Good morning, and welcome to the American Express Global Business Travel Second Quarter 2023 Earnings Conference Call. As a reminder, please note today's call is being recorded. I will now turn the call over to the Vice President of Investor Relations, Barry Sievert. Please go ahead, sir.

Hello, and good morning, everyone. Thank you for joining us for our second quarter earnings conference call. This morning, we issued an earnings press release, which is available on the SEC and our website at investors.amexglobalbusinesstravel.com. The slide presentation, which accompanies today's prepared remarks, is also available on the Amex GBT Investor Relations web page. We would like to advise you that our comments contain forward-looking statements that represent our beliefs or expectations about future events, including the duration and effects of COVID-19, industry trends, cost savings and acquisition synergies, among others. All forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the statements made on today's conference call. More information on these and other risks and uncertainties is contained in our earnings release issued this morning and our other SEC filings. Throughout today's call, we will also be presenting certain non-GAAP financial measures. Such as EBITDA, adjusted EBITDA, adjusted EBITDA margin, adjusted operating expenses, free cash flow and net debt. All references during today's call to such non-GAAP financial measures have been adjusted to exclude certain items. Definitions of these terms and the most directly comparable GAAP measures and reconciliations for non-GAAP measures are available in the supplemental materials of this presentation and in the earnings release. Participating with me today are Paul Abbott, our Chief Executive Officer; and Karen Williams, our Chief Financial Officer. Also joining for the Q&A session today is Eric Bock, our Chief Legal Officer and Head of Global M&A. With that, I'll now turn the call over to Paul. Paul?

Well, thank you, Barry, and welcome to everyone, and thank you for joining our second quarter earnings call. We are the clear leader in a $1.2 trillion industry with a significant runway for growth. And in the second quarter, we continue to deliver on our strategic priorities and create strong momentum for the future. First of all, we delivered outstanding financial results in the second quarter. The demand for our software and services drove results ahead of guidance, including record quarterly revenues, strong revenue yield, continued margin improvements and very importantly, a return to positive free cash flow ahead of our previous forecast. This is a huge milestone for the company and an inflection point that demonstrates our strong momentum. Based on these positive trends, we are raising our 2023 guidance. Second, we are positioned for strong growth ahead. I am confident that our momentum will continue, driven by the growth in business travel, the demand for our software and services and our ongoing share gains. Our view of industry growth is supported by both direct feedback from our top customers as well as external industry forecasts. And our confidence in continuing to gain share is underpinned by our sales performance and a robust sales pipeline that's powered by our leading software and services. Third, we continue to win in SME. Our results demonstrate excellent momentum in this very large customer segment with the fastest growth and the highest margins in the industry. We reported record SME new wins that continue to include a significant contribution from previously unmanaged customers. Record new wins in the SME segment positions us well for continued strong growth ahead. And clearly demonstrates the demand for our software and services in this very important segment. Finally, we continue to act on investor feedback, and we're…

Thank you, Paul, and hello, everyone. Before I get into the details, given this is my first call as CFO of Amex GBT, I want to share my 3 key priorities when it comes to managing our financial performance. Firstly, achieving outstanding financial results by growing revenues, growing adjusted EBITDA and increasing free cash flow. This has been a key strategic priority for Amex GBT, and remains a critical area of focus. Secondly, and importantly, driving continued margin improvement. And finally, creating capacity to invest and drive long-term sustained growth. And so now let's turn to the highlights. We had a fantastic quarter, thanks to the continued hard work across our team to drive performance. As you heard from Paul, we delivered strong revenue and adjusted EBITDA growth. As you think about our performance, we were above guidance in Q2 as a result of revenue outperformance, driven by higher volume and higher revenue yield. We saw continued momentum in the second quarter across our 3 financial priorities. And very importantly, we returned to positive free cash flow. We continue to reduce our net leverage ratio and delivered year-over-year margin improvement, all the while allocating incremental investment dollars with an eye toward driving longer-term growth. Looking at the second quarter results in more detail. Revenue increased 22% to reach $592 million. This was ahead of our guidance. As I mentioned in my opening summary, this was partially driven by our strong transaction growth, which was roughly 3 percentage points ahead of our expectations, but also by our yield. As a reminder, our yield is measured as revenue [indiscernible] TTV and reached 8.1% in Q2. The strong revenue yield in the quarter was also 30 basis points ahead of our expectations driven by higher performance incentives. And as such, travel revenue increased…

[Operator Instructions]. The first question today comes from the line of Toni Kaplan with Morgan Stanley.

It looks like a lot of continued progress on the SME side of the business. I was hoping you could give some additional color around the pipeline for new clients there. Any verticals in particular standing out more than others? Any sort of changes in the pipeline versus normal? Just wanted to get more color there.

Yes. Sure. Toni, it's Paul. Thanks for the question. Overall, the SME pipeline looks really strong. As I mentioned in my prepared remarks there, we've reached a record level of new signings over the last 12 months, and that's really driven by the momentum in the last quarter. So really pleased with the momentum in terms of the SME signings overall. Because it's such a broad segment, it's really across all industries. There's no real specific industry that I would call out. One of the areas of focus for us, though, has been that unmanaged segment because of the overall $950 billion opportunity, $600 billion of that is in that unmanaged segment. So that's a subsegment that we watch really, really carefully. And we are about -- up to about 30% of our SME new wins are coming from that unmanaged segment. So pipeline looks really strong, really good momentum in Q2 and continuing strength in the unmanaged segment as well. And I think that the value proposition, the choice that we offer now with the Egencia platform and the GBT Select platform and Ovation is definitely helping us to increase our win rates. The percentage of customers that we win that we target has also been tracking up quite nicely as well, given the broadest set of offers that we have in the market. So those would be the highlights.

Yes. Terrific. And maybe, Eric, I was hoping you could talk about the M&A pipeline, what you're seeing in the market, if valuations -- how valuations are? And then also maybe just strategically, anything that you guys would be considering doing from a either technology-wise perspective or just any other capabilities that would be useful in trying to attack the market?

Yes. Thanks for the question. I'm not going to touch on valuation too much. But strategically, SME continues to be a focus area, a huge opportunity as Paul and Karen pointed out on this call, geographic -- select geographic areas where we think operating proprietary is better than operating as a partner. And then yes, the capabilities and technology areas, we are continuing to look at. We do have a pipeline. We are evaluating opportunities, but it is M&A, so no assurances that we're getting across the line, but we're -- yes, something that we continue to be focused on.

The next question comes from Duane Pfennigwerth with Evercore ISI.

Just on the new customer wins and I think focused on the SME segment, can you speak to how much of your revenue growth and your transaction growth was driven by new wins or customers that you didn't have 12 months ago? And as you think about recovery potential, how do these wins shape your kind of longer-term thinking about what recovery looks like, why wouldn't we be well ahead of 100% at some point? And when do you think we get to retire 2019 comps?

Well, Duane, we've already retired 2019 comps, as you may have seen in the presentation. But coming back to your question, if you look at the SME segment specifically, we grew at 15% in the second quarter and half of that was net new wins. So think about 7.5 points of it being sort of organic improvement and 7.5 points of that being net new wins. If you look at our kind of full year performance, take the midpoint of our kind of growth in 2023, that's about 22% growth year-over-year. And you should think about kind of 5 points of that really coming from net new wins in the full year 2023. And with the pipeline that we have, we feel confident that we can kind of continue that momentum into 2024.

Okay. And then maybe you could touch on if there was any surprise, my guess is most of this was conservatism, but to the extent that there was any positive surprise over the balance of 2Q, what geographies sort of surprised you the most?

I mean, yes, I wouldn't say it's conservatism. I mean, basically, our H1 results came in -- in terms of sales growth, they came in 3 points higher than we had forecasted for H1. I think we previously guided to sort of 2 points of recovery per quarter. And so we were expecting a kind of 2-point improvement in recovery rate in Q2 versus Q1, and we actually saw a 4-point improvement. So I guess you could call it conservative, but that was really the difference between what we guided to previously and what actually played out in the second quarter. I wouldn't say there are any surprises in terms of the overall trends. SME continues to outpace global multinational, 16 points ahead in terms of the recovery rate. So obviously, our focus there has been very helpful. APAC continues as a region to outperform EMEA and the Americas, although EMEA and Americas were still double-digit growth. And hotel continues to outpace air. Hotel was the other area where we definitely saw outperformance in the second quarter. I think we had 14% on hotel, which was a little ahead of our forecast for the quarter. So no major surprises, Duane, it's more a sort of continuation of the trends that we were already seeing.

The next question comes from Lee Horowitz with Deutsche Bank.

This is Jeff Seiner on for Lee. So beyond the third quarter, have the prospects of the economics soft landing in the U.S., major customers more confident in this [indiscernible] during the business travel season. I know you called out the customer survey in the second half, has this [indiscernible] your more constructive outlook for the full year?

I would -- I think we cited two pieces of customer research in our previous comments. There's an independent survey that was done by Morgan Stanley on business travel trends for the second half of the year, and that forecasted a 9% year-over-year increase. Our own survey as we go out to our top 100 global multinational customers, and each quarter, we asked them to refresh their forecasts for the balance of the year. And I'd say it was largely consistent with the prior quarter. So those really are the 2 data points. Obviously, there is still a degree of uncertainty in the macroeconomic environment. And I think that's reflected in the forecast that we get from our customers and obviously, Morgan Stanley have reflected in their survey. But to answer your question directly, we haven't really revised our outlook for the second half of the year that significantly. I think what we've seen is an outperformance in the first half of this year, and we've essentially forecasted for that level of performance to continue.

Okay. Great. And obviously, you have a large support organization and Gen AI capabilities evolving rapidly, including with the patent that you mentioned, how quickly do you think you may be able to realize these cost savings from these technologies?

Yes. Well, we have -- we see automation as a significant opportunity for us to improve productivity and increase our margins. But that is not just driven by generative AI. We are always looking for opportunities to automate demand that's coming into our existing voice channel, or our e-mail channel and to build out features on our software platforms, Egencia ,Neo in order to automate that demand and to increase the number of transactions that are going through our digital platforms. And I think I mentioned in the remarks there that we now have 77% of our total transactions coming through digital channels. Over 60% of those now on our own software platform. So the point I'm making here is that automation using big data, using AI is not new to us. It's something that we're already doing. However, the power of large language models and generative AI enables us to potentially take that to another level. And we are identifying a number of use cases, use cases that have also been proven in other industries and in other parts of the travel industry. And we are looking at how -- what impact those use cases could have in our productivity over the next couple of years. And so we definitely see it as a significant opportunity. I would say it's something that at a later date, we would look to discuss in more detail.

The next question comes from Peter Christiansen with Citigroup.

Nice execution of the quarter, and welcome aboard, Karen. My first question is on the Pro Services side, really nice growth there. Just curious if we should think about the cadence of that segment of results for the second half, how are you feeling about upside potential there and if there's any seasonality that we should be thinking of?

Peter, nice to talk to you, again, and thanks for your welcome. I think on the Professional Services, in particular, we just expect continued momentum really in the second half. And as we look more holistically at revenue, there is clearly a seasonality impact as we've pointed out. But as you think about our guidance, we have increased revenue by $70 million, and $43 million of that increase is flowing through in the second half, which really is reflecting the volume that Paul talked about earlier and expectations there with some impact from yields as well, but majority flowing through from volume.

That's helpful. And then, Paul, just curious if you had any qualitative thoughts on travel inflation -- business travel inflation generally, if you're seeing in cooling on the pricing side and whether or not you think that's impacting corporate travel.

Yes, we saw average ticket price in the second quarter was 2 points higher than the first quarter. So average ticket price relates to air. And then on hotel, average daily rates were 3% higher in the second quarter versus first quarter. So we are still seeing some moderate quarter-over-quarter increases there. On the air side, there is going to be additional capacity coming in, in the second half of the year. If you look at the global numbers, they're quite high, but we tend to sort of back out China and really look at the U.S. and Europe. And so there's 3% to 5% additional capacity coming into the second half of the year as opposed to the first half of the year. If you look at the major carriers in those geographies and actually a higher proportion of that capacity that's coming in is on international routes. So I do think as that capacity comes online and potentially as the economy starts to pull with the interest rate increases, it's logical to see some, I think, leveling off of ATP and average daily rates in the second half of the year, and that's essentially what we've assumed in our plan for the second half. We've assumed the kind of a leveling of price in the second half of the year.

Our next question comes from Stephen Ju with Credit Suisse.

Great. So I guess a follow-up on the 110% versus 2019. I was wondering if you can talk about whether we are ahead of where we used to be on a unit basis or if some of this was due to higher pricing overall? And I guess if you can update us on the sales cycles for some of the larger enterprise potential clients, whether it's getting easier now, about the same or more difficult but hopefully corporate attitude towards spending starting to losen up a little bit more.

Stephen, I didn't quite follow the first part of your question. Would you mind just clarifying that for me?

Sure. Your TTV is 110% in the second quarter versus what was the case in 2019, right? So there's unit growth and then there's price inflation that's happened because of capacity constraints. I'm just wondering between price and volume, like what drove a lot of the greater now overall volume as we kind of think about, you just highlighted additional capacity coming on next year. So how pricing might be impacted as we think about '24 and beyond?

Yes, Stephen, I'm not following the 110% of 2019. I think our TTV recovery kind of full year is around the 80% mark. So I'm not sure if there's a misunderstanding there in terms of the 110%.

Well, yes, you highlighted, yes, transaction recovery versus 2019 on the Excel, the KPIs that you presented for the second quarter. Yes. Well, we can take it offline if it's at 80%, then the question is invalid. But I guess on the second question, if you can update us on, I guess, the sales cycles in terms of what you might be seeing, whether they're getting easier or shorter or about the same?

Yes, sure. For the global multinational accounts, I think the first thing I would say is that we have a very active and healthy pipeline. I would say there's nothing materially different in terms of the sales cycles in global multinational, right? They've always been in that sort of 9- to 12-month range for very large companies to complete sophisticated global RFP process. So no real material change in global multinational. I would say that as SME becomes a higher share of our signings, which it is, and we're bringing more and more customers in from that unmanaged segment. Those sales cycles and close rates are much shorter and the implementation of ramp-up time is shorter. So if you look at our entire book, you're going to see an improvement, but it's driven really by mix, driven really by mix in terms of much higher share of SME signings.

At this time, we have no further questions. I'll turn the call back to Paul Abbott for closing remarks.

Great. Well, look, thank you in closing. Thank you so much to our colleagues at Amex GBT around the world for their dedication to our customers and the strong results that they have delivered. We are very confident in our position and our outlook for growth in 2023 and beyond. Thank you to all of you for joining us and your continued interest in the company.

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.