Roger that – Flight Centre delivers again!

Many have doubted Flight Centre’s ability to thrive in an online world. But its clicks-and-bricks strategy looks to be succeeding, as does the goal of expanding its global footprint.

Flight Centre’s (ASX:FLT) 2019 operating cash flow followed its normal seasonal pattern with the company recording a modest cash outflow during the first half, followed by a larger inflow during the second half of the year.

For the full year, operating cash inflow was $278.9 million, compared to $314.3 million in FY2018. An additional week of salaries due to some businesses moving to weekly pay cycles explains the difference which, if adjusted for, was flat.

The company’s statutory FY2019 profit before tax (PBT), which is not adjusted to exclude non-recurring losses and gains, was slightly higher than the underlying result at $343.5 million (FY2018: $364.3 million). As an aside, underlying is an indication of what businesses may do year after year if all other parameters remain the same, while the statutory profit is calculated by adding one-off gains (or losses) to underlying profit.

Adjustments to statutory PBT during FY2019 included a $29.8 impairment loss relating to the Olympus destination management company (DMC) in Mexico; which was offset by $30.1 million in non-recurring gains. The adjustments translated to a $266.6 million underlying net profit after tax (NPAT) or a $264.2 million actual or statutory NPAT (FY18: $283 million and $264.8 million respectively).

A growing overseas business

The announcement of FLT’s annual 2019 full year result was used to highlight the emergence of the company’s overseas businesses as generating the majority of the company’s profit and 52 per cent of total transaction volume (TTV). With a winning formula, and relatively small existing market share in several much larger overseas geographies, the trend is expected to continue.

The 2020 forecast is partly dependent on an improvement in the domestic tourism market. However, a growing corporate and overseas business should become a focus for investors. Indeed, in TTV terms, the Americas business is growing strongly, consistently and has just overtaken its counterpart in Australia and New Zealand to become FLT’s largest corporate business globally. The Americas businesses delivered an underlying PBT in excess of $100 million, having increased almost five-fold since FY2016. It is now entrenched as a key earnings driver for the group.

Record profit contributions were also recorded in New Zealand and from the Asia businesses (India, China, Singapore and Malaysia).

FLT’s company-owned corporate businesses grew TTV at 15.2 per cent and generated $8.9billion in TTV during FY2019

Despite rapid growth overseas, the Australian business is still large and investors are concerned with possible maturity locally. ‘Softness’ in domestic leisure reflected a challenging macroeconomic picture and disruptive changes including brand consolidation, a new wage model ($14 million), an EBA, and the deployment of a new sales system (GDS), which temporarily impacted TTV growth, sales staff numbers, margins and in-store productivity. The company is also reviewing its domestic leisure network. 20 new stores will be opened while up to 30 Flight Centre shops will be closed. An additional 30 are expected to be converted to either Travel Associates or the new youth-focused Universal Traveller brand. An additional 30-40 leisure shops are expected to be relocated to superior sites and roughly 200 sales consultants will be added to ensure optimum staffing levels.

Flight Centre is working towards a 2025 vision in addition to a transformation program with targets in place through to the end of FY2022. These include 7 per cent compounding annual TTV growth, a 10 per cent underlying cost margin (excluding touring cost of sales) and a return to a 2 per cent net profit margin which is defined as profit before tax as a percentage).

The company’s 8.8 per cent year-on-year TTV growth was achieved with fewer sales staff –14,622 at June 30 2018 to 14,346 at June 30, 2019.

Revenue growth was more subdued (up 4.5 per cent globally), which meant that its revenue margin – revenue as a percentage of TTV – decreased during the year to 12.9 per cent (FY2018: 13.4 per cent). While this was expected, as a result of its changing business mix (lower margin corporate business and fast growing online sales), the actual movement was larger than anticipated and was a key reason for FY2019 PBT being 10.8 per cent below the record underlying FY2018 result of $384.7million.

Other highlights include:

• Lower growth in expenses (in constant currency) during both FY2018 and FY2019 and improved cost margins.
• Record sales, with total transaction value (TTV) for the 12 months to June 30 2019 topping the record FY18 result by almost $2billion or 8.8 per cent.
• TTV has now eclipsed the prior year’s result in 23 of FLT’s 24 years as a listed entity.

Importantly, solid TTV growth did not translate to the record profit. While international and corporate delivered solid profit growth, it was more than offset by soft Australian results in a fairly subdued trading cycle and during a period of significant disruption for the leisure business in particular.

Europe, the Middle East and Africa (EMEA) held up well despite ongoing Brexit uncertainty in the UK, which is the company’s largest business within this region.

Asia delivered strong profit and TTV growth, making record contributions in both measures.

A strong balance sheet, and probably a founder who isn’t getting any younger, saw record dividends through the year including a special dividend of $1.49.

While Flight Centre describes a focus on organic growth, each year is marked with acquisitions. The company notes “major focus has always been on organic growth, we will continue to acquire businesses – when appropriate opportunities arise – to complement this growth.”

In FY2019, the company bolstered its technology platforms and offerings with the acquisitions of Upside, Umapped, Claire & Sam, expanded its corporate travel footprint through Casto, and 3mundi, and accelerated growth in emerging businesses with the purchase of the Bali Camakila resort.

Since June 30, FLT also acquired the remaining 25 per cent interest in Les Voyages Laurier Du Vallon (LDV) in Canada to take 100 per cent ownership of an established corporate travel and premium leisure business.

Outlook

External challenges have continued in early FY2020. A weaker Australian consumer is having a negative impact on leisure travel demand, while uncertainty relating to Brexit in the UK and the recent unrest in Hong Kong is also impacting travel plans.

As the company expands its overseas footprint, however, geographic and brand diversity will help shield the company from the impacts of individual macroeconomic or geopolitical events. If the company continues on its current path, with the inevitable bumps along the way, investors will see it much as they see Resmed, CSL or Cochlear – an Australian export success with domestic performances becoming a footnote.

Significant ongoing spend in systems and technology is tantamount to investment in future growth at the expense only of short-term performance.

Any stabilisation or improvement of the Australian leisure results will be a bonus but the long-term story is global.