Michael Pherous upbeat as investors stay grounded

Then coronavirus smashed business trips. But not only did Corporate Travel avoid raising funds immediately – as others staged emergency capital raisings – the company even says it took the unorthodox step of not tapping banking lines to sustain adequate cash.

Shares are steadily climbing, revenues are rising and some investors are impressed with how the company handled COVID-19. Pherous, meanwhile, is a 53-year-old ball of evangelical entrepreneurialism, the kind of boss with the flair to carry off a KISS-rocker style outfit at a work party and then proselytize to investors in a suit.

Jamie Pherous shows his flair at a travel industry event in 2013.

“Here we are, a nimble company with expert service, with our own technology – that users like,” he told that investor call.

But some market concerns niggle. Hesitancy surrounds cosmetic governance issues, such as the company not detailing deals with directors and stockbrokers when analysts expected to see related-party declarations.

Or maybe it is being jaded by a late filing of results (a similar delay happened last August).

Deeper concerns include how Pheros repeatedly sold millions of dollars in shares in the company he founded as a two-person outfit in 1994. More fundamentally, some doubt whether Corporate Travel can realistically hit ambitious targets in a post-pandemic world, after swelling via more acquisitions.

American Pie

Pheros is usually based in Brisbane. He has an $11.3 million New Farm home there and has just obtained council permission for a cliffside pool after a legal battle. But he has been living in the US for six months.

Pherous meeting in the UK last month with executives and staff.

He was presenting results from Omaha, the home of Transport and Travel, a stressed rival bought for $280 million in 2020’s pandemic depths. Corporate Travel’s US operations are now registered at a massive glass tower overlooking parkland and an Asian diner in the mid-western city.

The relocation was to bed down the acquisition, and visit teams and key suppliers. “The first week I was here, we resolved more things in five days than we would have in five months trying to do it from Australia,” Pherous told The Australian Financial Review after the results.

He also met UK staff at its sports division in March. Pherous celebrated a partnership with the London Broncos rugby league team, posing for photos in their blue-yellow jersey, albeit the football he held was flat.

Corporate Travel had just reported a $10 million loss for the six months to December. Omicron had mugged the pandemic recovery.

Still, the company argued underlying earnings before interest, tax, depreciation and amortization had lifted to $18.2 million. That figure excludes costs such as developing technology, which Corporate Travel says is a key asset – and acquisition and integration expenses, for a business making multiple buyouts.

Its operating cashflow was solidly $38 million in the black. The company says some unusual helped features, such as cash held at December “awaiting client direction” boosting cashflow by $20 million. This related to a “client project” and was resolved in January.

It is a reference that left several with sector knowledge scratching their heads.

Perhaps it was handling payments for clients, which Corporate Travel had spoken of during short-seller critiques about cash flows? Or maybe it refunded money to a business client? Corporate Travel did not answer questions about the $20 million or other matters.

One surprising feature has been how Corporate Travel once heavily churned through lending lines, drawing down and repaying $200 million in 2019 alone. Yet amid cash-strapped coronavirus times, accounts state Corporate Travel never tapped its banks.

not tapping banks

In fact, Corporate Travel tightened financing valves from HSBC, CBA and Barclays. UK regulatory filings state the group’s treasury entity is USD Treasury Coy (UK) and the group requested to reduce funding lines from £100 million ($178 million) to £60 million. The company said cash fueled operations, and there was no backdoor supply chain financing here, for instance. (When fundraising to acquire Transport and Travel, it also raised an extra $100 million for varying costs, including “balance sheet flexibility”).

Revenues jumped to $158 million, reflecting “record” client wins. Among the successes was Australia’s parliamentary contract off rival Flight Centre.

Some big customers also praise Corporate Travel. Take miner Citic Pacific, which commanded the company for wrangling the evacuation of 550 staff from its Western Australian iron ore operation when a cyclone was approaching.

That client list will expand thanks to its $175 million buyout late last year from Australian rival Helloworld’s business division. Pherous was crowing. “No other company has been making transformational acquisitions to get themselves into this position,” he said.

That is debatable. The sector’s 600-pound gorilla is American Express GBT, which last year acquired Expedia’s business travel arm. That added $US8 billion ($11.1 billion) in total transaction value, representing customer funds such as for airline tickets. GBT’s expanded operation would have $US39 billion in such transactions. Corporate Travel ranked fourth globally with about $US8 billion.

GBT, listing on the New York Stock Exchange, even sniffed in its prospectus that Corporate Travel lacked “scale” or “technology capabilities”.

Commission debate

Other comments from Pheros on the call were up for debate. Analysts were worried about airlines cutting commissions to travel agents, with Qantas last year flagging a squeeze.

Pheros countered: “I’m seeing suppliers all around the world, Qantas is the exception to the rule.”

But at rival Flight Centre, chief executive Graham “Skroo” Turner said “certainly overseas, most of that front-end margin pretty much disappeared years ago”.

“Coming into Australia, there’s a reasonable number of carriers, that if they haven’t done it already, will tend to cut the front end commission.”

Graham Turner, chief executive of Flight Centre. Oscar Colman

Qantas was “not” an outlier, and he was “surprised that [Corporate Travel] would have said that”. Turner said such commissions were generally reinstated elsewhere, such as via back-end volume targets for agencies.

The market is recovering, with Corporate Travel and Flight Center last week talking of higher transaction levels. Still, earnings guidance from both companies was weaker than some market expectations.

Corporate Travel, for instance, subtly changed wording. In February, it said second-half earnings would have a “stronger” skew than normal years. But by last week, the company maintained it was “still expecting” a normal skew.

Citigroup analyst Samuel Seow said the downgraded implied guidance of $55 million in EBITDA, almost 30 percent below market estimates. Although transactions were picking up at a solid rate, Seow said some positives for the company included a higher mix of domestic travel, which implied lower revenue margins.

Structural impact?

One of Corporate Travel’s final presentation slides used blue and green bars forecasting how much more successful the newer, bigger company could be once COVID-19 eases. It would have an underlying EBITDA equivalent of $265 million against Corporate Travel’s standalone $150 million result before the pandemic.

Calculations by the Financial Review that based on Corporate Travel’s previous margins of 2.3 per cent of transaction value, it would theoretically hit that EBITDA target with about $11.5 billion in transactions. That seems feasible, with Corporate Travel previously saying the bigger group would – on a pre-COVID basis – have notched $12 billion in such transactions.

But there is a wild card: will businesses, used to cheap Zoom online meetings, resume flying at pre-COVID levels?

Corporate Travel last week cited industry studies from November predicting business travel recovery between 90 per cent and 100 per cent by the end of 2024.

Flight Centre’s corporate travel boss Chris Galanty was more circumspect in February, envisioning the medium-term recovery would probably “be somewhere around between 70 and 80 per cent”.

So, skeptics see Corporate Travel having to climb a much steeper mountain to hit transaction numbers because it has to capture more market share, which in turn makes hitting earnings targets even tougher.

Regardless, Pheros was optimistic the underlying earnings target was realistic. “The business we have won’t be able to offset any potential structural issue to travel,” he said.

Assuming that 80 per cent post-COVID slump was correct, Corporate Travel’s estimated $12 billion 2019 figure would fall to $9.2 billion in transaction value. At 90 percent, it would trim to $10.8 billion.

But Pherous argued provided any Zoom-led structural change would only upset international travel and that market 30 percent of Corporate Travel’s group revenue. So, any structural hit would fall to between 6 per cent to 9 per cent of group revenue, he forecast. Not that it mattered.

“We’ve materially outgrown that since calendar ’19,” he said. Further, he maintained that Corporate Travel was extracting greater cost efficiencies from mergers, helping to reach EBITDA targets.

He is preaching this while earning $490,000 a year, low wages for a boss of a company that size. Usually, dividends provide pherous with extra cash – $4.7 million flowed from 2019’s final dividend alone.

He has some expensive tastes: $150,000 for Jimmy Barnes to perform songs including Working Class Man at his 50th birthday party at Hamilton Island, $25 million in property in Queensland alone and more than $25,000 donated to his former school Brisbane Grammar.

dividends

But Corporate Travel has frozen dividends since COVID-19. Pherous subsequently sold $31.5 million in shares in March last year, and another $39 million in August, taking his total sales since the company’s 2010 float to $140 million. That said, pherous retains almost 17.5 million shares, worth almost $430 million.

He told the Financial Review in December he would not sell more shares in “the foreseeable future”.

“I didn’t get a bonus or a dividend, and that’s what I live off,” he said.

He needed $40 million to live off? “No, well, it’s all relative,” he replied. “It’s not affected the share price.”

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