes from Brian Nowak with Morgan Stanley. Please go ahead.

Alex Wong -- Morgan Stanley -- Analyst

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, was wondering if you can focus on the revenue yield management side, on the internal front? And then you talked about sort of supplier group relying more on Despegar given their own marketing challenges. So, I was wondering how sustainable do you think that is as we sort of progress through the recovery? The second question is, I think you called out some improvements in marketing ROI. I wonder if you could provide some color there whether that's mostly driven by a continued shift to mobile or are there other factors driving sort of better ROIs in the performance marketing channels?

Alberto Lopez Gaffney -- Chief Financial Officer

Okay. Sure, Alex. Good morning. Again when we talk about marketing clearly, one of the key on course of the company marketing expenditure strategy or markeing investment strategy is mobile and over mobile is a direct connection, OK? So what we are seeing is that the share of the direct connection continues to be very much in line with what the target that we set for the company back then -- more than the targets we have the pivot that we displayed back in 2019, which is close to 70% of the overall traffic of our website actually goes either through the app or direct or other unpaid channels, OK? So we continue with that idea. And we believe that even of as the app continues to solidify when it comes to the product offering and capabilities, I think we are in a strong position on that point. Going to your very first question on take rate, OK, clearly -- on take rate, I would like to maybe deconstruct the answer in at least two points.

The first one is, importantly today the priority 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 the strategy, not co-market share gains, as it was in the past, but given the pandemic, in order to preserve cash and minimize losses, OK, the companies have higher price strategy in relative terms to the ones we used to have and that is a contributor to higher take-rate. Secondly, while we're seeing clearly, as you well pointed out, suppliers relying on Despegar to sell their inventory. I think we continue to solidify our relationships, OK? We have strengthened our sourcing power through the integration of Best Day activities and prior to that, integration of Viajes Falabella, OK? 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 supplier's inventory, OK, we believe our suppliers are also benefited from us, OK?

With regards to revenue yield or revenue management, OK, I think as loyalty program continue to expand south, we already over 800,000 members in the region with limited marketing activity of these loyalty programs given the COVID-19 situation, OK? We have the four levers that work into the take rate function that are -- into the profitability function that are marketing expenditure, financing, pricing and now the loyalty program. So we believe that what, the way we are looking at the prior 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 a leaner side, a higher pricing level for cash preservation purposes. We are not seeing that the current situation that this -- that the different factors at work in the current pandemia will not be there as they are in the future, i.e., we should be able, leaving pricing aside, to deliver a stronger take rate and reach the level we had in 2019 and '18.

Alex Wong -- Morgan Stanley -- Analyst

Great. Thank you.

Alberto Lopez Gaffney -- Chief Financial Officer

You're welcome.

Operator

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Damian Scokin for any closing remarks.

Damian Scokin -- Chief Executive Officer

All right. Thank you very much, operator. So, 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.

Operator

[Operator Closing Remarks]

Duration: 43 minutes

Call participants:

Natalia Nirenberg -- Investor Relations

Damian Scokin -- Chief Executive Officer

Alberto Lopez Gaffney -- Chief Financial Officer

Kevin Kopelman -- Cowen & Company -- Analyst

Alex Wong -- Morgan Stanley -- Analyst

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