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Despegarcom, Corp (DESP -3.13%)
Q2 2021 Earnings Call
Aug 19, 2021, 8:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good morning, and welcome to the Despegar Second 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. There will be an opportunity for you to ask questions at the end of today's presentation. [Operator Instructions]

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

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Natalia Nirenberg -- Investor Relations

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 US Generally Accepted Accounting Principles, we discuss 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 the COVID-19 pandemic and integration and performance of the businesses we 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 second quarter and update you on our strategic priorities; Alberto Lopez Gaffney, our CFO, will then discuss the quarter's financial results. After that, we'll open the call to your questions.

Damian, please go ahead.

Damian Scokin -- Chief Executive Officer

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 32% 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 certain recovery in Mexico, driven by Best Day, as well as in Colombia as most of these countries entered their pick 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 63% increase in international transactions, but again we experienced a high take rate even more so when excluding Brazil, which faced a second wave of COVID, which drove a surge in extraordinary cancelations. Also contributing to this quarter's take rate are the investments we have made in technology and [Technical Issues], which allow us to price more accurately, improving algorithms to cut through more profitable transactions and the continuation from Best Day, which have higher take rate were key drivers.

In turn, we also saw non-air products capture larger portion of our second quarter. Looking at our second quarter financial results, our adjusted EBITDA loss in the quarter, which exclude extraordinary charges was somewhat $4 million lower than the first quarter of 2021 results. As mentioned previously, we believe the company on a stand-alone basis can be breakeven when reaching quarterly gross bookings of $400 million. These excluding extraordinary charges and call center costs resulting from customers cancellations and rescheduling. Lastly, we continued to be vigilant about our cash position. As a result, our balance sheet remains healthy with over $300 million in cash.

Moving next for a discussion of the LatAm 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 had the most impact on our P&L. First, countries with lower restrictions [Technical Issues] Mexico and Colombia, so better travel trends. By contrast, Brazil was hit with the second wave of COVID, while Argentina and Chile were impacted by another round of higher mobility restrictions imposed by their governments. Second, our geographic diversification provided the 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, while gross bookings were about 2% above the second quarter of 2019 pre-pandemic levels with recovery driven by both the Mexico and international travelers. Sequentially, gross bookings increased 99%. Colombia represented 22% of total transactions this quarter, an 800 basis points increase from the first quarter of 2021.

Brazil firmly 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 COVID and a tightening of more meaningful 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 2019, and the positive sign as we move through the quarter where we tend to see an easing of restrictions and gross bookings will improve each 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 safer travel. Notably, the level of cancellations observed [Phonetic] through the peak of the second wave would comprise the months 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 inter transaction.

Moving to Slide 5, 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 these more clearly detailed in the chart on Page five. Earlier, I spoke about the importance of Mexico to our results in the quarter. And as also shown in this chart, travel is permitted in Mexico and their borders are open. Thus giving us confidence that when 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 with our travel in the US, 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 broad geographic coverage and capital base to capture anticipated recovery in our main markets.

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 [Phonetic] in Brazil followed by the launch in Argentina. And during the second quarter this year we launched this program in Mexico. In the short period that the program has been available, approximately 13% 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 Despegar platform.

Now we are working steadily to finalize the integration of the In-destination activities verticals by the first quarter of next year. In Brazil, we have been offering more financing options to customers. Koin has been key to this. At Koin, we are implementing a risk-based pricing strategy, where 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 Parcelado, our buy, now pay later payment capability. Second, we also offer our payments an anti-fraud capabilities to companies from which we're taking a fee per client transaction. More recently, we have begun to work with some key online loan providers in Brazil, where we are as a distribution channel paying the fee for each transaction that is closed.

I will now turn the call over 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. 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 customer's 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. Comparable 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 of the 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. These benefited working capital, with the 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, for 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 helped to smoothen the asymmetrical dynamics observed across our LatAm 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%. These sequentially signaling strong pent-up demand in markets more open to travel. In turn, demand in 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 we put in place over the last couple of years has allowed us to grow our business this quarter, despite the travel restrictions imposed in Brazil, due to the second COVID wave. As discussed earlier, cancellations for this quarter, restricting our top line growth translates into profitability. However, when excluding extraordinary cancellations, our adjusted EBITDA was better than last quarters. 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 take rate remained at solid levels, with revenues excluding extraordinary 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.

Four, we are expanding Koin's B2B product offering beyond Boleto Parcelado by adding new partnerships to turn our 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 for the e-commerce sector. These constitutes that they are 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 the 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 at Koin on strengthening its B2B business with addition of platforms, payment getaways and digital wallets. We also expect to further benefit from the implementation of risk based pricing, while focusing on expanding to other geographies. The integration of Best Day is also progressing nicely and we remain on track to complete this process by Q1 '22.

The B2C migration to Despegar's platform is allowing us to beat our internal targets for key KPIs, such as conversion rate and revenue margin in Best Day's B2C segment. 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 question. Operator, please open the line for questions.

Questions and Answers:


We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Ed Yruma of KeyBanc Capital Markets. Please go ahead.

Ed Yruma -- KeyBanc Capital Markets -- Analyst

Hey, good morning, guys. Just a couple of quick ones from me. I guess, first as you prepare for seasonal recovery in Argentina and Chile, are you anticipating that those travelers are domestic or you're looking at international packages?

Second, it seems like you have a very interesting, kind of, hidden asset in Koin 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.

Damian Scokin -- Chief Executive Officer

Hi, Ed. How are you? This is Damian. 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 3 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.

Ed Yruma -- KeyBanc Capital Markets -- Analyst

It does.

Damian Scokin -- Chief Executive Officer

And as per Koin, yes, we definitely are moving into not only increasing the penetration of Koin within this regard and the color in particular, while also moving into other verticals. And also we are exploring options to take Koin 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 payables 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.

Alberto Lopez Gaffney -- Chief Financial Officer

Hey, it's Alberto joining here for your third question on tourist payables. And clearly in this quarter, we certainly benefited from -- I think, again, the bottom line is we -- the second wave in Brazil, certainly impacted us negatively, so that actually curtailed our growth rate. Having said that, OK, it also drove second wave of cancellations, OK, I -- 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, OK? 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 returned money to clients in the proper schedule, OK? Having said that, we also compensate, because the growth rate of the company, OK? 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 these second quarter. The situation keeps on getting delayed and these tourist payable balance, again is not something that you need to pay it immediately. It's a very long cycle that actually as I had just highlighted on this response gets affected by the different waves of COVID in the region.

Very importantly, as you know, OK, we do pay our suppliers following checkout, OK. So in the end, the expectation is that a phase recover, we will generate cash that we only need to cancel that down, following checkout. So we continue having the positive working capital dynamics that we pivoted pre-COVID.

Ed Yruma -- KeyBanc Capital Markets -- Analyst

Great. Thank you guys.

Damian Scokin -- Chief Executive Officer

Thank you.


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

Emily DiNovo -- Cowen -- Analyst

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.

Damian Scokin -- Chief Executive Officer

Emily. Hi, this is Damian. As we mentioned in the prepared remarks, it was a very positive quarter in terms of share. And in particular, because those share gains were obtained with the revenue margins, which I described. What was remarkable is that within 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.

As per inorganically as part of the overall strategy of the company, you know, that we are actively pursuing opportunities that help us to apply those tool in a broader scale. So basically, we are very happy with the results so far. And we expect that to increase in a recovering market.

Emily DiNovo -- Cowen -- Analyst

Very helpful. Thank you.


[Operator Instructions] And our next question will come from Brian Nowak of 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. Just two, 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 2Q '19. 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?

Alberto Lopez Gaffney -- Chief Financial Officer

Okay. Alex, hi. Thanks for the question. As you know that we do not disclose specific numbers and in particular take rate 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 it's the different stages of the market. In Mexico and Colombia to your specific question, as you correctly point these were the markets during Q2 have been closer to full recovery, particularly in Colombia. Accordingly, we have been much more aggressive in our investments in those two markets. And particularly in Colombia, I can't disclose at the general level that we've been gaining share significantly. And we received -- we started 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 per the sustainability of the take rate, I think we mentioned in prior calls that we do not expect these to be the new normal. This [Indecipherable] company that has a significant growth potential going forward. And -- when the market returns to normal levels, we are ready to invest not only our full capabilities, where our financial resources to continue growing aggressively.

Damian Scokin -- Chief Executive Officer

And just complemented the take rate response with the new algorithms, with the change in mix, the improved mix that we actually have more non-air, more packages, etc. The expectation is, as you might recall, what we discussed in the December 2019 Investor Day that we have a 11.5% [Phonetic] plus take rate Horizon in the middle long-run. We do believe that certainly with the change in mix and 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 our industry that is operating at less than half its capacity.

Alex Wong -- Morgan Stanley -- Analyst

Great. Thank you.


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

Damian Scokin -- Chief Executive Officer

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


[Operator Closing Remarks]

Duration: 32 minutes

Call participants:

Natalia Nirenberg -- Investor Relations

Damian Scokin -- Chief Executive Officer

Alberto Lopez Gaffney -- Chief Financial Officer

Ed Yruma -- KeyBanc Capital Markets -- Analyst

Emily DiNovo -- Cowen -- Analyst

Alex Wong -- Morgan Stanley -- Analyst

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