Saga plc (SAGA) Earnings Call Transcript

Thank you very much. Good morning, everybody. Welcome to the Q&A. Hopefully, you have had time this morning to digest the information that we have put out to the market. 2 RNSs, 1 on the interim results, and 1 on the capital raise. Hopefully, you'll also have time -- or has had time to go through our video summary presentation and digest that, too. I know that we've also had extensive conversations with many of you over the last few days, so I'll keep my opening comments brief and then maximize the time to any follow-up Q&A with the team that are here with me today. So around the table here today, we have Cheryl Agius, the Chief Exec of our Insurance business; Stuart Beamish, our Chief Customer Officer; James Quin, our CFO; and Mark Watkins, our IR Director. So we're all happy to take your questions. In summary, it's been a good first half for Saga. As I said on the video, it has been busy, productive and successful. We've seen the early green shoots of recovery in Insurance with the return to policy growth for the first time in 5 years and a very active period within our Travel businesses as we prepare them for a resumption of service within a COVID world, and I'm sure we'll talk more about the details of that on this call. But we are confident in the proposition being right going forward, and we are ready to return to service. All of that is then underpinned by a clear strategy for growth. That is, in turn, underpinned by our cornerstone investor, Sir Roger De Haan. I'm very pleased to say that a GBP 150 million capital raise has been confirmed, supported and fully underwritten, as we talked this morning. So some very proactive and strong steps to drive a good result for the medium and long term for Saga. And certainly, everybody in the business here is working hard to create the position where Saga emerges more strongly from the crisis than it went in. So with that as headline comments, I want to just pause now and open up for questions, given the extensive conversations that we've all had over the last few days, and open up for questions from the floor.

[Operator Instructions] We have a question from Ben Cohen of Investec.

The first question I had was, could you just clarify the central scenario that you have for the resumption of cruise? I think I heard from the webcast that there's some beginning now then it sort of goes into, I guess, a sort of winter pause and then you resume in the, I guess, around about the middle of the year. So if you could provide clarity there. And the second thing was related, I suppose. Post the funds that you're looking to raise, how long do you think you could trade within your covenants or with realistic expectations for your covenants if cruise and if travel as a whole does not resume?

Yes. Great. Thanks, Ben. If I kind of kick that off, and then I'll bring James in to talk through the stress-test scenario that we put into the presentation. So if I give you a kind of latest update as we understand it from the government, the cruise bodies, public health things, and et cetera, on the resumption of Cruise, and then we'll talk through our more cautious stress test. And then the implications of that and the significant amount of time that we can withstand and enforce layout. So on the first aspect of that, we've been heavily involved with the government, public health agencies across the country during the summer. We've hosted all of those bodies, MPs, and ministers onboard our ship. And we believe that there is government-backed industry guidance about to be issued within the next few days detailing a resumption of cruise, so paving the way for the industry to come back, which is positive news. We're still waiting for the final confirmation of that, but we understand that that is due certainly this month and we understand in the next few days. What that, we understand, will say is that it will be on a cruise-line-by-cruise-line basis, so not a sector-wide piece of guidance, i.e., if you can prove that you can operate safely within a COVID world to the new protocols, you can resume sailing. So that's a positive move. That would allow us to come back into service pre-Christmas, and we are certainly ready to do that. We're ready to do that from a couple of angles. First is that we've got the newest ships on the seas, which helps us particularly from a technological base, there is a whole load of new tech on our ships, which help us with things like airflow, air control, fresh air conditioning, and onboard segmentation of the ship, et cetera. On top of that, Saga has always had a reputation for the kind of next-level health and safety protection for our guests. So it's been arguably easier for us to make that set change into a COVID world with the prevention and testing. So we are in a very good place. And as we see the government rules as they're about to be laid out, we far exceed the standards that they have set. Secondly is our customer retention is very strong. So we're seeing that continue to flow through from the start of the pandemic at very high levels, above 65% retention, and our demand for cruises at the back end of this calendar year and into 2021 is also strong, too. So we've got the demand, and we believe we can get past the protocols. So in terms of the operational side of the business, we feel ready to get back whilst being cautious and protecting customers at all points. What we've put into the financial scenario planning is a more cautious set of numbers. And I'll hand over to James just to outline that. But with the capital raise, that allows us to further extend that caution and ride the way through pretty much next year with cruise certainly into the second half of next year. But I'll let James talk through the scenarios that we've put into the numbers.

Yes. Ben, we talked in the presentation really about 2 scenarios is I guess the base case and then there's the downside scenario. So the base case would have the Cruise business resuming towards the end of the year and essentially continuing from there and then the Tour Ops business starting again in earnest really from next April. I think we then set out a downside scenario, and the downside scenario is obviously not the one that we would be working to, but it is a more precautionary view where we would start towards the end of this year. But then for whatever reason, we would essentially go back into suspension mode in January, and then we would start trading again in May. And the reason we did it that way around is because we wanted to be comfortable that if we did start and we then had to stop, if we wouldn't be in a worse place and if we haven't started at all. So that is the scenario that we're basing most of our modeling around, but it's probably also worth saying that we have factored in then some downside trading stress scenarios on other parts of the business as well so -- and we sort of added them all up rather than try and do some sort of weighted average or anything like that. So it is essentially looking at a reasonably adverse scenario for the Travel business. And I think it's definitely one that gives us plenty of protection. And in terms of where that would leave us, and I think coming back to -- that's the second part of your question. So in our downside scenario, we would have had headroom to the covenants at the 31st of July next year that we set in March. And I think that what we've also done is, in discussions with the banks, we've also looked to move out some of those covenants at the 31st of July next year on the basis that that might now be the tightest point for the covenant testing. So this obviously is assuming that there is an extensive level of travel disruption into the first half of next year. So I think what I would say here is that on the downside scenario I was talking about, we would still have had headroom to the old covenants, but we've obviously then got more headroom to the new covenants that we have agreed with the banks. I think we should -- I'd also say we have looked at other scenarios, too. So we did run a scenario where there was no travel until the 1st of August. It obviously starts getting a bit tighter. But I think we would still pass the covenants before taking any material further actions which will be available. So what we haven't perceived, for example, is any further cruise debt deferral. And I think another important point is that, even at that stage, the absolute amount of net bank debt that we would have would be pretty low. So I think, all in all, given that we've still got a very cash-generative Insurance business and given we haven't got very much net bank debt following the capital raise, we think we've got a lot of financial flexibility to cope with some pretty serious scenarios as they may arise next year.

And I think, just to add to that, as James has said, we have further mitigating actions that if that much worse situation were to extend the time frame significantly, you would see us as a team taking the same proactive steps to mitigating those risks as we went through each month. We've hopefully demonstrated that as we've gone through the last 6 months that we've been very proactive in taking those steps to protect the long-term future of the business. And we continue to do that.

We have a question from Abid Hussain of Crédit Suisse.

I think I've got 3 questions, 2 on the Travel and 1 on the Insurance business, if I can. Just on the Travel, I was wondering if you could share your plans on managing cruise and tours for that matter at all for potential changes to the list of countries on the U.K.'s quarantine list. Because obviously, we've seen a lot of toon inferring -- and I know your base case assumes that you're going to be cruising from November, December of this year. And so I'm just sort of wondering how you're thinking about planning for changes in the quarantine list. And then the -- related to that second question, just a little bit more color on the capacity of your ships that you're planning to run in the -- in your base case scenario and also the downside scenario. I think I saw in the presentation a load factor of 80%, why is it 83%? But I just wondered what does that actually mean in terms of physical occupancy? Is it 80%? And have you discussed that with -- it sounds like you have discussed that with the government. If so, can you just give any further thoughts on that, please? And then the final question is on insurance distribution. Again, from the slides, I see that you are, as before, focusing on price comparison websites as a means to reaching potential new customers, but it's still secondary to the direct channel. And I was just wondering, given that PCWs is the largest channel across the market as a whole, is there perhaps an opportunity to sort of reset how do we focus on the PCW channel versus the direct channel, especially given the lower costs associated with distributing through that channel versus the direct channel? I suppose sort of flip side to that is margins will suffer at lower-margin business. But just your thought process around that would be very helpful.

Great. Thank you. I'll try and take those in turn and make sure that we cover off everything. If we miss anything, please jump in, and we'll make sure that we cover it. So just starting with flexibility around countries, local lockdowns, both Cruise and Tour Operations. The cruise line is in effect a floating hotel, so it has maximum flexibility. And we've already talked to our guests around having that flexibility. They are largely used to that. Because while we would head off in a destination, say it's Scandinavia, and we would have a number of ports in mind, if there was an issue pre-COVID, then we would pause and redirect to a port that was kind of nearby. So we do have that flexibility. Our guests are aware that safety and their well-being is top of our mind as well as top of their mind, which is why they select Saga. And therefore, we don't think that, as we move forward, that is going to provide us with too much of an issue. So that kind of flexible floating hotel gives us that ability, for example, in the Mediterranean to move from Spain to Italy, if we had to and if we had to at fairly short notice. The other point to note on our cruise guests is that it's not the majority that want to get off and do shore-based excursions. There are quite a number of our guests that will go on the cruise and visit the locations that remain on board. So again, we have more flexibility with that. But we've been very transparent with our guests in the planning process going forward. On Tour Operations, I guess that was one of the reasons that we decided pretty early on to put that business into a state of pause for longer. So we're planning to come back from March 2021, principally with the first of our own river cruise ships, which is fully booked at the moment. River cruise in Europe has resumed already, so we have a number of competitors already operating within that sector and on the rivers that we are planning to start up on, so we've got more confidence in that resuming. Clearly, as we look forward into the spring and summer of next year, we've got good retention. We have over 40% retention within Tour Operations today. And we are driving a significant marketing campaign for 2021, beginning this month, reaching almost 2 million people. That will be open to flexibility as we go forward. But by that stage, we are hoping to have more visibility. But we have time to be able to manage that while keeping our costs extremely streamlined and low. So hopefully, that gives you a sense of where we're thinking in the flexibility that we've got around travel, which gives us comfort. Secondly, on the base case around load factors and talking to government. The governments are not particularly, we understand, going to send out guidance that is going to limit load factors or capacity. And that's principally because the cruise industry varies in size significantly. So we operate, I guess, what we call midsize ships with a smaller capacity, so there is more physical space onboard our ships than many of the larger ships. So if you were Carnival or Royal Caribbean and they're very large ships, so 3,000 to 6,000 people, then there is a significant amount of extra complexity in getting load factors up and also their model, which is not all-inclusive, as opposed to ours, which is, means that there is more stress on how they make their money and earnings within a cruise. I can go into more detail, if you want, on that. But in general terms, we were running ahead of 80% load factor pre-COVID. We believe that limiting to 80% is a sensible first step for the first few months. It's not something that the government have asked us to do. It's just one of our planning principles to be cautious on that. And also, so it is a direct -- so it's 80% of the people, so it would be up to a maximum of about 800 people, but we also have the highest proportion of single cabins, too, for our guests, too. So even though the cabin is occupied, there's only 1 person for up to 125 of those on board. So that's not a restriction we understand from the government today. It's more of our cautious planning principle. On Insurance, the third question. Yes, clearly, we are very focused on direct because that's our focus across the whole of Saga, be that Cruise, Tour Operations or Insurance. That's the most meaningful and value-creating relationship that we can have with our customers. And as we drive the strategy of the business forward and begin to get to grips with more meaningful cross-sell, then that's where we want to be. But clearly, the PCW entry point is an interesting entry point for us. There's a lot of key customers, as you said, shopping in that marketplace. And we're looking to take it from that marketplace and introduce them to the value-add that we've got within our direct products and in particular, the 3-year fixed. James, do you want to add a bit? Maybe Cheryl add a bit to that last point on Insurance, or anything else on Cruise, James, you wanted to add?

Yes. I was just going to add a little bit on cruise. So I think if we look at next year in terms of the current bookings, we've got GBP 73 million of bookings for next year, and we've got another GBP 15 million, which relates to people who canceled off cruises this year, but they've taken a voucher for next year, rather than book onto a specific cruise. We've got GBP 88 million of bookings effectively for next year. So that's half of a full year revenue target. And that's with almost no marketing spend, not monthly spend at all in the last few months. So I think what that would suggest is that demand generation is probably not going to be the issue here around the Cruise business, which, again, I think, gives us confidence that, when we can get up and running that we would be able to hit those sorts of load factors. I think on PCWs as a direct, I'm going to ask -- I'll just say a couple of things, and then I'll hand over to Cheryl, too. It's something we spent a lot of time talking about last year. I think that PCWs, typically a higher cost of acquisition. You've got no customer retention because the focus is predominantly on price. Loss ratios tend to be higher because you get more fraud. There's a bunch of reasons why, in a perfect world, you would really want to focus on the direct proposition and have that direct access for the customer. And that's very much what Saga has all been built around. Equally, we need to be somewhat realistic about how people buy. So I think that there is a balance to be struck. But that's -- I'll hand over to Cheryl.

Yes. So James says, there are many reasons as to why we continue in the PCWs. It does give us a good source of new business. And as Euan has alluded to, it also gives us a very reasonable up-sell from our essentials products into the 3-year fixed. Later this year, we will relaunch our motor PCW proposition to optimize that journey further. So -- and whilst the direct remains our priority, the PCWs also remains a very strong source of new business going forward.

Thanks, Cheryl. Hopefully that covered all the points.

Yes. Those were very detailed answers.

[Operator Instructions] We have a question from Edward Morris of JPMorgan.

Three, please. The first one is you sort of mentioned several times on the presentation this morning that you don't see demand as being an issue at all for the Cruise business and you feel quite confident in that. I was wondering if you could just give us a little bit more detail on that. And is this something that you're seeing a rollover of previous bookings? How does that sort of level of bookings look as you look a bit further into next year? Are you continuing to see positive trends? Just a bit more clarity on that topic would be really helpful. Secondly, in your sort of more forward-looking outlook, which I suppose is based on a more sort of business-as-usual type scenario, you're talking about building on a PBT base of GBP 110 million with 3% growth at steady margins in Insurance, 4% in Travel, and then the cruise ships are still at GBP 40 million EBITDA. I just wondered if you could give us a little bit more on the thought process that goes behind those growth assumptions. What are you -- what are they based on? And how determined on market conditions are they? And then lastly, you mentioned that so far you haven't booked any benefit from frequency benefits seen in the first half. I wonder if you can give us an indication of how significant the reduction in accident frequency has been so far. And as you sort of look at the last couple of months of run rate, is it sort of starting to get back to normal? Or how are things looking right now?

Great. Edward, thank you. Let me take those in turn and bring in Cheryl and James as well. So just to give you some drop-down level into demand confidence in cruise, I think in the early months, again, around our kind of cautious return to service, we would plan to bring 1 ship in and then 2. We're looking at load factors at the moment on individual cruises, which are pretty positive. That's got to be taken in the context of the fact that during the last 6 to 7 months we have not been marketing cruise. So in any normal year, we would have been marketing every month. Clearly, we have saved that marketing money and it doesn't make sense in the midst of a lockdown with the levels of uncertainty going on as we went through April, May, June, July to be driving that demand when there was uncertainty. So if you take that as a downside and you look at the level of retention and the level of bookings that we still got in the non-canceled cruises from November onwards, then we're looking at pretty decent load factors on pretty much all of those cruises. What we're going to go into is a program of consolidating in the early months. So the first couple of months probably, where we will consolidate each week from 2 ships into 1. That, in effect, gives us the opportunity where actually we've got more than 100% bookings if you were to take what we've got clearly with both ships going into 1. So that gives us the extra confidence in being able to look at early demand. And as we go into 2021, you're right that we have the benefit, the kind of positive/negative, if you like, of the retention based on canceled cruises from 2020, where customers have moved their booking from, let's say, an April date in 2020 into the same slot for 2021. So if you take that, we've moved quite a lot of bookings, which have shored up 2021, and we haven't yet gone out and advertised for the rest. So that really kind of gives us the balance of confidence on the rollover between the 2 years and the confidence in the outward-looking bookings. In terms of the balanced scorecard, we've been through a lot of detail. Clearly, these are figures that we feel comfortable to make public and to hold ourselves accountable to. As you go through those numbers, the one, I guess, that you would kind of question a bit in terms of the level of uncertainties that Tour Operations revenue growth. To be clear, we have made that business smaller and more secure from a cash position, given the development pre-COVID and during COVID. And so that's the one, if I look at that balanced scorecard, there's probably the least amount of certainty on, not from a downside planning, but potentially from an upside planning. But that is entirely based certainly in the transition year of 2021 on how the country comes out of these kind of localized or country-based lockdowns. So we'd probably come back and revise or look at a more accurate figure around that. Other than that, I think we feel very confident that the balanced scorecard that you see in the presentation is the right mix and the right quantum. And we feel confident getting back, for example, to the cruise metrics as soon as cruising starts up again and we've got a long-term solution. But James, I mean other comments around that before we drop into the kind of COVID approach in terms of claims for insurance?

No, I think just the only other thing I was going to add on cruise bookings is that, so out of the GBP 88 million of bookings for next year, so about GBP 15 million of that is people taking of voucher and there's another GBP 15 million, which is where people have rolled over from a current year cruise to a next year cruise. So effectively got about GBP 58 million of sort of direct bookings specifically for next year. That is a little bit lower than you would have expected at this stage, but then that's entirely a function of having us not spent any money on marketing. And there are very clear levers to drive demand once you spend -- start spending that money, and that's exactly what we demonstrated, I think, from last year. So again, I think we're confident that the point at which we've got those specific itineraries, which we've got a very high confidence, will go ahead. I think you then start pushing quite hard to make sure that we get to the sort of load factors that we have in our numbers.

Great. And then, I guess, moving on to the last question around the claims frequency and the latest numbers that we're seeing. Clearly, we are seeing returns to some of the more normal activity from the early month in lockdown, where it was quite severely changed. But Cheryl, James, do you want to add any of your thoughts, Cheryl and what you're seeing?

Yes. So back in April, we saw frequency levels about 70% lower than normal. They're starting to trend back to current levels, but they're still slightly lower than pre-COVID levels. We do expect frequency to return to normal over the more medium term as behavior starts to move to some sort of normality, but there's still quite a lot of uncertainty as people are walking in slightly more and taking their cars rather than avoiding public transport. So we continue to monitor their position and take account of it in our numbers.

And just to put a bit of number around that, I mean, we will probably imagine that the full number is probably somewhere between GBP 20 million and GBP 30 million. So that's before we consider the actions we will take to pass some of those benefits back on to customers.

Our next question is from Andreas van Embden of Peel Hunt.

I've got 2 questions, 1 on strategy and 1 on the Travel business. On strategy, I appreciate that a lot that you've put out today after reviewing the business is all about evolution. But over time, it's all about, I think, increasing customer numbers as after we get through this challenging period. I just wanted to ask, when you came into the business and went through strategically all the business units, what would you do differently than previous management teams to boost these customer numbers in a sustainable way? Because it's always been sort of hit and miss. Is it just an issue of execution and becoming more digital? Or do you think that the previous management teams have missed something that you would sort of readjust and change strategically? And my second question is on the Travel business, more of a numbers question. How much cash do you think the rolling company would need to continue to inject into the Travel business all the way up to sort of April, May next year? Because that seems to be your central scenario. And how much cash would you need to inject in your downside scenario?