On The Beach Group PLC
LSE:OTB
Earnings Call Analysis
Q4-2023 Analysis
On The Beach Group PLC
On the Beach Group PLC has emerged with a triumphant narrative, the year culminating in their most successful summer to date. Steered by CEO Shaun Morton and CFO Jon Wormald, the digital travel company announced a remarkable 26% surge in total transaction value (TTV) to nearly GBP 1.1 billion, backed by a 13% rise in passenger numbers. The story doesn't end with sheer volume; the company strategically enhanced its offerings with long-haul and premium holiday segments experiencing growth of 74% and 32% respectively, outstripping previous years' performance.
The company's financial storyline is equally compelling. With record TTV driving group adjusted revenue up by 19% to GBP 171 million, On the Beach celebrated a 42% rise in adjusted EBITDA. Notably, this profitability boost was partially credited to a decrease in marketing spend relative to revenue. The group's profit before tax improved by GBP 10 million, absorbing impacts from increased investment in technology. Cash reserves remained robust with GBP 76 million on hand at year's end, indicating a strong foundation for future ventures and illustrating a fiscally responsible narrative.
Fiscal prudence is emphasized in On the Beach's capital allocation. With total cash reaching GBP 75.8 million and an additional GBP 108.6 million in trust, the group is well-equipped to navigate its cycle of investment and revenue. The highlight for shareholders comes with the announcement of a dividend reinstatement, signaled for FY '24 with a payout of 25% of retained earnings, subject to market conditions. This move is not merely a token gesture but a testament to the company's confidence and its commitment to returning value to shareholders.
On the Beach has not only navigated the complexities of the market but also the legal landscape. A favorable judgment post-year-end against Ryanair, awarding the company GBP 2 million plus costs, underscores a tenacious and risk-aware approach, though this gain is cautiously deferred to FY '24 given the pending appeal. Innovation didn't pause either, with notable investments in technology infrastructure, including a cloud migration that fosters reliability and scalability – vital for the beach holiday behemoth's continued disruption of the traditional tour operator model.
The expansion tale is led by the premium sector, where On the Beach has not just dipped its toes but dived into the deep end. Sales of 5-star products vaulted to 2.5 times pre-pandemic levels, illustrating a lucrative shift. The company has strategically positioned itself as an essential partner for hotel distribution within the U.K. market, further fortifying its premium segments and hinting at a broader market capture in the future.
Ending on a note of optimism, On the Beach's narrative looks beyond the horizon. With a clear, focused strategy on organic growth, an approach to capital allocation that balances investment with shareholder returns, and the flexibility to entertain mergers and acquisitions should the ideal opportunity arise, the group's saga of progress is far from its final chapter. The anticipated reforms to the Air Travel Organiser's Licence (ATOL), now pushed to 2024, are yet another plot point the group seems well prepared to address, embodying their continual theme of resilience and readiness for change.
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Welcome to the 2023 results of On the Beach. I'm Shaun Morton, CEO of the company, and I'm joined by Jon Wormald, the CFO. I will start with some highlights from the year. We've had a very, very good year. It's been our best summer ever, delivering TTV of nearly GBP 1.1 billion, which is 26% more than last year, with an increase in passenger numbers over the summer of 13%. Sales continued to grow in long haul and premium holidays, which we set out as our key expansion areas last year. Long-haul sales up 74%, and 5-star sales up 32%. This was our second year of offering perks to our customers, including free lounge and fast track. This gave us a communicable point of difference versus our competitors, acts as an acquisition tool for new customers and a retention tool for existing customers. The direct result that we've seen is a higher purchase intent, improved customer satisfaction and an increased likelihood to rebook.
This proposition is supported by our market-leading access to quality hotel product, ensuring we secure the best rates for our customers. And we continue to invest in our technology, which includes launching new web and mobile apps this year. We now enter 2024 with a record forward order book and with conviction that our investments are working. Finally, reflecting the group's continued cash generation and in line with our capital allocation framework that Jon will take you through, we will be reinstating the dividend next year.
Moving on to trading. As you can see from the charts on the right, every quarter was significantly ahead of last year, and each one was our biggest ever within that respective period. Sales in the second half were particularly strong, 30% up year-on-year, benefiting from the investments we made in the first half. And our forward order book for next summer is significantly ahead of last year as customers increasingly look to secure their holiday early and take advantage of flexible payment schemes. Trading post year-end has been very encouraging. Sales in this period are 26% higher than last year. So now I'll hand over to Jon, who will take you through the financials.
Thanks, Shaun. I'll start by summarizing the key financial highlights for the year before going into more detail in each of the B2C and B2B businesses. As Shaun said, it's been a really strong year with record TTV at GBP 1.1 billion, which is up 26% on last year. And what's particularly pleasing is that, that has been achieved through double-digit growth in both bookings and ABVs, and that resulted in a group adjusted revenue up 19% to GBP 171 million. We've seen particularly strong growth in group adjusted EBITDA, which is up by 42% and in line with the update that we gave in September. And this has come from both B2C revenue performance and also from reduced marketing spend as a percentage of revenue.
There's been a GBP 10 million improvement in adjusted PBT year-on-year with increased interest income from a higher base rate environment offset by additional depreciation charges as a result of the investment that we've made into technology in the past 2 years. And this is at the top end of market expectations. And finally, on cash, we remain in a strong position with GBP 76 million of cash at the year-end. And I'll talk more later about our working capital cycle, how that interacts with the trust account and how we see that developing going forward in terms of potential ATOL reforms and our capital allocation framework.
So moving on to Slide 7 on the B2C P&L. Booked TTV was up by 29% on the prior year, again, from double-digit growth in both bookings and ABVs. And as Shaun said earlier, each quarter was up on the prior year with strong growth across both winter and summer bookings. In terms of our strategic focus areas, long-haul TTV was up by 74% with growth across both existing eastbound and westbound destinations supported by new destinations and growth across all areas. And across all star classes, we've seen positive growth with both 5-star premium bookings and 3-star value bookings posting 32% growth in TTV. In terms of the drivers of ABV growth, this is a combination of both the mix effect with greater proportion of long haul and premium holidays plus continued airline and hotel inflation.
Adjusted revenue is up to GBP 107 million, an increase of 23% on the prior year, and the slight dilution versus the TTV increase is explained by the mix of holidays sold. And I think it's worth explaining why we focus, as a management team, on revenue per booking rather than necessarily just looking at the revenue percentage. The increase in long-haul bookings and indeed premium bookings with a more significant flight element means that the margin will be a couple of percentage points lower, but crucially, the revenue per booking is higher. And as we continue to grow bookings and we continue to grow the revenue that we make on each of those bookings, then we believe that sets us up well to achieve our targets going forward. And as well as looking to grow revenue per booking, we are always testing and optimizing pricing for the best balance of volume and revenue. This is a dynamic market in which we are operating, and it's important that we remain flexible on price and we have the tools in place to be able to do so.
In terms of marketing costs, whilst we are talking to full year numbers today, it's worth mentioning the shape of marketing spend in the year as we expect FY '24 to follow a similar pattern. We invested into offline marketing in the first half to support the peak booking period with the expectation that this would have a halo effect in half 2 and offline spend will be lower as we focused on online performance channels. And that is exactly what happened and resulted in marketing costs as a percentage of revenue being back down to 38%, which is below the historic run rate of 40%.
Overheads in the year are flat at 30% of revenue with an absolute increase year-on-year, which I'll break down into 3 particular elements. A significant amount of our overhead is variable, relating to either our contact center or to debit and credit card charges on bookings. So we'd expect that to grow in line with bookings growth. We also saw strong wage inflation in the year. We made the decision to pay the real living wage to our colleagues and also look to support them by making the 1st of January pay award 3 months earlier. And that was the right thing to do to support those colleagues who were paid below GBP 30,000. And the third element of the year-on-year movement is the transition to AWS and cloud-based service, and this added an extra GBP 2 million versus the prior year. And the result of all of those movements is a strong EBITDA result with growth of 45% in adjusted EBITDA on the prior year.
Moving on to Slide 8. I'll cover off the performance of our B2B businesses, and we show here the combined performance of Classic Collection and also Classic Package. And before moving on to the numbers, just a couple of general observations on B2B. Both of our B2B businesses are our trusted brands, which we believe operate in markets with significant opportunities for growth. This is a more challenging space post the pandemic, but we believe that both agents and homeworkers are looking for a different offer outside of the larger tour operators, and we believe that we can provide that and fill that gap.
And there are 2 specific actions that we've taken in the year to support that. Firstly, we appointed Andy Freeth as the Classic CEO in November last year, and he's been looking to put his strategy in place supported by the wider group exec team. And secondly, we've already taken specific action to move back towards profitability. And at the end of FY '23, we decided to integrate a number of the B2B back-office functions into the group, which has given us better alignment across activities and also removed a significant amount of overhead costs. In terms of the financial performance, revenue was up by 14%. And as we invested into the team and also into marketing, this resulted in an increased loss in EBITDA. We remain confident that the B2B segment will return to profitability next year.
If I move on to the group P&L slide. We've talked to a number of elements that make up EBITDA within the B2C and B2B slides. So I'll just like to draw out a few points below adjusted EBITDA on this slide. Depreciation has increased, as expected, in the year, reflecting the increased investment into technology. And that has been offset by interest income, which has increased significantly, reflecting the increased base rate environment. The numbers that we talk to today are on a continuing basis as they exclude the activities of our international business. And as we set out in more detail in the RNS this morning, the Board took a decision in September to stop new sales within the Scandinavian markets, and the impact to group PBT is an [ add back ] of GBP 0.5 million of losses. We remain confident that the platform and the proposition are both scalable, but there were specific factors around these markets and, in particular, at our flight supply that led us to the decision that we took.
Moving on to exceptional costs. This includes the costs relating to both ongoing litigation, principally with Ryanair, but also to the costs relating to the restructure I referred to on the B2B slide. In terms of legal costs, it's worth noting that we obtained a successful judgment post year-end in our refunds claim against Ryanair, and On the Beach was awarded GBP 2 million plus costs. The costs have not been finally determined yet and the judgment remains subject to appeal at the time of the balance sheet date. And so we haven't recognized any of the income or an asset within the FY '23 accounts, and this will be included within exceptional items in FY '24. And we have GBP 1.5 million of exceptional restructuring costs, which relates to the consolidation of group functions between Classic and OTB.
Moving on to the cash slide. In terms of the year-end, we remain in a strong position with cash on balance sheet of GBP 75.8 million and a trust balance of GBP 108.6 million. Given that we're setting out our capital allocation framework today, we thought it was worth taking a couple of moments to talk about our working capital cycle and the investment decisions that we make as part of the proposition. As a reminder, we've got a GBP 60 million RCF facility, which is due to mature in December 2025, but it's got 2 years of options for further extension. With the chart on the right-hand side, whilst setting out the cash position for FY '23 could be applicable to any year in terms of the shape that we are showing of the cash balance and also the trust balance.
So as you can see on the chart, as we move through the first half of the year, our cash balance reduces and we begin to utilize the RCF in January when bookings are at their highest. This is because customers are taking advantage of our low deposit offer, and we are funding the payment of flights out of our cash resources. This continues through Q2. But customers, at the same time, are making installments [ of final bonus payments ] for their holidays. And so the trust balance through that period increases significantly with cash only coming out of trust when the customer returns from holiday. The other factor that at play here is that our marketing spend is also at its highest in the same period with offline investment to support the peak booking period. And altogether, we show here an investment of over GBP 100 million into the business between the year-end and the cash low point, which is typically in April.
In the year, the RCF was drawn to GBP 30 million with GBP 48 million available because GBP 12 million is used on ancillaries for [ FX found in ] virtual cards. So we're effectively managing the business to GBP 20 million of headroom on a GBP 1.1 billion order book, which I think speaks volumes for the efficient cash management that is in place. We've mentioned before that ATOL reforms were due by the end of this year. We understand that, that has been delayed until 2024. And at this stage, we don't know what the impact will be, but we believe that we are well placed to manage the outcome of those reforms.
Moving on to Slide 11, and we've set out today our capital allocation framework and how we continue to prioritize our resources. I think the key point on this slide is that we remain absolutely focused on organic profitable growth, and as the business continues to grow, we'll continue to invest into working capital to support the proposition through the [ low ] deposit scheme. We're also announcing today that we intend to reintroduce a dividend of [ 25% ] of retained earnings from FY '24 subject to any material changes in macroeconomic conditions. This reflects not only our confidence in the business and the more stable market conditions, but the cash generative nature of the business.
And we also believe that our business model and the platform is scalable. And so whilst we don't believe that M&A is likely in the short term, we remain open to the right opportunities. And finally, once we have invested for growth, once we paid a dividend and taken advantage of any M&A opportunities, if the Board considers that surplus cash exists, we will look to return that to shareholders. It's worth saying we don't believe that to be the case at the moment, but we will continue to keep that under review. And I'll now hand back to Shaun, who will take you through our strategic progress.
Great. Thank you, Jon. So we'll start with an overall look at strategy. On the left-hand side of this slide, we summarized how our addressable market has evolved since before the pandemic. Our improved supply position in both hotels and flights and investment in our proposition means that we are now attracting customers from an audience of beach holidaymakers, which is 2.5x bigger in terms of volume. And because spend per head is so much higher in long haul and premium segments, this represents 6x the revenue opportunity. So we are effectively fishing in a pond that's significantly bigger than where we were in 2019. I will come back to the progress that we've made in all 3 of these segments later in the presentation.
On the right-hand side, we summarize how we have evolved our long-term strategy to ensure we continue to grow our share of this wider audience. Holidaymakers are increasingly engaging with us all year round. They are seeking support at every stage of their holiday journey from research and anticipation through to holidaying and reminiscing. And consumers are increasingly using social media, mobile apps and community groups to inform their decision-making and engage with brands.
Our strategic pillars shown in light blue are designed to meet these customer needs throughout this cycle, and we'll do this by bringing holidays and experience to life through rich visual content; evolving search, making it easier for and more enjoyable for customers to find what they are looking for; being trusted to deliver a hiccup- and hassle-free holidays using industry-leading self-service and automation all delivered via our web and mobile apps; and finally, creating more moments of anticipation and adding value to holidays to improve customer experience, as we have done with our lounge and fast track offer.
Underpinned by our technology and with a real focus on the native mobile app and social engagement, we will continue to differentiate our proposition and invest in customer service and ensure we have access to the best and most relevant hotel and sea supply. We have delivered strong growth this year across all 3 segments I discussed, and I'm convinced that execution of this strategy will help us capture share right across the beach holiday market and continue to disrupt the traditional tour operator model.
Moving on to technology -- sorry, proposition. This is the second year we have offered free lounge and fast track to our customers. Our ambition is to continue to develop our perks proposition to enhance and extend the holiday experience through our app. We believe this will attract new customers and build loyalty and advocacy with existing customers by offering a unique value proposition to holidaymakers, giving us a communicable point of difference versus our competitors. Having this differentiation increases the effectiveness of our offline and online marketing activities. It gives us the opportunity to talk about quality in a tangible way, which strengthens our brand, broadens our appeal and helps attract new customers. And to complete the circle, the value-add elements enhance our customers' holidays and increase the likelihood they will rebook or recommend us to friends and family.
The results so far, outlined on the right of this slide, demonstrate why we believe this is an effective strategy. Highlights include: achieving prompted brand awareness of 88%, achieving our highest-ever peak top 3 consideration of 30%, achieving an even higher top 3 consideration score for people who are aware of our perks of 44%. Customers who had a perk with their holiday scored as 19% higher for customer satisfaction, and ultimately, rebook rates for customers who had these parks were higher than for those who did not. By investing in the proposition in this way, we have continued to grow 5-star and long-haul bookings, which, even net of the cost of this improvement in our proposition, generates a higher revenue per booking.
Moving on then to technology. 2023 was a big year for us in terms of investment in our technology. We completed migration to the cloud early in the year, which involved moving nearly 200 apps. By removing reliance on owned infrastructure, we will benefit from improved reliability and security as well as ensuring we can scale quickly and effectively. In addition, our new architecture, coupled with automated systems, allows for hundreds of deployments per week. This facilitates rapid experimentation and development of our technology.
We have also made significant progress in upgrading our core platform to support our new web and mobile apps. This includes completing major upgrades of our hotels, flights and packaging platforms, increasing the accuracy and speed at which we can customize holidays from millions of flight and hotel combinations. Overall, the rearchitecture and upgrades of our core platform, combined with the migration to the cloud, not only improves our performance of our systems and their reliability but also gives us access to a richer pool of tech talent.
So moving on to our expansion areas, starting with premium. So as laid out earlier in the pack, there remains a significant incremental revenue opportunity from growing volumes and share in mainstream premium holidays. We estimate the market is a similar size to value [ of Beach ] in terms of volume. But due to higher prices, it is 2.5x more valuable. We are a key strategic partner for hotels looking for distribution from the U.K. market and have continued to add a new relevant hotel product, most of which are 4- and 5-star properties. This means that our hotel supply position increasingly supports growth in this premium segment. This improved product, combined with our enhanced proposition and the faster recovery of this segment post pandemic, means that On the Beach sales in 5-star products is now 2.5x greater than it was pre-pandemic. And encouragingly, our core market sales into value 3-star hotels also grew 32% year-on-year and are now ahead of pre-pandemic levels.
Moving on to long haul. We continue to make significant progress in growing long haul. Driven by further development of flights and hotel product, long-haul sales were 74% up year-on-year and now represent 8% of group sales. This growth was supported by the integration of 6 additional airlines, building out our hotel product in existing destinations and launching several new destinations. Sales growth in the second half was particularly strong, more than double the prior year, and sales since the 1st of October were 90% ahead of last year. So whilst we still have a relatively small share of a significant market, our brand is now firmly associated with long-haul beach, and we are confident that this will continue to grow in 2024.
Just finishing then on outlook. Our FY '23 growth has continued into the new financial year with TTV across the first 9 weeks of FY '24 26% ahead of the prior year. Our forward order book is at record levels, including 34% growth in sales for winter '23. We approach our key booking period, which is quarter 2, with significant momentum. And our platform and proposition are stronger than ever as we take share in adjacent markets. Current trends and all leading indicators give us confidence that summer '24 will be even greater than summer '23. And as a result of all of the factors we've discussed today, we are reinstating payment of a dividend from 2024. And on that point, I'll conclude. So thank you all for listening, and we look forward to updating on progress through the year.