Hostelworld Group (LSE:HSW) — Investor Presentation

0:01 Good afternoon, ladies and gentlemen. Welcome to the HOSTELWORLD GROUP PLC interim results investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and could be submitted at any time via the q and a tab. It's just situated on the right hand corner of your screen. Please just simply type in your questions at any time and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, all questions will be reviewed with responses published on the investor meet company platform where it is appropriate to do so.

0:32 Before we begin, I would like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. And I'd like to hand you over to CEO, Gary Morrison. Good afternoon, sir. Good afternoon, and welcome everybody to our interim results presentation. So I'm gonna dive straight in. I'm joined by with Caroline Sherry, our CFO, and David Brady, our Head of Commercial Finance. And I wanted to start just by giving some highlights of the first half to June. So in broad terms, we've had a super sell, very, very encouraging. We've seen recovery all demand segments in our portfolio and notably across all the major destinations as well. In particular, I'm incredibly pleased to see our new customer booking behaviors of all the customers that we acquired in from January to June has normalized to pre COVID levels.

1:28 And as you'll see during the presentation, when I start talking about recurring revenue, the fact that these customers are coming back in exactly the same proportions as we would have expected as if COVID hadn't happened. So it's very exciting. We're very encouraged to see it. And with that, we have managed to sustain some pretty significant OpEx reduction since first half in twenty one, but also pre COVID levels. And in terms of how we see EBITDA, while EBITDA was negative for first half, I must tell you that the the reason that it's so significantly negative is because we are building up what's called a deferred revenue provision.

2:16 And essentially, about half of our bookings are on a flexible cancelable product. And although we collect the cash and we have the cash in our bank account for those bookings, and we've incurred the cost for those bookings, we don't record them on the p and l until the last cancellation day has passed. So as a result of that, as we came into the period where we had 30% of 2019 in terms of net revenue and net net bookings, and we exited the half year at 80% of net bookings and a 104% of net revenue, we'd be building up that provision on the balance sheet. And as a consequence of that, h one EBITDA looks significantly lower.

3:02 But if you add that revenue back in, it's almost breakeven.

3:07 In June, we were EBITDA EBITDA positive, July EBITDA positive, and we expect to be EBITDA positive for the balance of the year. So we're feeling really good about the year. In parallel, we've been working incredibly hard during COVID, you know, making sure that we have all of the growth drivers for second half and into 2023. And, you know, first and foremost, we continue to be remain, you know, very highly geared towards the travel recovery as a whole. In June, we were 80% of net bookings compared to 2019, and, obviously, we believe that there's more to come. Last time we met, I started walking through this very highly differentiated growth strategy that really capitalizes on the unique needs of the hustling category.

3:55 And today, we're gonna go a little bit deeper in each of those items so you can see how that manifests itself. And you can see that the growth drivers that are gonna be coming through, it's setting off and into '23. So I think overall, when I look at the trends in first half, super encouraging. You know, there is a bit of macroeconomic uncertainty out there. So on the assumption that there is no further deterioration, you know, as I said, we expect fully expect to be EBITDA positive for second half. And I think finally, it's important to note, you know, pre COVID and now and going into the future, our overall business model will remain asset light, very highly cash generative.

4:41 And I think finally, as you consider that macroeconomic backdrop, about 80% of our customers are 18 to 35, 60% of them are solo travelers. These are not the people who have mortgages. Many of them don't have families. So their exposure to a lot of the macroeconomic trends, inflation is not as great as you would see in other areas of the travel landscape. And as a consequence, you know, I really believe that they are showing and will continue to show that they have the flexibility, the means, and the desire to travel despite that macroeconomic backdrop. But with that, Caroline is now gonna run through, you know, a lot of the economics, you know, for first half. And then I'll pick it up again, and I'll talk about the growth strategy.

5:30 So with that, I'll hand over to Caroline. Thank you. Thanks very much, Gary. Very, very happy to be here this afternoon to talk to business on the first half performance for 2022. So thanks to everybody for their time this afternoon. Looking at the financial performance for the first half of the year, what we wanted to do with this chart is really focus on GMV. So what is the total value of the transactions that pass through our platform in any in the half year? GMV is gross merchandise value, and this represents the full transaction value, so the full quantum of the booking. We have a commission based model, so our net revenue represents a percentage, the commission of the total transaction.

6:18 Looking at the left, GMV is 8.4 times higher in h one twenty twenty two versus h one twenty twenty one. So that's an astonishing recovery rate. We've been talking to the market about our strong recovery, how demand has bounced back, and that GMV graph just contextualizes the scale of the recovery in the first half of the year versus h one twenty twenty one. Looking at the middle graph, which is net GMV, this is the same same metric being gross merchandise value, I. The total transaction value. The difference here, though, is it takes into consideration cancellations. Net GMV was 8.9x higher in H1 twenty twenty two versus H1 twenty twenty one. And what that tells us is we had slightly less cancellations in the first half of this year than we did last year.

7:14 And finally, the third graph to the right is net revenue. Again, 8.9 times higher than it was in H1 twenty twenty one. And worth noting, we haven't changed our commission rates, so the percentage that we are charging our HOSTELWORLD partners has remained flat. So despite the recovery, bounce back, the increase in demand, we haven't taken an increased percentage compared to last year, and we have kept that commission rate flat. So really pleasing to see that the significant rebound where travel restrictions are lifted and the demand recovers. Now moving to the next slide, we're looking here at net bookings on a monthly basis. So moving left to right, we're starting January 2021, working our way through to June 2022.

8:04 So the light orange bars and the dark orange bars. The gray bars in the background are twenty nineteen monthly net booking numbers, so bookings less cancellations. They're included to show what a normalized year looks like pre COVID impact, what the normal seasonality structure looks like in in our booking numbers. And as you can see and as we've messaged to the market, we COVID has obviously had a huge impact on our business. In January 21, starting at a very low base, we've been seeing the gradual recovery in net booking numbers into the summer months of 2021 as an element of restrictions was lifted, introduction of the COVID passport, etcetera. But then we could see from October, November, December, those numbers precipitate downwards again. And that was really the impact of a fourth wave of COVID in Europe and the emergence of the Omicron variant and with it, the reintroduction of travel restrictions.

9:01 But from January onwards, the picture is different. And, really, we're seeing that strong month to month recovery that we've been messaging to the market, continuous recovery through the half year. And just to anchor us in some numbers, January 2022, net bookings were 33% of January 2019, whereas June 2022 was 80% of the June 2019 number. So really closing the gap to pre pandemic levels. Now the next chart we look at, similar structure, looking at monthly numbers, January 21 right through to June 2022 with 2019, the gray bars in the background. This graph, though, looks at net revenue. So what was the value of those bookings that are that came through our platform?

9:50 And you can really see the difference here in 2022 and the incline in recovery of net revenue, how it's so much sharper than net bookings. And that really is inflation of our ABB, which has been driven by the recovery in bed prices. So what we've seen throughout the pandemic is where restrictions ease, demand recovers, and then as a result, hostel bed prices recover. So the hostels can start raising their bed prices again back to normalized 2019 levels and then beyond where the demand is is is such to accommodate that. And we could see in April that gap closing to 2019. May, that prices, ABB were flat to twenty nineteen levels. And then in June, it exceeded.

10:35 So again, anchoring us in some numbers, January 2022, net revenue was 34% of 2019, whereas in June, it had exceeded twenty nineteen levels and was up 104. The main drivers of the increase in ABB and recovery is bed prices, I've said, But we've also seen an improvement in length of stay. So what that tells us is that when people can travel, they're doing so, and they're going away for longer. We've also seen a favorable geo mix. So higher proportion of our bookings are coming from regions where the bed prices are higher, so Mainland Europe, North America, Canada, with lesser volume coming from regions with typically lower bed prices such as Asia. And that's a factor really of travel restrictions and where demand has been able to recover.

11:25 So looking now at that regional recovery and how it unfolded. The lines here represent different regions. The dashed navy horizontal line represents recovery back to 2019 levels. So anything above that line means that it has grown versus 2019. The gray blocks in the background are net bookings as a percentage of 2019. So again, that 80% in June showing us that net bookings in June 2022 had recovered to 80% of June 2019 levels. What's really interesting about this graph is it tells you a lot about travel restrictions. So the green line is Central America. The recovery here has been stellar. It crossed the 2019 level in September 2021 and has grown since and was almost at one point twice the size it had been in 2019.

12:20 Central America was pretty unique in that it had always had very low levels of restrictions, if any. It was open to everybody from every region. The only restrictions that were placed in travelers were restrictions back to their home territory. So Mexico for us absolutely took off, and it really kind of proved the hypothesis that the demand is there. People want to travel. And when they can, they will. The orange line represents Europe. So this is the second line down just below that dotted navy horizontal line. And we can see here that Europe in June was almost at 100 of 2019. Europe for us is a very important territory. It represented 40% of our net bookings in 2019. So recovery here is of paramount importance to us.

13:08 Looking, though, at Europe in a more granular level and looking at key regions, Southern European countries such as Spain, Portugal, Italy, these countries are above 2019 levels. So they have they are now bigger than they were back in 2019. Looking at the bottom of the graph on the lines that the yellow Oceania line and the Lilac Asia line, these started at very low levels in the year. So if we look at January 2022, they were a sub 10% where they were January 2019. And we've seen a slow and steady recovery in these regions as they've reopened to international travel. Pleasingly, Oceania in July is now ahead of that 50% mark, so it's growing very rapidly as that region is now open to international travel and as we're moving into their high season.

14:00 And we will see the recovery in Asia follow through as well.

14:07 Looking at the demand segments. So we can see here that all segments are recovering. Long haul, very pleasingly, is at the 75% level, and that, in turn, feeds short haul. So short haul was almost at a 100%. And to anchor that point back to Oceania and Asia, those regions combined were 30% of our twenty nineteen volume. And in part, the closure of those is impacting the recovery in long haul. So to have our long haul at 75% despite Asia and Oceania only coming back on stream now is very, very encouraging. The 75% recovery is being driven by travelers from North America and Canada traveling into Europe.

14:59 Moving on into the inventory side of our business. We're pleased that on a net basis, inventory has declined only 8% versus December 19. So this is looking at all of the hospitals listed on our platform, December 19 versus June 2022. Worth noting that the June 2022 number, there's circa 400,000 hostels based in Russia and Belarus that we have temporarily delisted from our platform. So as I said, that negative eight is a net number. So it's the net of the number of hospitals that would have delisted from the platform and the number of new hospitals that we would have signed up to the platform. So we are pleased with the net 8% over a two and a half year period given the the impact that COVID has had on the category and wider travel sector.

15:54 The drop at the eight percent, the drop was most acute June 2020 to June 2021, but we can see now that, that drop has tapered off. And if we look to the right at the number of producing hostels as a percentage of 2019, where a producer is a hostel, we have received at least one booking in the time period. We're seeing a steady recovery in the number of hospitals that we're receiving a booking from with q two twenty twenty two at sixty six percent. And just to anchor us back to the June 22 net bookings, which had recovered to eighty percent of 2019 levels, that sixty six percent is relevant to that number because large cohort of our hostels in Oceania are only recovering now as well. So the sixty six percent here in Q2 correlates back to the 80% net bookings.

16:53 Looking at volume and ABB and how that has influenced our margin. So working left to right on this graph, we can see that h one twenty one net margin was point eight. We see clearly since h one twenty one a huge recovery in volume. We've talked about big increases in GMV, net booking volume and ABV. So net booking volume and ABV recovering very, very strongly, but partially offset by two big things. The first yellow block pardon me. The first yellow block is deferred revenue, the 4,900,000 loss, and this is something that Gary talked about at the start of the call. So this is the deferred revenue buildup we've been talking about. We entered the year with a very low provision on our balance sheet for deferred revenue.

17:43 A deferred revenue provision arises when we receive a free cancellation booking. A customer places a free cancellation booking on our platform. We record the booking. We receive the cash, but we cannot recognize the revenue until the last day of which a customer could cancel has passed. So what that means is that revenue of that booking is placed on the balance sheet until that day has passed that they could cancel. In the normal year, we would have a normalized provision on our balance sheet, and we would have a offsetting outflow from the balance sheet, offsetting the inflow of the deferred revenue booking. So normally, this isn't a big number in our p and l. But because we entered the year with a very, very low provision, it's building up that provision, and it will be unwound in the second half of the year.

18:35 So excluding the deferred revenue impact, for the first half of twenty twenty two, we would have been very close to EBITDA positive, if not EBITDA positive. The other thing that the deferred revenue causes in the p and l is you have the buildup of the provision. So you can't recognize the revenue in your p and l, but you recognize the cost. So the cost for those bookings is included in our h one twenty two p and l.

19:01 The other adverse in the margin walk is the increased marketing spend. Gary will explain in the strategy section of the presentation as to why this was appropriate level of marketing investment for this half year.

19:16 Now looking at our cost base. Our cost base in H1 twenty twenty two remains lower than it did pre pandemic levels, something that we're very pleased about and something that we will look to retain in the business. Just to note, these are operating costs. They exclude paid marketing spend, and the business doesn't have any brand marketing. So purely is operating costs.

19:40 So the chart shows h one nineteen, what the operating cost base was pre COVID, h one twenty one, what it was last year, and h 01/22, what it is this year. And starting bottom up, the orange part of the bar chart is wages and salaries. So this is the our largest operating cost. We have about just under 250 people in our business at the moment. And if I look at wages and salaries year on year, they've increased marginally. However, in h one twenty one, we received government subsidies from both The UK and the Irish government. We also received a smaller quantum in the first half of this year. And stripping those out, wages and salaries would actually have been 3% lower this half year versus h 01/20 one and eleven percent lower versus where we were in h one twenty nineteen.

20:34 The pink bar represents temporary contractor costs. So these are temporary resources we brought into the business to help with the execution of our social strategy and our social features. More of which Gary will talk about later and something we're very excited about as a pivot for the business.

20:51 The yellow bar represents tech technology and product maintenance costs. So these are in house resources. That cost has stayed flat year on year. The blue bar is FX. FX has been a hit for us on our cost base in the first half of the year as USD rates moved close to parity with euro. The purple block is other. So all other cost items, mainly T and E, insurance, training and recruitment costs, legal and professional, your normal operating costs. And these have predicted predictably but modestly increased versus H1 'twenty one and are still substantially lower than they were in H1 'nineteen. The main cost increase half year on half year really relates to recruitment cost and training cost as well as some T and E as our GMT team got out and started meeting with our hostel partners and got on the road again.

21:48 Now taking all of this together and looking at our EBITDA for the first half of the year. Starting left to right, EBITDA H1 last year was a loss of £9,700,000 We've talked about the recovery in volume, the ABV inflation and the tailwind we've gotten from the increase in bed prices. So that delivered GBP 13,700,000 EBITDA benefit.

22:14 The deferred revenue we've spoken to, again, as a reminder, this is a onetime hit to the P and L as we build up that provision. And in a normalized year of trading, so when we look at next year's numbers, that won't be a drag on EBITDA performance. Increased marketing investment, Gary will talk to in more detail in strategy section. Temporary contractor costs, we've talked about temporary costs introduced to the business this year to help with the execution of social features. Those contractors are winding down, and that cost will be removed by the end of the year. FX headwind from USD moving to parity with euro wages and salaries, nominal increase versus H1 last year and then other operating costs we've just touched on as well. So combined together is an EBITDA loss for the first half of the year of £5,200,000 of which the deferred revenue was 4,900,000

23:10 So we've seen strong margin growth. We've talked about our OpEx, keeping that tight and using temporary contractors to help support the execution. But overall, positive in the month of June, which we were delighted to see and also in July. And as we've signaled to the market, we fully expect to be EBITDA positive in H2.

23:33 And then just looking at this from a cash performance perspective. So we started the year with an opening cash balance of £25,300,000 and closed half year with £23,300,000 so a £2,000,000 reduction in our cash over the first half of the year. Again, huge amount of it driven by the recovery in our volume, our booking volume, the ABB, revenue recognized in H1 of 24,700,000 The 6,400,000 just shows we've received 6,400,000 of cash relating to the deferred revenue. So these are the free cancellation bookings that we cannot yet recognize. So we've received the cash for them, and the equivalent revenue we will recognize in our P and L in H2. Direct costs and operating costs, we've spoken to.

24:20 And then within €1,100,000,000 the other cash flows is included our first cash outlay on the HPS £30,000,000 five year term facility we agreed in February of last year. So we have been cash generative in Q2 for the first time since the pandemic, something we've been very pleased to be able to report. On average, June 30, our net debt position was 6,500,000. We've no other financing facilities in place, and we have 9,400,000 of payroll taxes warehoused with Irish revenue.

24:56 This debt doesn't incur any interest. Interest would only start to accumulate from April 2023, and we are currently working on a repayment plan with revenue on that quantum. And with that, I will hand back over to Gary.

25:15 Just to Sure. Here we go. Great. Sorry. Oh, I am. Yep. Mic is on. Good. Thank you very much. So I used a very, very similar chart last time, the story is exactly the same. We are executing a growth strategy which is highly differentiated, and it capitalizes on the unique characteristics of the HOSTELWORLD category. So we are designing a business model which will make us dominant in this category.

25:46 And when you think about how you do that, you've got to look at the differences that HOSTELWORLD has as a category compared to the whole online travel marketplace. And there's really three leverage points which we are looking to exploit. The first one is when we think about booking app. So as soon as you may know, I spent many years running a portion of Expedia's business pre HOSTELWORLD. So I have a pretty good idea of how mainstream OGA's mainstream OGA leisure works. So with that said, thinking about the booking path,

26:23 what's interesting when you look at, you know, mainstream OTA, the majority of their customers go on a single destination trip once a year or less. And when I actually look at numbers, it was about 80 to 85% of their customers booked once a year or less. So you might see them one year, you wouldn't see them for the next two years, and then maybe you'd see them for the third year. Now this is very different to the hosteling category. You know, when you think of the hostelers, 18 to 35 year olds going on these trips, these trips usually comprise multiple destinations. I might start in The UK, go to London, Paris, Amsterdam, go down to South Of Spain, or I might start in The US and go to Asia.

27:13 But, generally, these trips always comprise multiple destinations.

27:18 Many of our customers take many trips a year, and again, many of our customers take many trips over several years. Now why is this important?

27:30 It's important because we've got more than twenty years worth of data to be able to look at all of that booking patterns and create these very, very predictable cohort curves where we can see for every new customer that joins our platform, how many bookings they're likely to make in one day, seven days, twenty eight days. And with that data and its incredible predictive power, we're able to invest in acquiring customers by looking at what their predicted lifetime revenues are. So we can orientate and create a marketing technology stack that exploits this booking pattern. The second part of the leverage point is the customer need that you are trying to solve for.

28:19 If you're a mainstream leisure customer and you're going to an OTA and if you're looking for lodging, in general, you're looking to find and book something based on its functional attributes.

28:33 How convenient it is. Does it have an en suite bathroom? Does it have a swimming pool? Where is it located relative to the city center star rating price? It's a very functional set of attributes that you're trying to optimize for. HOSTELWORLD, for all of you people on the call who've been hustling, will know that the reason that people go hustling is not because it's cheap. The reason that people go hustling is means to meet other people. And one of the big data points, of course, is 60% of our travelers are traveling solo. And they're not traveling solo because they're antisocial. It's because they expect to meet people on the go. So the real need that they're trying to solve for is, can you find, you know, can you find ways to help me find people to hang out with?

29:25 And this is why that we've invested so much testing and building the platform in the latter part of last year and launching this year a set of features in our app on a social platform, which is designed exactly to do that. And, of course, this is very tailored towards the hosteling category because nobody cares who's staying at the Marriott or the Hilton, let alone wanting to meet them. And if you think about a hostel bar, if you go down to a hostel bar and you start talking to your neighbor, that's accepted practice. That's what you do in terms of, hey, I'm Gary. I've just come from Thailand. I'm thinking of going here, you know, and and so on. That's how you create those conversations. And as I've said to many other investors, you know, try doing that in the Marriott or the Hilton, then people are gonna wonder what your intentions are. So it's a very prevalent need, which no OTA or no technology company is trying to solve, but it's hyper prevalent as a need in the hustling category.

30:26 And this is, you know, the key lynchpin of our growth strategy. When I think about trip add ons, I'm not really going to talk about too much about that today, and I'm going to leave that until the Capital Markets Day, which we will have in November. But in general, when you look at mainstream leisure, if you're buying a hotel, the sorts of things that you are looking to add on, think cross sell, are things like grand transportation, maybe car rentals, maybe you're looking for a sightseeing trip for you and your family. But for HOSTELWORLD and the category, what they're really looking for is other group experiences which help them find people to hang out with. So that might be things like short adventure tours.

31:11 It may be find me a group of people to go on a walking tour with. So we have started building out that portfolio. We have Romy's, which is a a very long term contract with Geo Ventures. It's very small right now. I would say it's about 38 itineraries with 50 hospitals across, I'm gonna say, 15 countries. It will grow over time. A lot of those itineraries are actually based in Asia or South America, which is still on the road to recovery. But the things that I'm gonna talk about most today are how we think about marketing in the context of leveraging that cohort predictability and how we think about solving that customer need, which is all about social features.

32:01 So moving to cohorts. Sorry. I think we just lost the presentation. There we go. Let's come back. So just to orientate ourselves on this chart. So we went back in time, actually, all the way to 2009, but I'm just sort I'm just showing 2013 onwards. We looked at 2013 and said, let's look at all of the customers we acquired in 2013. How much revenue did we get from them in the first seven days, twenty eight days, ninety one days? Then we went back and said, okay. Let's look at 2014. All the customers that we acquired, how much revenue did we get in one day, seven day, twenty eight days?

32:50 And what I've done here is to normalize that number at the seven day level just for competitive reasons, but then show the growth versus that seven day number over time. So I'm now going to give you the 2022 numbers just so you can get an idea of payback period. So if you look at our financial statements, you will see that our net average booking value, the value to us of that booking is about €15. Now over January to June, we acquired about 520,000 customers, new customers to our platform. In the first seven days, all of those new customers on average were worth about €30.

33:43 So what that means is, on average, every single customer, all 520,000 of them did approximately two bookings. And then if I look at the twenty eight day mark, it rises to €34. And then ninety one day mark, it rises to €40. And what we're seeing is that the cohort behavior of those 520,000 is exactly tracking the same cohort behavior that we have pre COVID. So you could scale those numbers for one year, two year, three year, four year, and be very confident about what the customer lifetime value was going to be.

34:28 So keep in mind, twenty eight days was 34, and ninety one days was €40. So if we think about how to compute the payback period. So January to June, we spent on paid marketing. We have no brand marketing. And we also paid for the credit card processing fee for when we take that deposit. Obviously, we have to pay our payments provider, Stripe. We take both of those numbers. It's about 20,000,000. So what that means is 20,000,000 divided by 520,000 is about 38. So our payback period is somewhere between twenty eight days and ninety one days across all of those 520,000.

35:19 So after that point, all of that revenue is free because I take all of my marketing cost and I apply it to customer acquisition. So if we go on to the next slide, I'll show you how those cohorts add up over time. So what you see here is the historical data pre COVID, and I'm taking the revenue and I'm slicing it by when the customers were acquired. So if I look at 2015 as an example and you look at the dotted bar, that pink block is the revenue that I acquired from customers that I acquired in 2015.

36:05 And then if you look at '16, '17, and '18, you can see that pink block showing up. And those are the customers that we acquired in 2015 who are coming back. And when in our RNSs, I keep talking about our loyal customer base, this is actually what I mean. It's the fact that customers come back again and again and again. So as you look at the pre COVID years, you can see that recurring revenue bank from customers acquired in the prior years has been growing and growing and growing. So if you now turn to 2022, and I'm going to give you a bit of an explanation as to why marketing as a percent of revenue is 60% in first half.

36:54 If you add back that deferred revenue that Caroline talked about, just imagine in your mind, if I took that twenty twenty two first half because it's only a half year, and I extended it to a full year. So it looked about the same height as 2019, just as an example. There are two things that you would see. The first one is all of those colored slices, which are customers that I acquired pre COVID and in COVID, the proportions are exactly the same as if COVID has never existed. So the customers that we acquired in COVID are showing up in 2022 as if COVID had never existed.

37:42 That's the first thing you would see. The second thing you would see is that ground bar, which is the customers that I acquired in 2022 and the revenue that I got from those new customers is disproportionately greater as a percentage of the total. So it would look greater with a small amount of recurring revenue. So, essentially, because I don't have as much recurring revenue because of COVID, there's two years missing, I'm disproportionately acquiring new customers this year. But it also means when I look into 2023, those customers are going to come back and we know exactly mathematically how much, and I'll start building up that recurring revenue bank again.

38:35 So as a consequence, mathematically, without any social features, without any change to the platform, without any improvements, which, of course, we are going to do continuously, mathematically, marketing as a percent of net revenue will fall. And the guidance that we've given is we are 60% for full year this year, and that will drift down into 50 to 55% in 2023, purely because the mathematical behavior of cohorts. So I'm gonna flick in the interest of time to make sure we have enough time to answer the questions. I'm gonna flick over the next one, and I'm gonna talk about the slope the social features. So the first thing about the social features is they are highly relevant in the hostling category.

39:26 80% of our customers say to us that the reason that they stay in hostels is a means to meet other people. 60% of them are traveling solo. So I'm not solving for a need for 30% of my customers. I'm solving for a need that virtually all of my customers have. And if you would like tangible evidence about how important it is to to drive and to create a set of features to help people to hang out with, go on Trustpilot. Look up hostelworld.com, and then do a sweet search on the keyword either meet or people. And if you read the reviews, you will see that those people who were talking about meeting people while they are traveling, the experience is magical, absolutely magical. They will never remember the sheets.

40:23 They won't remember what the bar looked like. They won't remember, you know, what the reception looked like. But, oh my boy, they will remember meeting new people. So what we are trying to do is to help create those magical moments. So this social platform that we have built was launched on iOS in April, and it launched on Android in June. It is new. We have a various sets of features that we are experimenting on, and I'll talk a little bit about the KPIs in a second. But we're super happy with what we're seeing so far. So moving left to right, the first part of it is just simply using our data to create user profiles. So we have photo, what your name is, what your nationality is, and then looking at our own data, we can see which countries you've been to in the past and what your prop and which properties that you've stayed at.

41:19 And what's interesting is already we are seeing people use profiles in unexpected and exciting ways. For those of you who've been hustling, you'll know that when you go to a hustling, it's that typical icebreaker moment where you're standing next to someone. You obviously like the look of them, they look like they could be friendly. And you've got to think of your first conversational gambit, and it could be, you know, hey, I'm Gary, you know, who are you? You you try something. And what we are already observing with profiles is that people are saying, you're Gary, aren't And because they know a little bit about you, they can say, I just saw that you've been to Thailand. Could you tell me a bit about that?

42:05 So you're compressing that icebreaker conversation and making it a lot easier. And this is just with a version one product. We haven't even put things like whether you're a solo traveler, what your interests are, and so on. If you look at the third one, which is interest based chats, this was a feature that we developed to understand how people were thinking about connecting with each other. And fourteen days before you check-in, you can subscribe to different chats, chats, drinks and dancing, you know, coffee, walking chores, pub crawls, and so on. And I can reliably say, drinks and dancing is the one that people subscribe to the most. And when we look at the conversations that are happening, and we wanted to be able to see these conversations to try and create new product features from it, what we noticed is that as people were saying, I'm thinking about going to Joe's Nightclub.

43:04 There was so much volume of chats that that chat was going up. So a new joiner would have to keep scrolling down to find it. So as a result of seeing those things in the chats, we then launched the next feature, which is these user created events, which launched on iOS last week. So what this allows a user to do, instead of creating an event in a chat by saying, I'm going to Joe's bar, I can actually create a card, an event saying, Joe's bar, 07:00, you know, fantastic happy hour, you know, who else would like to go? And people can attach their profile to it, say, yes, I'm interested. So now you have a catalog of people who are generating their own user events.

43:51 And this is a super exciting platform for us because our hostel partners want to use this past platform to load their own hostel events on, which we will publish to all hostelers in the city. And some of the larger chains have contacted us and said, we'd like to use it to put on big citywide events. In other words, not events in their hostel, but think, you know, concerts for example. But in order for them to feel comfortable with the expense, they obviously want to use our platform to know how many people would go. So we're super excited. It's early days. What I can say is the people who use our platform the most in terms of going on these trips are the people who are using the social features the most.

44:41 What I can't say yet, and obviously, this is what we're trying to drive to, is that the social features themselves are generating more power users. But what we can see when we look at one day, seven day, twenty eight day, the number of people who are opting in, loading photos, engaging with the chats, It's too early to talk with user created events. Right? These these numbers are moving every single day. They're getting better. So we're super excited about it. In Capital Markets Day, we will come up with some or we will show more of the KPIs around people who were set up to use the social features and then the engagement with the social products themselves. So we also are very committed, you know, with a customer base like ours that 18 to 35 who are very social socially conscious and especially from a sustainability perspective.

45:37 We've achieved climate neutral accreditation in partnership with the South Pole, so we bought offsets for all of our 21 twenty twenty one emissions, and we'll continue to do so as we move forward. We're also working with our HOSTELWORLD partners, the Global Sustainable Tourism Council, and other parties to create a bespoke program where HOSTELWORLD can show in a very accurate way what that's emissions data is versus a representative sample of hotels. In the next thirty days, we're going to have some super exciting news to share on that front, which really shows if you choose a hostel, it is so much more of a sustainable choice than staying in a hotel.

46:24 We've continued to introduce a lot of new employee policies to provide flexibility, agile working, general well-being. We've just concluded an engagement survey, and very pleasingly, we're off the charts scores in terms of remote working. Now other companies are taking different directions in terms of asking employees to all be back in the office versus remote. We're hybrid, and that is certainly working for us. Equally, we're also heavily invested in making sure that we are a diverse and inclusive employer, very proud supporters of the 30% club in Ireland. And all of these elements, whether it's environmental or social government oh, sorry. Government. Governance is a regular standing item in our board meetings as well. So summary and outlook.

47:18 Very, very strong start to the year. Very, very happy with how this is growing. We do remain highly geared to the ongoing travel recovery. You know, June was only 80% net bookings, although a 104% of revenue. There's still recovery to come versus 2019. In addition to that, we have the future growth drivers in place. All of the investments that we made during the COVID years to develop this very highly differentiated set of social features, You know, these are things that we're experimenting on. They are going to draw new customers to our platform, new incremental customers to our platform. They're going to make our products more sticky, which improves lifetime value. And those extra retention is going to come more through the app, which will give us more leverage on marketing expense.

48:09 Comprehensive strategy update to follow in q four, which will be in early November, date to follow. So with that, we have twelve minutes. So David, would you thank you so much, by the way, for submitting your questions. We're taking the liberty, if I may, of compressing those into general themes. David's now going to read out the theme, and Caroline and I will be on hand to answer each. So thank you very much. Thank you, Gary. Good afternoon, everybody. Great to be talking to you again after our last presentation in June. And we have lots of questions. And we're trying to get through as many of them as we can in the time that we have. First team of questions is around the area of marketing. And our half year report, which noted marketing spend as a percentage of revenue at around 70%.

49:00 You know, guys, maybe you might shed a little bit of color on what we think is driving this level of spend and what is the pathway to get back to a normalized level that we've talked about before of the 50 50 to 55% range. And then perhaps maybe more broadly, we might talk to the dynamic created by the brand equity that we've built up over time, which generates some free bookings and some paid bookings. What do we think this free element is worth to the business? Super. Great questions. So if you look at revenue recognized, it is 70%. Marketing is 70% of net revenue. If you add back this one time deferred revenue, it then becomes 60%.

49:46 When you think about the cohort and the revenue cohort chart and building up the recurring revenue, so this year, we are going to build up more recurring revenue in next year, so it'll be bigger than this year. That simple mathematical leverage without any improvement on the platform or any improvement in terms of social features, just mathematically, is going to bring marketing as a percent of net revenue. What I've guided so far, just looking at the maths, is that that is going to through 2023, that is going to come to 50 to 55%. Now in relation to the point of brand equity, free bookings, paid bookings, What I would say is, as a business model, we generally get a bit over half of our new customers through paid channels.

50:36 But if you look at total bookings, we get a bit over half of our bookings through free channels. So what that means is, as a business model, if you're going for a multiple destination trip, it may be that while you're sitting in New York and looking at Bangkok, that you're using your desktop and you make your first booking. But as you do your trip around Asia, we're very, very good at flipping you to the app. In terms of the brand equity point, I think there was a question around, you know, what what would happen if you reduce paid marketing to zero? And the answer is you'd make an awful lot of money for a short period of time. Because as as your recurring revenue kicked in with no paid marketing, obviously, that would be, you know, a very, very profitable business. But if you're not topping up the funnel to create that revenue, recurring revenue bank, you know, ultimately, the the the the business would run out of steam.

51:35 What I'm very, very confident is we have a formula to be able to invest of our marketing capital into new customer acquisition by predicting the revenue, understanding the customer acquisition cost, and acquiring as many customers as we can. So that is actually how we run the business, And using the metrics on the superior platform that we have now, I'm very confident that we can create that growth going into 2023. The growth strategy with social will make that business model even better. So I'm very confident to say there's going to be revenue growth and margin growth as we go into 2023. Thank you, David. Next question. Thanks, Gary. Next question is in the area of our differentiated strategy and specifically two elements within that, the social element and the adventures and ancillaries element.

52:30 So particularly in relation to social, what are your views on how it's performing? What kind of KPIs are you looking at? And what have we learned and iterated so far as as we've gone through this journey? And how are hospital owners reacting? Do we have any feedback from their perspective? And then relating to g Adventures, maybe you can talk a little bit about the commercial arrangement of g Adventures, the scale and contribution that we've seen so far this year, and maybe what we can expect towards the remainder of the year. Okay. So I'll do the Geo Ventures, Romy's first. The portfolio is fairly minimal right now. The first departure dates were only in May, and a lot of the destinations are in places that are still recovering. So it's not going to be a material contributor this year. It will have a small impact next year.

53:20 But as the the Asia region and as the business recovers, both on the geo venture side as well as our own side, I would expect that to be more of a material contributor as we get into '24, 2526. Now dealing with the social platform. So we look at two sets of KPIs. We look at you as a user. Have you opted in? Do you have photo? Do you have push notifications enabled? So we look at those as a sort of a user level KPI. What we can see looking at one day, seven day, twenty eight day moving averages is every single day, the one day is meeting this beating the seven day moving average, and the seven day is moving beating the twenty eight day moving average.

54:09 So the number of people who are set up and want to use social features is increasing over time. The second metric it is, once you're set up for success on social, which features are you using? Well, today, we only have one, which is basically the chat function. So we look at people viewing chats, and we look at people posting. Again, we can see growth one day, seven day, twenty eight day. Link ups was only launched last week. We're only launching it in London. We're basically going very deep and doing, you know, conversations, meeting users in London to really be able to understand how to optimize it for one city. And as soon as we've discovered the formula, then we will scale it globally.

54:54 These metrics that I've just talked about in Capital Markets Day, we will show the growth in all of those metrics. Thank you, Gary. For our next question, now we might turn to OpEx. And maybe, Caroline, you might take this. Okay. Our our OpEx, versus 2019 has significantly reduced, and that reflects the initiatives that management have implemented over the last couple of years. You might comment, though, on how we should think and how we might expect OpEx to trend as we look ahead and potentially maybe how inflation might impact the business. Of course. Okay. Yes. Very good and very topical question. Yep. A lot of the cost taken out of the business versus 2019. And as we've said before, it's it's not something we're looking or keen to reintroduce back into the business. It's you know, we took 7,000,000 of cost out of the business 2021 compared to 2019.

55:47 And that, you know, it's it's taking that level of cost out of an organization is is challenging. But we're very happy with the cost structure we have in place now. We are at a headcount just oscillating around the $2.50, slightly below $2.50 headcount. And that's really a structure we're we're happy to keep in place. We'll operate around that level. We are not looking to scale up any of the teams. As we look into next year, obviously, wage, salary inflation is something that we we need to be conscious of, and that will be reflected in our numbers for next year. Looking at the graph when we went through OpEx, wages and salaries is by far our biggest operating cost base. So people can expect we'll keep wages and salaries at around the 250 headcount similar to where we're at at the moment, albeit there will be a wage salary increase.

56:37 Tech products, we look to keep around the same level as this year as well. There's no major significant project on the road map that would mean that that cost would be higher than it is this year. So I think year on year, we we we are very keen to keep that cost rigorous cost control that we've had in place since the the dawn of the pandemic because the the benefit of that, obviously, is your improved operating leverage, and that's not something we're willing to give up anytime soon. Thanks, Caroline. For next question, we might turn to platform. And, Gary, maybe you might comment on how you think the platform compares to a to a best in class OTA. In your view, do you think there's maybe more back end projects that you need to undertake in order to be satisfied with the platform?

57:25 And and maybe regarding some of the projects that we have implemented, like cloud migration. What, in your view, are the benefits of those both maybe financial and operational, and how do you think they materialize as we look forward? Okay. I'm I'm actually gonna answer that question, and I'm gonna take the question about counter as well. But at the same time, I'm just conscious of time. So what we've done on the platform over COVID now, if you think about platform as having three clients, there's an iOS client, an Android client, and I'm gonna say a website. The website is actually a thing called the Progressive Web App, but it's a client. And then you have a back end. So all three clients have been rewritten from the ground up during COVID.

58:10 So the brand new iOS client was launched in April, Android in June, PWA was being a gradual moving from the old legacy website to PWA. So all of those three are net new. On the back end side, there's really two things to do. The first one, we used to have our stack in on premise data centers, but we wanted to move it to the cloud. So that project in all on its own took about a year to cut up the stack into pieces and push it into GCP, which is Google Cloud provider. That completed in March, which means that we no longer have any on premise data cost in terms of taking fixed capacity or servers. We benefit from Google Cloud in terms of its elastic.

58:58 You can scale it as and when you need it. And obviously, the service and memory that you have available there are far more performance than we had in our own venture center. What's left to do is that stack that is now in Google Cloud has different blocks, pricing block, promotions block, availability block, payments block. And we've been on a journey of sequentially going through each of those blocks and saying, we know it's old. Would it be better to find a third party to be able to do this block for us? Great example of that is payments. We used to have our own legacy payments stack that we wrote ourselves, and we took that that out and replaced it with Stripe.

59:45 Sometimes you find that you can't find a third party provider. So especially when it relates to something like social features or something which is unique to our platform or our category. So there, we've taken the approach of refactoring that code to utilize as many native services within Google Cloud and to make it as efficient as possible. Doesn't use a lot of memory. Doesn't use a lot of processing power. There are some of those blocks which quite frankly just work okay, and there's no need to refactor them. So we're now in a process of what I would sort of say the tail end, which is much more of a gradual taking each block in turn and sequit sequentially, you know, to buy it, to build it, to refactor it.

1:00:34 And that process will just continue, I would say, over the next eighteen months. But, you know, what I can say is by moving to the cloud and starting to optimize, you know, using third party packages versus refactoring, we're also seeing an appreciable impact in terms of the speed, meaning just the the page load speeds. And we're also as we go into the future, it makes it much easier for the developers to be able to write code. They can simply write a piece of code. They can take a clone of the website for half an hour, test it, see how it works. If it works, release it on live, and then pull down the clone. So it creates a very efficient software development process. So a lot of work during COVID, we will be reaping the benefits of this as we get into 2023 and 2024.

1:01:26 In relation to Counter, Counter was the replacement for our legacy property management system. We have now taken that in house. We created a joint venture so that we could have another party be able to develop that software on the side for us. We've since bought those joint venture partners out a little bit ahead of schedule. The product has probably doubled the amount of users now than our legacy PMS product does. We're also thinking about the correct business model for that going forward. It's been built fit for purpose for the hustling category. And again, we're looking at different ways that we can leverage our social strategy also into the supply side.

1:02:12 So I'll pass it back, David. Thank you, Gary, for that. And for our next question, we'll turn to market share. And you comment on whether we're seeing any recent trends indicating a change in your position versus booking.com. Many observers will look at our results, and they will look at booking.com's results, and they might try to draw some inference. So maybe some comments or some color for them. I I can take that one, David. Yeah. I mean, difficult to infer a HOSTELWORLD segment performance from from bookings numbers. But, look, what we can say is that we had the highest GMV record on record in June. So the highest gross merchandise value pass through our platform in the month of June 2022 than we've ever had.

1:03:03 When we look at this on a net GMV basis and a net revenue basis, it's slightly down because of increased cancellations. And as we're all fully aware of what we saw happening at the airports over at month of June, that's not that surprising. So, look, achieving that highest g GMV on record ever, that is very pleasing for us. It tells us that our platform is growing and that we are capturing market value. So I think that for us, the recent trends there are that we are in a very strong and in position, and this business is certainly growing. Thanks, Caroline. We might try and squeeze in two more questions. I know we're slightly over the hour, but we'll try and squeeze in two more. First one of those is on inventory and a couple of points that have come through in this area from our attendees on the call here. First is maybe, can we comment specifically about the supply situation we're seeing in Asia, particularly as that reopens after quite an extended dormant period?

1:04:03 Maybe then some comments around any changes that we've seen in the configuration of hotels as a result of COVID. And are we seeing any change in the structure of the market? Is it still very fragmented? Or are we seeing any impact of moves by chain operators like Sabina and Generator? Okay. So first on Asia, yes, obviously, it's been hugely impacted by COVID. We think that, you know, the supply there, they've had a very dormant two and a half year period that they're just coming out of. So slightly greater net loss of inventory in Asia compared to what we've seen in other regions. However, in saying that, we have dedicated supply teams in Shanghai and in Sydney and people on the road, and we're working to rebuild the supply there with some great hostel partners.

1:04:51 There's always we've always had great partners in that region, and they are very keen to welcome travelers back into into their hostels. And the relationship that we have with the hostel partners is they like getting the bookings from us because they know that we're gonna bring them the best people. We're gonna bring them true hostelers. What's a true hosteler? A hosteler is someone who understands the experience, so knows what they're going to get when they get to a hostel. They'll bring the party. They'll spend the money on food and beverages, which is how hostels actually make make their margin. We also have very competitive rates. As I said, we have not changed our commission rates. We have kept it flat, and we do not use margin to undercut our partners. And over the next few months, we'll be launching new initiatives, which will help further help our proposition with our HOSTELWORLD partners as well as the social features that we've launched to date.

1:05:43 In terms of what we have seen in terms of bookings, any change in in the mix there? We did see during COVID a slight shift towards dorm dorms versus privates, but we're also kinda seeing that online now and and normalize our demographic of customer like dorms, that's that's the experience that they go and what they look for when they go hosteling. And in terms of the marketplace, have we seen a shift? Not really. It's still a very fragmented market. More than 75% of the market is run by independents. And then circa 12% is what we call micro chains with a micro chain being, you know, two to five hostels.

1:06:29 But there is there is there is money in the industry that we've seen. Mad Monkeys announced their their the funding that they raised and their expansion plans in Southeast Asia over the course of the next few years. But it's still a very independent run sector, which I think is part of its charm as well. Final question. Yeah. Final question. Thank you, everybody, for the questions. Apologies that we've stuff we've went over. We just were quite keen to answer everything, and thank you for your engagement. Last question is a very appropriate one to close things out, and it's about your outlook guys and your priorities as you look ahead for the remainder of the year and next year. What should people expect from the business and actually specifically as well for you, Gary? You're four years now almost leading HOSTELWORLD.

1:07:17 How should shareholders think about your ten years as we move forward? So let me answer the first part of the question. What you should expect, laser like focus on the core business and social features. We're not doing in any m and a. We're not doing any side projects. All we are gonna double down on is making sure that, you know, the core platform that we have, we spent so much time on that is working so well. And the social features which create this competitive moat, you know, in our category, we will have the most amazing product for HOSTELWORLD. And with that, you know, I'm very confident that you're gonna see revenue growth and margin expansion as we get into 2023. Very confident of that. You know, in terms of my own tenure, it's funny. I I looked at this question and I just sort of said, well, I I I've sort of had three jobs.

1:08:10 Yeah. Job number one in 2019 was sort of a turnaround. You know, how can we make this core OGA better? We talked about roadmap for growth, and that was supposed to be two years long. And then, of course, COVID came, and then your survival CEO calls on different different sets of skills in terms of, you know, needing to right size the business, keep the team really engaged, you know, support the HOSTELWORLD GROUP PLC, supporting our employees while we're still reducing costs, doing all of this work. And now we're in growth CEO time. And I have to say, it's rare that a CEO has an opportunity to build something new in an existing category. And, you know, myself and the team are so excited about this. And the initial things that we're seeing continue to build that excitement every day, and I really look forward to sharing that with you in November.

1:09:05 So there's the answer. Thank you. Gary, Caroline, David, if I may just jump back in there. Thank you very much indeed for taking the time to address all of those questions that came in from investors today. And, of course, if there are any further questions that are submitted today, we'll make these available to you immediately after the presentation has ended for you to review. And ladies and gentlemen, we'll publish all those responses where it's appropriate to do so on the investor meet company platform. Gary, perhaps before redirecting those on the call to provide you with their feedback, which I know is particularly important to yourself and the team, If I could please just ask you for a few closing comments just to wrap up with, that'd be great. Thank you. We've had a great start to the first half. Right? The next eighteen months, in my opinion, ongoing travel recovery will continue to lift the business. The recurring revenue mathematically is going to make marketing as a percent of net revenue reduce. The growth strategy is going to expand revenue and margins still further.

1:10:04 All of that is aided with an operating cost base that is lower than 2019, which gives us operating leverage. So I think we're really set up, you know, to make an enduring business which is competitively differentiated, which is gonna give you superior returns to shareholders. And super exciting thing for us to be able to, and really an honor and a privilege to be able to meet the company. So with that, I'll say thank you very much. We've enjoyed presenting you today. Thank you for your questions, and we'll cover off the rest of the questions as we see them in due course. Thank you. Thank you. Gary, Caroline, David, thank you very much indeed for updating investors today. I please ask investors not to close this session as you will now be automatically redirected for the opportunity to provide your feedback in order that the management team can better understand your views and expectations.

1:10:55 This will only take a few moments to complete, but I'm sure it'd be greatly valued by the company. On behalf of the management team of HOSTELWORLD GROUP PLC, we would like to thank you for attending today's presentation. That now concludes today's session. So good afternoon to you all. Thank you. Good afternoon. Thank you.